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PETITIONER: THE NATIONAL STEEL WORKS LTD.

       Vs.

RESPONDENT: COMMISSIONER OF INCOME-TAX, BOMBAY

DATE OF JUDGMENT: 03/05/1962

BENCH: DAYAL, RAGHUBAR BENCH: DAYAL, RAGHUBAR DAS, S.K. KAPUR, J.L. SARKAR, A.K. HIDAYATULLAH, M.

CITATION:  1966 AIR 1356            1963 SCR  (2) 937

ACT: Income-tax--Agreement  by quota-holder to  supply  steel  to manufacturer  at a certain royalty per ton--Receipt of  lump sum  in lieu of royalty--Assessment on  amount  received--If according    to    law--Capital    receipt    and    revenue receipt--Distinction--Indian  Income-tax  Act,  1922,(11  of 1922),s. 66A (2).

HEADNOTE: The  assessee company was receiving quota of coal and  steel from  the Government but had no factory.  It entered into  a partnership  with a person who had a factory but  no  quota. The  latter  agreed to pay a royalty of Rs. 50  per  ton  of steel  supplied  to the firm under the quota.  A  few  years later,  that agreement was modified and the assessee  agreed to  receive  a lump sum of Rs. 60,000  in  consideration  of waiving the royalty. 938 In  assessing the income-tax on the assessee, the  Incometax Officer  brought the amount of Rs. 60,000 to tax.  When  the matter  went  to the High Court, that court  held  that  the amount  was a revenue receipt, and hence liable to tax.   On appeal to this Court, Held, that the amount of Rs. 60,000 represented  capitalised profits of the assessee company on account of its  transfer- ring  or  selling  the  steel  which  the  assessee  company purchased under the authority given by the quota allowed  to it.   The  assessee company purchased the goods in  its  own name and delivered them to the partnership.  The sum of  Rs. 60,000 represented the capitalised value of the profits  the assessee  company was to have on supplying all the steel  it had  under  the quota at net price.  No right to  the  quota itself was transferred, and hence it could not be said  that the  sum of Rs. 60,000 was paid in lieu of the  transfer  of the  rights in the quota of steel.  The description  of  the amount as goodwill in consideration of waiving royalty  from partnership  account did not convey the real nature  of  the amount.   There  was no question of goodwill  in  waiving  a royalty.

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JUDGMENT: CIVIL APPELLATE JURISDICTION : Civil Appeal No. 544 of 1961. Appeal  from the judgment and order dated July 1,  1959,  of the Bombay High Court in Incometax Reference No. 58 of 1958. C.B.  Agarwala,  A. D. Mathur for K. P.  Gupta,  for  the appellant. K.N. Rajagopala Sastri and D Gupta for respondent. 1962.  May S. The Judgment of the the Court was delivered by J.RAGHUBAR DAYAL, J.-This is an appeal under  s. 66 A (2) of the Indian Income-Tax Act. The  appellant,  the National Steel Works  Ltd.,  Bombay,  a limited  liability company, hereinafter referred to  as  the assessee, carried on the business of a ’Rolling Mill’  prior to  the  partition of the country in the  territory  now  in Pakistan.   It  was  a member of  the  Steel  Rolling  Mills Association of. 939 India  and as such was receiving a quota of coal  and  steel from  the  Government of India.  After  the  Partition,  its registered office was shifted to Bombay.  It had no  factory there  for  carrying  on the business  of  a  rolling  mill. Though  possibly not entitled to receive the quota  of  coal and steel,. it however continued its membership of the Steel Rolling Mills Association of India and continued to  receive the quota of coal  and steel.  In order to utilise the  coal and  steel so received, it entered into a  partnership  with one  K. P. Irani who had put a factory in Bombay called  the New  Era  Iron & Steel Works but had no quota of  steel  and coal.   The  agreement of partnership entered  into  between Irani  and the assessee on September 29, 1948 provided  that the partnership would continue so long as the, quota  system regarding  steel continued in the Dominion of India or  till the expiry- of the then,’ lease of the factory premises, and that  the  capital of the firm would be  subscribed  by  the partners  in  equal shares.  Paragraphs 12 and  13  of  this agreement are of importance and are quoted below.               "12.  In the consideration of  Company  taking               the   said  Mr.  Irani  as  partner   in   the               partnership  it  is agreed that a sum  of  Rs.               50/-  per  ton on all steel  received  by  the               partnership  from  the  Company,  through  the               Steel  Re-Rolling Mills Association of  India,               Calcutta   or  Iron  and   Steel   Controller,               Calcutta shall be paid to the Company by  this               partnership calculated every mouth, and               after   deducting   all  the   other   expense               incidental to the business of the  partnership               the not profit of the partnership after provi-               ding  for.  outgoings  and  interest  on   the               current  loans, if any, shall be paid over  to               the partners in equal shares.               13.  All the quota of steel and  coal  that               Company may receive from the Iron & Steel               940               Controller,  the Government of India and  from               the Provincial Iron & Steel Controller, Bombay               or from the Steel Re-Rolling Mills Association               of  India,  Calcutta or any  such  other  body               under  the quota system that may be  in  force               from  time to time for Steel re-rolling  mills               of  the  company at Bombay shall  be  utilised               solely for the purposes of the business of the

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             part. nersbip who shall pay for the same. Thereafter, in 1954, the assessee and Irani entered into  an agreement  where by the terms of the agreement of  September 29,  1954, were modified.  The amendments to clause  12  are important and they are quoted below:               "IT IS HEREBY AGREED THAT in clause 12 of  the               Partnership   Agreement  dated  29.9.48,   the               Royalty by which is fixed at Rs. 50/- per  ton               shall be reduced in the manner following  from               1st October, 1953."               (a)   Royalty  of  Rs. 25/- per ton  shall  be               charged from 1/10/53 on all rollable materials               received  up  to  30,6.54  except  semis   and               perfect  billets  on  which  royalty  will  be               charged  at Rs.  1O/- per ton on all the  said               materials received upto 30/6/54.               (b)   That  cess charges payable to Steel  Re.               Rolling Mills Association of India,  Calcutta,               will  be  paid  by the  partnership  till  the               partnership exists.               (c)   Mr.  K. R. Irani hereby agrees to pay  a               lump  sum  of  Rs. 60,000./-  a  good-will  in               consideration of waiving the Royalty from  the               partnership  Account  on  the  quota.  of  re-               rollable   scrap  materials   received   after               30.5.54.               941               (d)   Mr.  K.  R. Irani here agrees  that  the               said amount of Rs. 60,000/- be debited to  his               capital  account in the books of  partnership,               bearing  interest  at 6% per  annum  from  1st               July, 1954.               (e)   No Royalty will be charged on any kind               of  rollable  materials  received  after  30th               June,   1954,   by  the   Company   from   the               partnership.               (f)   The partnership shall pay to the Company               Rs.  500/- per month as office allowance  from               1/10153 till the partnership exists. In assessing the income-tax on the’ assessee, the Income-tax Officer brought the amount of Rs. 60,000/- mentioned in sub- cl.  (d)  of amended paragraph 12 of the agreement  to  tax. The   assessee’s   appeal  to’   the   Appellate   Assistant Commissioner failed and so did its appeal to the  Income-tax Appellate Tribunal.  On an application by the assessee,  the Income-tax  Appellate  Tribunal stated a case  to  the  High Court  for the decision of the question whether the  sum  of Rs. 60,000/received by the assessee company from Irani is  a revenue  receipt and liable to Income-tax.  The  High  Court decided that it was a revenue receipt and liable to tax.  It is against this order that this appeal has been filed  after obtaining the certificate of fitness from the High Court. The  contention  for the appellant is that the  sum  of  Rs. 60,000/-  was paid by Irani to the assessee company in  view of the partnership getting the rights under the quota  which the  assessee company possessed and that therefore  the  sum represented a capital receipt and not a revenue receipt.  We do not agree. It  is clear from the facts stated in the statement  of  the case that this amount represents capitalised profits of  the assessee company on account 942 of its transferring or selling the steel which the  assessee company  purchased, under the authority given by  the  quota allowed  to it.  It is the assessee company which  purchases

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the  goods  in  its  own  name  and  delivers  them  to  the partnership at cost price.  Under the original agreement  of 1948,  the. partnership was to pay to the  assessee  company Rs.  50/per ton on all steel it received from  the  assessee company.   Clearly,  therefore, the sum of  Rs.  50/per  ton represented  the  profit  which  the  assessee  company  was getting  per ton from the. partnership.  Under the terms  of the amended agreement, no such profit was to be paid to the. assessee  company for the steel received from it after  June 30, 1954, and it was to receive Rs. 60,000/- in a lump  sum. This amount, therefore, represents the capitalised value  of the  profits, the assessee company was to have on  supplying all the steel it receives under its quota at net price.   No right, to the quota itself has been transferred to Irani  or the  partner  ship under the agreement and  therefore  there could  be no basis for considering that this amount  of  Rs. 60,000/-  was paid in lieu of the transfer of rights in  the quota of steel to Irani or the pertnership.  The description of  the  amount  as goodwill  in  consideration  of  waiving royalty  from  the partnership account on the quota  of  re- rollable scrap materials received after June 30, 1954,  does not  convey the real nature of this amount and is really  an expression  which conveys no meaning.  There is no  question of goodwill in waiving a royalty. We are, therefore, of opinion that the- High Court came to a correct  conclusion  that  the sum of  Rs.  60,000/-  was  a revenue  receipt and liable to tax.  We accordingly  dismiss the appeal with costs Appeal dismissed.  943