the National Steel Works Ltd. v. Commissioner of Income-Tax, Bombay

Judgment

CIVIL APPELLATE JURISDICTION: Civil Appeal No. 544of1961. Appeal from the judgment and order dated July 1, 1959, of the Bombay High Court in Inoometax Referenoe No. 58 of 1958. C. B. Agarwala, A. D. Mathur for K. P. Gupta, for the appellent. K. N. Rajagopala 8a8tri a.nd D Gupta for reepondent. 1962. May 3. The Judgment of the the Court. was delivered by R.&GHUBAR DAYAL, J.-Thie is a.n appeal under e. 66 A (2) of the Indian Income. Tax Aot. The appellant, the Nations.I Steel Works Ltd., Bombay, a limited liability company, hereinafter referred to as the 888elleee, oarried on the bueineea 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 Mille Aasocia.tion 0f 2 s.o.R. SUPREME OOURT REPORTS 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 u\ilise the coal and steel so received, it entered into a partnership with one K. l'. 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 a.s the quota system regarding steel continued in the Dominion of . India qr 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 equ~l shares. Para.graphs 12 an·d· 13 of this agreement are ·of importance and are quoted below: "12.

In consideration of Company taking the said Mr. Irani as partner in the partnership it is agr; ed that a sum of Rs. 50/- per ton on all steel received by the partnership from the Company through the Steel Re,H1)lling Mills Al18ociation of India, Calcutta or Iron and Steel Controller, Calcutta shall be paid to the Company by this partnership oalt)ulated every month, and after deducting all the other expen- . see incidental to the business of the partnership the net profit of the partnership after providing for outgoings and interest on the current loans, if any, shall be pa.id over to the partners in equal shares. 13. All the quota of steel and coal that Company may receive from the . Iron & -Steel National Steel Works Ltd. Commissioner of L-:com~· Tax, 8Gmb1y Raghuhar DaJal J. 11¥1 Nntional Stttl Work• Ud, rornmissiafl4r oj /1u0Mt·lox, BH1ba' Rag1uWaf' Do,10l J. SUPREME OOUR.1 REPOR'l'S f 1963J Controller, tho Government of India and from the Provincial Iron & Steel Controller, Bombay or from the ~tee!

Re-Rolling Mille A88ociation of India, Calcutta or any such other body under tho quota. sy~tem that may be in force from time to time for Steel re-rolling mills of the company at Bombay shall be utilieed eolely for the purposes of the business of the partnership who shall pay for the same. Thereafter, in 1954, the asse88ee and Irani entered into an agree111ent 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 1:1 of the Partnership Agreement dated 29.9.48, the Royalty by which is fixed at Ra. 50/- per ton shall be reduced in the manner following from lst October, 1953." (a) Royalty of Rs. 25/· per ton shall be charged from 1/10/53 on all rollable materials reoeived up to 30.6.54 except semis and perfect billets on which royalty will be charged at Rs. IO/- per ton on all the said materials received upto 30/6/54. (b)

That ce88 charges payable to Steel Re- Rolling Mille Association of India, Calcutta, will be paid by the partnership till the partnership exists. (o) Mr. K. R. Irani hereby agrees to pay a lump sum of Rs. 60,000/- a good-will in consideration of waivini the Royalty from the partnership Account on the quot~ of re-rollable scrap materials received after 30.5.54. 2 s.o.R. (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 let 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. (£) The partnership shall pay to the Company Rs. 500/- per month as office allowance from 1/10/53 till the partnership exists. In &SBeBBing the income-tax on the assessee, the Income-tax Officer brought the amount of Rs. 60,000/- mentioned in · sub-cl. (d) . of amended paragra:ph 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 asseBBee 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 ie against this order that thiS appeal bas 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 t0 the assessee company in view of the partnership getting the rights· under the quota which the aaaeaasee company po880BBed and that therefore the sum represented a capital receipt and not a revenue receipt. We d1J not agree.

It is clear from the facts stated in the state· ment of the caae that this amount represents capitalised prolita .of the IM!llessee company on account N otion1Jl Sl#eZ W01k" Ltd. Commissionlf' of Intome..tax, B1m1hay National Ste•l Wwks Lt<l. c.mmis•iont1' •f /r.CnM-l•x, Bombay !!42 of its transferring or selling the steel which the assessee company purchased under the :iuthority given ·by the quota allowed to it. It_ is the• assessee com· pany which purchases the goods -in its own name and delivers them to the partnership at cost price. 'Under the original agreement of 1948, the partner- Ra1hulmDay.JJ. ship 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 he paid to the, assessee company for the steel received from it-after June 30, 1954, and ~t was to receive Rs. 60,000/· in a ·lump - sum. This amount, therefore, represents. the ca pit· -. alised value of the profits, the assessee company was to have on sµpplying 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 !here. 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 partnel'.· ship. The description of the amount_ as gqqdwi)l in consideration of waiving royalty from the. p;:irtnership account on the quota of re-rollable. scrap mater.· ials received after June 30, 1954, does not conviiy the real nature of this amount and is really an ex· pression which conveys no meaning.

There is no question of good will in w>iiving a rpyaJty. - - - 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.