THE NATIONAL STEEL WORKS LTD. vs. COMMISSIONER OF INCOME-TAX, BOMBAY

CIVIL APPEAL No. 544/1961Supreme Court[1963] 2 S.C.R. 93703 May 1962Bench: 5 JudgesAuthor: S.K. DAS, J.L. KAPUR, A.K. SARKAR, M. HIDAYATULLAH, RAGHUBAR DAYAL6 pages
AI SummaryDismissed

What were the facts?

The assessee, National Steel Works Ltd., a limited liability company, had a quota of coal and steel from the Government but no factory. It entered into a partnership with K. P. Irani, who had a factory but no quota. Initially, the partnership agreement stipulated a royalty of Rs. 50 per ton of steel supplied by the assessee to the firm. Later, in 1954, the agreement was modified. Irani agreed to pay a lump sum of Rs. 60,000 as goodwill in consideration of waiving the royalty on the quota of re-rollable scrap materials received after June 30, 1954. The Income-tax Officer brought this Rs. 60,000 to tax as revenue receipt. The assessee's appeals to the Appellate Assistant Commissioner and the Income-tax Appellate Tribunal failed. The High Court also held the amount to be a revenue receipt and liable to tax. The assessee appealed to the Supreme Court.

What did the Supreme Court hold?

The Supreme Court held that the amount of Rs. 60,000 represented capitalized profits of the assessee company. The court reasoned that the assessee purchased goods in its own name and delivered them to the partnership. Under the original agreement, the Rs. 50 per ton royalty clearly represented the profit the assessee was to receive per ton. The lump sum of Rs. 60,000 under the amended agreement was the capitalized value of the profits the assessee would have earned by supplying all the steel it received under its quota at a net price. The court found that no right to the quota itself was transferred, and therefore, the amount was not paid in lieu of the transfer of rights in the quota. The description of the amount as goodwill was considered not to convey its real nature, as there is no question of goodwill in waiving a royalty. Consequently, the High Court's conclusion that the sum was a revenue receipt and liable to tax was upheld. The appeal was dismissed.

What were the issues?

1. Whether the lump sum of Rs. 60,000 received by the assessee company from K. P. Irani is a revenue receipt and liable to income-tax, as per Section 66A(2) of the Indian Income-tax Act, 1922. Assessee's contention: The sum of Rs. 60,000 represented a capital receipt because it was paid in consideration of the partnership acquiring the rights under the quota that the assessee company possessed. Revenue's contention: The High Court held that the amount was a revenue receipt and liable to tax. The judgment does not explicitly record the revenue's arguments before the Supreme Court, but it implies agreement with the High Court's finding.

Which sections of the Income-tax Act were involved?

Section 66A(2)

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• 2 s.c.n.. SUPREME COURT REPOR'l'S 93'1 had become futile. I, therefore, hold that the Regula- tions in so far as they purport to· regulate the mines situate in West Bengal have not been validly made under the Act inasmuch as a. condition pre- cedent imposed. by s. 59. of the Act on the exercise ofthe Government's power to make a regulation was not complied with.

In the result, I direct the issue of a writ of prohibition against respondents 1 to 4 res training them from proceeding with · the criminal case launched against the petitioners.

The petitioners will have their costs. · ' "' BY ComtT : In view of the majority opinion of the Court the Writ Petition fails and is dis- missed. THE NATIONAL STEEL WlJRKS LTD. . v. COMMISSIONER OF INCOME-TAX, BOMBAY (S. K. DAS, J. L. KAPUR,. A. K. SARKAR, M.

HrnAYATlJLLAH and RAGHUBAR DAYAL, JJ.)

Income-tax-Agreement by qunla·holder to aupply steel to manufacturer at a certain royalty fl'r to" -Receipt of lump aum in lieu of royaUy-Asaessm1mt on amounl received-'-!/ according lo Zaw-Oapital receipt and revenue receipt-Distinction-'- Indian Income·tax Act, 1922,(11of1922), s, 66A (2).

The assessee company was receiv

The order continues below.

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