Maharaja Shri Umaid Mills v. Commissioner Of Income Tax(63)

1. In these three cases, identical questions have been referred to this court by the Income-tax Appellate Tribunal, Delhi Bench 'A' (hereinafter referred to as "the Tribunal") for our opinion and as these questions arise out of the same facts and in similar circumstances, we consider it proper to dispose of the three reference cases together by a common order.

2. The question which has been referred to this court by the Tribunal in Income-tax Reference No. 1 of 1971, is to the following effect:

"Whether, on the facts and in the circumstances of the case, a demand of Rs. 1,07,837 by the assessee can be disallowed as capital expenditure ?"

3. The common question, which has been referred to us in Income-tax References Nos. 19 of 1972 and 13 of 1973, is asunder :

"Whether, on the facts and in the circumstances of the case, the payment of Rs. 1,20,775 and Rs. 2,14,795 made by the assessee to the State of Rajasthan can be allowed in assessment years 1953-54 and 1954-55 respectively under Section 10(2)(xv) of the Indian Income-tax Act 1922 ?"

4. The assessee is a registered company and in the year 1941 the assessee company entered into an agreement with the then ruler of the former State of Jodhpur, with a view to establish a cotton mill at Pali, which was then situated in the former Jodhpur State. We need not go into the details of the terms and conditions of the agreement arrived at between the assessee-company and the former ruler of the erstwhile State of Jodhpur. After India obtained independence, the former State of Jodhpur merged with the other princely States of Rajasthan to form the United States of Rajasthan and the Indian Income-tax Act was made applicable to Rajasthan, which was then a Part B State, from April 1, 1950. It would be sufficient in these cases to say that certain amounts were paid by way of royalty by the assessee-company to the State of Rajasthan as the succeeding State, in the assessment years 1952-53 and 1953-54, in accordance with the terms of the aforesaid agreement with the former ruler of the erstwhile Jodhpur State.

5. The assessee-company also made provision in its books of account for payment of the amount of royalty, during the accounting year relevant to the assessment year 1954-55. The amounts thus paid and for which provision was made by the assessee-company during the three assessment years were as under ;

Assessment year Amount Rs.

Remarks 1952-53 1,07,837 Actually paid.

1953-54 1,20,775 Actually paid.

1954-55 2,14,795 Provision made but not actually paid.

6. The income-tax authorities, while making assessments for the aforesaid three assessment years, disallowed the expenditure incurred by the assessee-company on account of royalty as specified above, on the ground that such expenditure was not incurred for the purposes of carrying on the business of the assessee-company. Thus, the claim of the assessee-company that such payments were of the nature of revenue expenditure was disallowed. The finding of the Tribunal in this respect was that the expenditure incurred by the assessee-company regarding payment of royalty was made for acquiring an advantage of enduring nature for its business and thus the same was in the nature of capital expenditure. It was in the context of the aforesaid facts that the questions mentioned above have been referred to us by the Tribunal for our opinion.

7. The assessee-company filed a civil suit and disputed its liability to pay income-tax on the basis of the terms of the agreement entered into by the company with the former ruler of the erstwhile State of Jodhpur and in the alternative claimed that the State Government was bound to refund to the assessee-company such amount out of the royalty paid by it, which was payable by way of income-tax ; or in other words, the company sought reimbursement from the State of Rajasthan in respect of the amount of income-tax payable by the assessee-company, on the basis of the terms of the aforesaid agreement. The dispute was ultimately taken to the Supreme Court and in Maharaja Shree Umaid Mills Ltd. v. Union of India [1963] 48 ITR (SC) 186, their Lordships of the Supreme Court held that as the United States of Rajasthan or the Part B State of Rajasthan did not affirm the agreement entered into by the company with the ruler of the former State of Jodhpur, the assessee-company had no enforceable right against either the United States of Rajasthan or the Part B State of Rajasthan. Thereafter, the assessee-company filed another suit in the court of District Judge, Jodhpur, against the State of Rajasthan for the refund of the amount of royalty paid by the assessee-company from the year 1949 to the year 1954. This suit was decreed by the Additional District judge, Jodhpur, on April 11, 1972, and in pursuance of the decree passed by the Additional District Judge, the assessee-company has obtained the refund of the amount of royalty paid by the company to the State Government during the assessment years 1952-53 and 1953-54, besides the amount relating to royalty for the earlier years. As we have already mentioned above, the assessee-company had not made payment of the amount of royalty in respect of the assessment year 1954-55, but the company in that year made provision in its books of account for payment of the royalty amount in terms of the agreement. Thus, now, on account of the subsequent events enumerated above, the situation is that the assessee-company has either not paid any amount by way of royalty or the amount of royalty paid has been refunded in respect of the three years, namely, 1952-53, 1953-54 and 1954-35. Whatever amount had been paid by the assessee-company to the State Government by way of royalty, in respect of the two of the aforesaid three years, has already been received back by the assessee-company in pursuance of the decree passed by the Additional District Judge.

8. Section 10(2)(xv) of the Indian I.T. Act, 1922, with which we are concerned, provided that the profits or gains of business of an assessee shall be computed for payment of tax under the Act as the income of the assessee, after making allowance in respect of any expenditure, not being in the nature of capital expenditure, laid out or expended wholly and exclusively for the purposes of such business. The questions which have been referred to us in these three reference cases are as to whether the expenditure incurred by the assessee-company in making payment of the royalty amount to the State Government was wholly or exclusively expended for the purpose of the company's business or in other words whether such expenditure was of the nature of revenue expenditure or was it a capital expenditure ? Thus, the questions referred to us presuppose that the expenditure has been incurred by the assessee-company in making payment of the amount of royalty for the three assessment years in question, and we are required merely to determine the nature of such expenditure. However, as mentioned by us above, the actual situation is that the assessee-company either did not make payment of the amount of royalty or has obtained a refund of the said amount and thus the assessee-company did not make any expenditure at all in this respect.

9. In Indian Molasses Co. (Private) Ltd. v. CIT [1939] 37 ITR 66 (SC), their Lordships of the Supreme Court observed that "expenditure" in Clause (xv) means expense and the idea behind it is of spending or paying money out or away. Their Lordships observed that to constitute an expenditure for purposes of clause (xv) of section 10(2); the payment should be made irrevocably so that there should be no possibility of the money forming once again a part of the funds of the assessee-company.

10. Thus, where no money was paid by way of royalty or the money paid on that account was received back by the assessee-company, it cannot be considered to be an "expenditure" incurred by the assessee-company, unless such amount is paid or spent irrevocably. As no expenditure has in fact been incurred by the company, within the meaning of Section 10(2)(xv), the question of determining the nature of such expenditure in our view does not arise. It appears to us that in view of the subsequent events which have taken place as narrated by us above, the questions which, have been referred to us, relating to the nature of the expenditure incurred in making payment of the amount of royalty, namely, whether it is capital expenditure or revenue expenditure, have been rendered merely academic and, in our opinion, it would be an exercise in futility and unnecessary for us to proceed to decide those questions on account of the fact that no expenditure has at all been incurred by the assessee-company in respect of payment of royalty.

11. In CIT v. Smt. Anusuya Devi [1968] 68 ITR 750 (SC), their Lordships of the Supreme Court held that the High Court was not bound to answer the question referred to it by the Tribunal which is purely academic in nature and has no bearing on the dispute between the parties and has become unnecessary. Their Lordships observed as under (p. 756):

"The High Court may only answer a question referred to it by the Tribunal: the High Court is, however, not bound to answer a question merely because it is raised and referred. It is well settled that the High Court may decline to answer a question of fact or a question of law which is purely academic, or has no bearing on the dispute between the parties or though referred by the Tribunal does not arise out of its order. The High Court may also decline to answer a question arising out of "the order of the Tribunal, if it is unnecessary or irrelevant or is not calculated to dispose of the real issue between the taxpayer and the department."

12. We are therefore of the view that in these reference cases, we should decline to answer the questions referred to us, since those questions have now become purely academic and would have no bearing on the situation as exists how and it would be wholly unnecessary for this court to go into those questions and answer them on account of the supervening events which have taken place during the long period in which these reference cases remained pending in this court.

13. Moreover, learned counsel for the assessee-company has also filed applications praying that in view of the subsequent events and the supervening situation, since the assessee-company has received the disallowed amount of royalty, the assessee-company is not interested in pursuing the matter further and that it may be allowed to withdraw the references or the three references may be returned without answering the questions. As we have already observed above, the questions referred to us have, now, on account of subsequent events, become purely academic, we are inclined to accept the request made on behalf of the assessee-company that it may be allowed to withdraw the references and that the references may be returned unanswered particularly as the three references have been made by the Tribunal at the request of the assessee-company. A similar view was taken in K. Ch. Venkataratnam v. CGT [1974] 95 ITR 277 (AP), wherein it was observed that when an assessee makes a request to withdraw the reference or says that he is not interested in pursuing the matter, it is for the court to consider, having regard to the circumstances of the case, either to accede to his request and decide not to answer the reference or to proceed to answer the reference in spite of such a request. In Madras Machine Tools Manufacturer Ltd v. CIT [1975] 98 ITR 119 (Mad), a Division Bench of the Madras High Court observed as under (p. 125) :

"But having regard to the fact that the assessee at whose instance the reference on that question has been made does not want to prosecute the same, we think it unnecessary to consider that question and express our opinion thereon. It is purely a matter of discretion to answer or not to answer the question in the circumstances when a party who has caused a reference does not want to press the same."

14. We are in respectful agreement with the aforesaid two decisions.

15. In the circumstances of these cases, we hold that it would be wholly unnecessary for us to decide the questions which have now became merely of academic importance in the changed circumstances and, therefore, allow the request made by the assessee-company to withdraw the references. In this view of the matter, all the three references are returned without answering the questions.