IN THE HIGH COURT OF HIMACHAL PRADESH, SHIMLA Income-tax Appeal No. 11 of 2002 Reserved on: 16.12.2009 Date of decision: 08.01.2010 Commissioner of Income-tax, Shimla …Appellant. Versus H.P.State Forest Corporation Ltd. …Respondent. Coram The Hon’ble Mr.Justice Deepak Gupta, J. The Hon’ble Mr. Justice V.K.Ahuja, J. Whether approved for reporting? No. For the appellant: Mr. Vinay Kuthiala, Advocate. For the respondent: Mr. M.M.Khanna, Sr. Advocate with Mr. Vayur Gautam, Advocate. Per Deepak Gupta, J. This appeal under Section 260 of the Income-tax Act, 1961 has been admitted on the following substantial questions of law:- (a) Whether on the facts and circumstances of the case the ITAT was correct in holding that the liability relating to royalty and extension fee crystalised during the year and therefore was an admissible expenditure for the A.Y. 1995-96? (b) Whether on the facts and in the circumstances of the case the ITAT was right in deleting the addition of Rs.3,62,51,690/- by ignoring the provision of Section 43 B of the Income-tax Act, 1961? 2 The dispute relates to the assessment year 1995-96. The assessee is the H.P.Forest Corporation and is engaged in the business of felling, converting and selling of timber. It enters into agreement(s) with the Forest Department for this purpose. For the year in question, the assessee claimed deduction of a sum of Rs.3,62,51,690/- being the amount paid by it as royalty, sales tax, extension fee and damage bills relating to timber lots. The assessee follows the mercantile system of accounts. Before the authorities below the only question raised was that this amount had not crystalised and therefore, could not be claimed as deduction. The Assessing Officer decided the case against the assessee and made addition of this amount of Rs.3,62,51,690/-. This order was confirmed in appeal by the Commissioner of Income-tax. The case of the assessee was that in fact this amount was not on account of payment of royalty, sales tax, extension fee and damage bills relating to timber lots, to be paid by the assessee but the same was found payable on reconciliation of the accounts with the Forest Department. The Forest Department claimed that this amount had been paid by it to the State and therefore claimed reimbursement of the same from the assessee. The Tribunal held that this amount had crystalised during the year in question and held as follows:- “The assessee was following mercantile system. It has filed a copy of letter dated 05.10.1994, page 13 of the paper book, which clearly mentions that reconciliation of 3 accounts was complete and was to be urgently carried out. On the basis of the said letter, the assessee reconciled the accounts with the Forest Department for ascertaining its liability. Prior to reconciliation, liability had not been settled/crystalised. This is settled law that on the basis of mercantile system, liability secures when it is crystalised/settled. No doubt, the assessee has made provision to the best of its estimate but actual liability was settled during the year by reconciliation with the Forest Department and therefore, liability arose during the previous year. Since liability has arisen during this year, it has to be allowed. After going through the decisions relied upon by ld. AR, we find that the issue is covered by the ratio of the decisions in the case of Calcutta Co. Ltd. Vs. CIT 37 ITR 1(SC) and CIT v. Swadesh Cotton and Flour Mills Pvt. Ltd. 53 ITR 134 (SC). On the facts and circumstances of the case, we are of the view that the liability being contractual in nature has accrued during the year under appeal either reconciliation being done and therefore, it deserves to be allowed. Accordingly, we set-aside the order of the Ld. CIT(A) and direct the AO to allow deduction in respect of Rs.3,62,51,690 as claimed.” Aggrieved by this order of the assessee the present appeal has been filed. The main ground raised by the revenue is that the amount had not crystalised during the year in question and the Tribunal erred in deleting this addition of Rs.3,62,51,690/- In this appeal the revenue has also raised a plea that this 4 amount is a tax payable within the meaning of Section 43B(a) and therefore, unless it is actually paid cannot be deducted. On behalf of the assessee it is contended that this plea cannot be permitted to be raised for the first time in an appeal under Section 260-A. To understand the dispute between the parties, it would be pertinent to refer to Section 43B(a) of the Act:- “43B. Notwithstanding anything contained in any other provision of this Act, a deduction otherwise allowable under this Act in respect of – (a) any sum payable by the assessee by way of tax, duty, cess or fee, by whatever name called, under any law for the time being in force, or) (b) xxx… xxx… xxx…. (c) Xxx… xxx… xxx… (d) Xxx.. xxx… xxx… (e) Xxx.. xxx… xxx… (f) Xxx… xxx… xxx… shall be allowed (irrespective of the previous year in which the liability to pay such sum was incurred by the assessee according to the method of accounting regularly employed by him) only in computing the income referred to in section 28 of that previous year in which sum is actually paid by him: Provided that nothing contained in this section shall apply in relation to any sum referred to in clause (a) [or clause (c)] [or clause (d)] [or clause (e)] [or clause (f)] which is 5 actually paid by the assessee on or before the due date applicable in his case for furnishing the return of income under sub-section (1) of section 139 in respect of the previous year in which the liability to pay such sum was incurred as aforesaid and the evidence of such payment is furnished by the assessee alongwith such return:” According to the department, the payments made by the assessee on account of royalty, extension fees, damage bills, etc. are tax/duty or cess or fee within the meaning of Section 43 B(a). It would be pertinent to mention that admittedly before the authorities below the revenue had not taken the plea that the amount of Rs. 3,62,51,690/- was a tax and covered under Section 43B. The Assessing Officer and the Commissioner (Income-tax) had decided this question only on the ground that the liability had not crystalised in the year in question and therefore, the assessee was not entitled to claim benefit of the deduction of the same. As already mentioned above, the Tribunal held that the liability crystalised in the year in question and since the assessee was following the mercantile system, it was held to claim this amount as an expense. Number of authorities have been cited by the parties. In State of M.P. vs. Mahalaxmi Fabric Mills Limited and others, AIR 1995 SC 2213, the Apex Court held that royalties are payments which the Government may demand for appropriation of minerals timber or other property belong 6 to the Government. Two important feature of royalty are that payment is made for the privilege of removing the articles in proportion to the quantity moved and the basis of the payment is an agreement. In Bharat Earth Movers vs. Commissioner of Income-tax, (2000) 245 ITR 428, the Apex Court held that if the assessee had made provision for meeting the liability incurred by it under the leave encashment scheme proportionate to the entitlement earned by the employees of the company it was entitled to deduction of the said amount after the gross profits and it cannot be said that this liability is a contingent liability. In Gorelal Dubey vs. Commissioner of Income- tax, (2001) 248 ITR 3, the Apex Court held that royalty is a tax and therefore, in terms of Section 43 B of the Income- tax Act unpaid liability or royalty for extraction of limestone cannot be deducted. In Commissioner of Income-tax vs. Varas International Pvt. Ltd. (2006) 284 ITR 80 (SC), the question before the Apex Court was whether the fee paid under the Rules was amounted to tax or cess or not. It held as follows:- “10. We find that the order of the Commissioner of Income-tax(Appeals) is not very clear on this aspect. As far as the Tribunal is concerned, it is true that the submission of the Department was that the levy was either a fee or 7 excise duty. However, we note that rule 6 under which the levy is imposed on the import of spirit is contained in the rules which are described as Excise Rules. Additionally we find that in the grounds of the appeal before this Court it has been submitted that the levy was a duty and the duty would include payment on public revenue levied on the import, export, manufacture or sale and that the additional fee was nothing but duty and section 43B of the Income-tax Act, 1961 was fee on any sum payable by the assessee by way of tax or duty under any law for the time being in force. In any event, the Tribunal certainly erred in not dealing with the contention relating to the levy being an excise duty. The High Court also erred in holding that even an excise duty or other duty imposable by virtue of entry 51 of List II would be covered by the principle that the amount levied under that entry should also be treated as a price or consideration for the purposes of the grant of privilege with regard to the manufacture of alcohol.” In reply to the preliminary objection raised that this plea was not taken before the Tribunal, Shri Vinay Kuthiala, learned counsel for the revenue submits that this is a legal plea based on statutory provisions and therefore, cannot be ignored. He relies upon the judgements of the Apex Court in Moly and another vs. State of Kerala, (2004) 4 SCC 584 and Dakshin Haryana Bijli Vitran Nigam Ltd. vs. Paramount Polymers Pvt. Ltd. (2006) 13 SCC 101. 8 In our view these judgements are not at all helpful in deciding the matter. The question whether payment of Rs.3,62,51,690/- was on account of tax or other business expenditure was not considered by any of the authorities below. No plea was raised by the revenue before the authorities below that this amount was a tax and therefore, unless it was actually paid no deduction could be claimed under Section 43 B. The only plea taken was that the payment of the amount had not crystalised. The Tribunal held that the payment had crystalised in the particular year. This is a pure question of fact and not of law and we have to uphold this finding of the Tribunal that the payment had in fact crystalised in the year. On behalf of the assessee it is argued that though this payment was shown as royalty, sales-tax, extension fees, etc. this amount was not initially payable by the assessee but by the Forest Department. After the department had paid the amount to the State it claimed reimbursement under the contract from the assessee. This question could not have been decided without placing on record the original agreement and the lease deeds showing what were the terms of the agreement entered into between the assessee and the Forest Department. Since no such record was produced and the revenue never raised this question before the authorities below it cannot raise such a plea at this stage. Even before us 9 till date no record has been placed to show what is the exact nature of the amount payable. We are, therefore, of the view that the revenue cannot be permitted to raise the second question for the first time in this appeal under Section 260 of the Act since this question is not a pure question of law but a mixed question of fact and law. For the reasons stated above, question No.1 is answered against the revenue and in favour of the assessee. As far as question No. 2 is concerned in view of the fact that no such question was raised before the authorities below this question cannot be permitted to be raised in this appeal. The appeal is accordingly dismissed. ( Deepak Gupta ), J. 8th January, 2010 ( V.K.Ahuja ), J. ™