1. Royalty payments for trade name use under Income-tax Act — Suit for restoration of agricultural land possession — Impact of legislative amendment ousting civil court jurisdiction. (Para 1 , 2 , 4 , 5 , 3 )
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1993 Supreme(SC) 493
SUPREME COURT OF INDIA
B.P. JEEVAN REDDY AND N. VENKATACHALA, JJ.
Bharat Beedi Works (Pvt.) Ltd. and another etc. etc., Appellants
Versus
Commissioner of Income-tax, Respondent.
Civil Appeal No. 1452 of 1987 with C.A. Nos. 4462 of 1989, 1822, 1902, 1465 of 1987, 657,658,4461 of 1989, 6093,6204,6092 and 6092A of 1990
Decided on 7-5-1993.
Important Points
Royalty payments made to a firm for the use of a brand name are considerations for a valuable right and not remuneration to directors qua directors. Consequently, such payments do not fall within the restrictive ceiling prescribed under Section 40(c) of the Income-tax Act, 1961.
Subject
Tax Law - Income Tax
Act Referred
Headnote
Income-tax Act, 1961 - Section 256 and 40(c) - Deductions as claimed - Recovery of possession of land - Assesses claimed deduction of amount - Whether on case Tribunal was right in holding that sum of Amount - Commissioner of Income-tax initiated (suo motu) proceedings for revising said assessments in so far as aforesaid deductions were concerned - After hearing assesses he passed orders on September where under he disallowed payments to firm over and above ceiling prescribed in Section 40(c) - Assesses preferred appeals to Tribunal against orders of I.T.O - Appeals were allowed and orders of I.T.O. restored - On reference High Court answered question in negative i.e in favor of revenue and against assesses on following reasoning three directors of assesses-company were also the partners in the firm to which royalty payments were made - In law a firm has no separate legal existence it is not a juristic person or a distinct legal entity - Held, Impact of Fifth Amendment may give rise to a situation where the remedy lies entirely under the Act and may have to be taken in manner prescribed by or under the Act - For example where a person who is a deemed tenant under Section 4 of Act if evicted from land on or after 1st July his remedy under Section 8(2) is to approach the authority under the Act for recovery of possession of land of which he has been dispossessed - In such a situation the remedy may not be one available in case of a tenant other than a deemed tenant whose case is not governed by Section 8(2) of Act - But in the case of a deemed tenant who has been evicted from land on or after July since a remedy has been provided under Act jurisdiction of the Civil Courts stands wholly barred by virtue of Section 58(2) of Act - In such a situation the Civil Court would not be competent to pass any order for restoration of possession to deemed tenant - His remedy would therefore to be entirely under Act - This is just by way of an illustration - Appeal allowed
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Table of Contents
2. Whether royalty payments constitute director remuneration under Section 40(c) — Applicability of res judicata and Order 2 Rule 2 CPC — Effect of jurisdiction-ousting amendments on pending suits. (Para 7 , 8 , 4 , 5 )
3. Commercial payments for rights are not director remuneration — Technical dismissals do not trigger res judicata — Statutory amendments ousting jurisdiction apply to pending suits. (Para 11 , 13 , 14 , 4 , 5 , 9 )
4. Commercial payments for rights are not remuneration under Section 40(c) — Res judicata requires decided issues — Subsequent jurisdiction ouster requires referral to statutory authorities. (Para 13 , 4 , 5 , 9 )
5. Appeals allowed — Royalty payments held not to fall under Section 40(c) — High Court order set aside and matter remitted for referral to statutory authority. (Para 17 , 12 )
6. Does payment for a brand name to a firm whose partners are directors fall under Section 40(c) of the Income-tax Act?
No. Payments for a valuable right, such as a brand name, are consideration for a commercial right and not remuneration, benefit, or amenity provided to directors qua directors. Such payments may be scrutinized under Section 40A(2) but do not fall within the ceiling of Section 40(c). (Para 13 , 14 )
7. Does a suit dismissed on technical grounds bar a subsequent suit on the same subject matter under res judicata?
No. Res judicata applies only when the matter was heard and finally decided. If a suit is dismissed on technical grounds, such as the failure to seek consequential relief, the core issues remain undecided and the subsequent suit is not barred. (Para 4 )
8. Does Order 2 Rule 2 of the CPC bar a second suit if the cause of action is distinct?
No. Order 2 Rule 2 precludes splitting claims emanating from the same cause of action. It does not bar a subsequent suit based on a distinct cause of action, even if the subject matter of the suit remains the same. (Para 5 )
9. What is the effect of a legislative amendment ousting civil court jurisdiction on pending suits?
In the absence of an express saving clause, such amendments generally apply to pending suits. If the dispute falls within the exclusive jurisdiction of a statutory authority, the civil court should refer those specific issues to that authority for determination. (Para 9 )
JUDGMENT
B. P. JEEVAN REDDY, J.:— These appeals are preferred against the judgment of the Karnataka High Court answering the question referred to it, at the instance of the revenue, in favour of the revenue and against the assessee. The question referred under Section 256 of the Income-tax Act, 1961, read as follows: "Whether on the facts and in the circumstances of the case, the Tribunal was right in holding that the sum of Rs. 1,79,742/- could not be disallowed under Section 40(c) of the Income-tax Act, 1961." (The above question related to Assessment Year 1974-75. The question referred for A. Y. 1975-76 was identical except in the matter of amount). Since the facts in all the appeals are identical it would be sufficient to notice the facts in C.A. Nos. 6092 and 6092A/90 (Prakash Beedies (P) Ltd. v. Commr. of Income Tax, Karnataka, Bangalore).
2. Prior to 15-7-1972, a partnership firm called K. M. Anand Prabhu & Sons, Mangalore, consisting of three partners K. M. Vishnudas Prabhu, K. M. Ramdas Prabhu and K. M. Shankar Prabhu was engaged inter alia in the business of manufacturing and sale of beedies under the brand name Mangalore Prakash Beedies. On May 20, 1972 a private limited company called Parkash Beedies Limited (the assessee-appellant herein), was incorporated with its registered office at Mangalore. One of its objects was to take over the business of the aforesaid firm. Under an agreement dated July 15, 1972 between the firm and the company, the firm sold its rights and assets to the company on the terms and conditions set out therein. Clause 4(a) of the agreement, which alone is material for the purposes of these appeals reads:
"(a) For the use of the trade name the Company shall pay royalty to the Vendor at the rate of 10ps. for every thousand beedies sold by the Company by using the trade name of the Vendor. The royalty shall be worked out at the end of each quarter ending on March, June, September and December, on the sales made during each quarter. The royalty fixed hereby shall not be varied for a period of one year and may be reviewed and/or revised there afterwards from time to time".
3. The assessee was making payments to the firm every year on account of royalty in terms of said clause.
4. The three partners aforesaid of the firm were also the directors of the assessee-company.
5. For the assessment years 1974-75 and 1975-76, the assessee claimed deduction of the amount paid by it to the firm on account of royalty in terms of clause 4(a) of the agreement. The amounts paid during the accounting years relevant to the said assessment years were Rs. 3,16,526/- and Rupees 3,95,742/- respectively. The I. T. O. allowed the deductions as claimed.
6. In exercise of the powers conferred on him by Section 263, the Commissioner of Income-tax initiated (suo motu) proceedings for revising the said assessments in so far as the aforesaid deductions were concerned. After hearing the assessee, he passed orders on September 16, 1976 whereunder he disallowed payments to the firm over and above the ceiling prescribed in Section 40(c). The assessee preferred appeals to the Tribunal against the orders of the I.T.O. The appeals were allowed and the orders of the I.T.O. restored. On reference, the High Court answered the question in the negative i.e., in favour of the revenue and against the assessee, on the following reasoning: the three directors of the assessee-company were also the partners in the firm to which royalty payments were made. In law, a firm has no separate legal existence; it is not a juristic person or a distinct legal entity. It is merely a collection or association of the individuals for carrying on a business. Merely because the firm is an assessable entity under the Income tax Act it does not follow that it is a juristic or legal entity. It must, therefore, be held that the payments made to the firm are in reality payments made to the directors. Such payments clearly attract and fall within the mischief of Section 4
