The taxable income of the assessee is the royalty obtained under clause A plus the income-tax paid thereon by REMCO.

( 1 ) THIS is a reference made by the Income-tax Appellate Tribunal, Madras Bench, undeer section 66 (1) of the Indian Income-tax Act, 1922, at the instance of the assessee. The question referred reads thu :

"whether the assessment of the royalties received by the assessee during the assessment years 1953-54, 1954-55, 1955-56, 1956-57 and 1957-58 at the sums of Rs. 21,271, Rs. 87,379, Rs. 1,63,180, Rs. 2,54,827 and Rs. 2,98,901, respectively, is valid?"

( 2 ) THE learned judge set out the statement of case which ran as follow : there was an agreement entered into on 16th May, 1952, copy whereof is annexed hereunto as annexure "a" and forms part of the case between Messrs. Tokyo Shibaura Electric Co. Ltd. (hereinafter referred to as the "principal company") and the Radio Electricals Manufacturing Co. Ltd. (hereinafter referred to as the "agent company") under which the latter undertook in India the manufacture of house service meters with the aid of the licences and technical information, data and experience of the principal company aforesaid on certain terms and conditions embodied therein. The following clauses therein relate to the remuneration payable to the "principal company :

"article VII.- A. In addition to the reimbursements and payments elsewhere provided for in this agreement, REMCO agrees to pay to TOSHIBA as consideration for the licences and for the information, data and experience to be furnished hereunder, an amount in any currency acceptable to the Japanese Government equivalent to three per cent. of the net sales billed in rupees by REMCO directly or on its behalf of all watthour meters, as defined herein, manufactured by REMCO with an annual minimum royalty of 9,000 U. S. dollars payable in two equal half yearly instalments of 4,500 U. S. dollars, each not later than sixty (60) days from the end of March and September of each calendar year. . . D. All payments to be made hereunder shall be made in the City of Tokyo, Japan, in any currency acceptable to the Japanese Government with out deductions for taxes or other charges assessed in India, which shall be assumed by REMCO. "

( 3 ) NOTICES were served by the Income-tax Officer on the "agent company" aforesaid as the statutory agent of the non-resident principal (the assessee in this case) for the years ended 31st march, 1953, to 31st March, 1957, the "previous years" for assessment years 1953-54 to 1957-58, which were duly complied with declaring the royalties received for each of the years as its total income.

( 4 ) THE Income-tax Officer, however, grossed up the royalties and assessed the various years as shown belo :

Previous year

Grossed up

Rs .

31-3-1953 1953-54 ? ? 10,702 ? 21,271 31-3-1954 1954-55 ? ? 43,963 ? 87,379 31-3-1955 1955-56 ? ? 77,001 1,63,180 31-3-1956 1956-57 ? 96,353 2,54,827 31-3-1957 1957-58 1,15,077 2,98,901

Assessment year Net royalty Rs .

( 5 ) THE Income-tax Officer's reasons for doing so are as follow :

". . . . . . as the non-resident company has to receive the royalty free of all taxes it is clear that the total income of the assessee company is not merely the net royalty received as declared by their agents, but it is the royalty received plus such sum that, when the tax is levied on the total amount, the net amount left will be the royalty actually received by the assessee company. So I shall gross up the net royalty received and this will be treated as the total income of the assessee company. . . "

( 6 ) IT was contended in the appeals that the assessee filed before the Appellate Assistant commissioner, that in all the aforesaid years the correct assessable income had to be ascertained only by grossing up the net amount with reference to the provisions of the Finance Acts for the relevant assessment years. Copies of the grounds of appeal are collectively annexed hereunto as annexure "c" and forms part of the case.

( 7 ) THE Appellate Assistant Commissioner accepted the assessee's contention and modif

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