ASSOCIATED STONE INDUSTRIES (KOTAH) LTD. versus COMMISSIONER OF INCOME TAX, RAJASTHAN

Citation: [1997] 1 S.C.R. 957 · Decided: 05-02-1997 · Supreme Court of India · Bench: B.P. JEEVAN REDDY · Disposal: Disposed off

Judgment (excerpt)

ASSOCIATED STONE INDUSTRIES (KOTAH) LTD. 
A 
_,... }. 
v. 
COMMISSIONER OF INCOME TAX, RAJASTHAN 
FEBRUARY 5, 1997 
[B.P. JEEVAN REDDY AND K.S. PARIPOORNAN, JJ.] 
B 
I )- ,>.-
Income Tax Act 1922-Sections 34(1)(a), 34(1)(b)-Re- assess-
ment-Requirements-Duty of assessee to disclose material f acts-Assessee, 
a Public Limited Company carrying on business of quarrying stones on a lease 
granted by Maharao of Kotah--f'ayment of Royalty by assessee in terms of c 
lease deed-Subsequently, merger of State of Kotah with. State of Rajas-
than-Dispute as regards levy of tax between assessee, State of Rajasthan and 
Union of India pending before District Court-Amount of excess royalty paid, 
earlier allowed as deduction, disallowed on re-assessment-Held, Re-assess-
ment proceedings initiated in the instant case under Section 34( 1 )(a) was D 
-i'"~ 
invalid as there was no failure on part of assessee in disclosing material 
facts-Notice can however be sustained under Section 34( l)(b) and proceed-, 
ings initiated under Section 34(1)( a) can be completed under Section· 
34(1)(b). 
Income Tax Act 1922-Section IBA-Levy of Penal interest-Appeal E 
against-Can be challenged by assessee against order of assessment-Matter 
remanded to High Court for consideration. 
The Appellant, a public limited company was incorporated to carry 
on business of quarrying stones in the then Indian State of Kotah on 
January 17, 1945. The then Maharao of Kotah State granted a lease to the F 
assessee company on May 2nd 1945, for a period of 15 years beginning from 
October 1944. Clause 18 of the lease agreement inter-alia provided that in 
consideration of the concessions and privileges granted by the grantor 
and in lieu of Income tax, super-tax and excess profits tax, the grantee 
-
was covenanted to pay to the grantor royalty on the stone excavated at 
• 
G 
the rate of rupee one per 100 sq. feet subject to minimum amount of 
Rs. 1,50,000 per financial year so long as the selling rate of unpolished 
~~ 
slabs did not exceed Rs. per 100 sq. feet. Thereafter, the Kotah State 
merged the United State of Rajasthan and the Income Tax Act 1922 
was brought into force in the newly formed State of Rajasthan with 
effect from 1st April 1950. On a civil suit filed by the assessee in the H 
957 
958 
SUPREME COURT REPORTS 
[1997] 1 S.C.R. 
A 
Court of the District Judge, Kotah, against the Union of India and the State 
of Rajasthan, seeking a declaration that it was exempt from payment of 
income tax that the royalty paid by it in excess of the minimum amount of 
Rs. 1,50,000 was in lieu of income, tax, super-tax etc, the District Judge 
while dismissing, the suit against Union of India, held that the State· of 
B Rajasthan was entitled to the minimum royalty amount of Rs. 1,50,000 
while the Union of India was entitled to the amount equal to the tax liability 
of the assessee company in respect of federal taxes out of the excess royalty 
paid in that year and that the State of Rajasthan was entitled to the residue. 
The Income Tax Officer for the assessment years 1950-51 to 1961-62 disal-
lowed the deduction of minimum royalty amount of Rs. 1,50,000 as capital 
C expenditure while allowing the excess royalty paid as deduction. In the year 
1959, notices for re-assessment of tax u/s. 34(1)(a) of the Income Tax Act 
were issued for the assessment years 1950-51, to 1956-57 and in the re-as-
sessment proceedings, the amount of excess royalty paid, which was earlier 
allowed, was disallowed and added back to the income of the assessee 
D company. On appeal by the assessee, the disallowance of the amount was 
confirmed by the Appellate Assistant Commissioner. The Income-Tax Ap-
pellate Tribunal by its two orders for the assessment years 1950-51 to 
1961-62 held : 
E 
F 
(a) that there had been no failure on the part of assessee company in 
disclosing fully and truly any relevant material necessary for assessments 
in. respect of those years; (b) that in respect of assessment years 1954-55 to 
1956-57, the proceedings although initiated within a period of four years 
from the date of original assessment, yet because such proceedings were 
initiated under S/34(1)(a) of the Act, they could not be upheld as having 
been made u/s. 34(1)(b) of the Act; (c) that the portion of excess royalty 
paid to the State Government which was ·equivalent to tax liability of 
assessee company could not be a permissible deduction. However, remain-
ing portion of excess royalty paid l

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