TMI Blog1983 (10) TMI 24X X X X Extracts X X X X X X X X Extracts X X X X ..... ication was made by it as promoter in the name of the new company for the grant of such licence. The Government of India informed it that such a licence could be granted on the understanding that it would surrender the licence already granted to it. On December 31, 1957, it returned its licence to the Government of India and in February, 1958, the Government issued a licence in the name of the assessee. On April 26, 1958, the assessee entered into an agreement with Kirloskar Bros. Ltd., the terms of which are relevant to this reference. The agreement recited that Kirloskar Bros. had obtained from the Government a licence for the manufacture of air compressors and had been permitted to expand its existing engineering business, that to do so Kirloskar Brothers had promoted and registered the assessee and the Government had transferred the licence to the assessee, and that Kirloskar Brothers had agreed with the assessee to desist from manufacturing air compressors below 500 cubic feet per minute at 100 lbs. per square inch, so long as the assessee manufactured and sold the same and had also agreed to permit the assessee the use of the name " Kirloskar " in connection with its busine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f material used and an overhead charge (as consideration for the use of Kirloskar Brothers' goodwill) equal to. " (sic) On October 1, 1967, a supplementary agreement was entered into between the assessee and Kirloskar Brothers whereunder it was provided that notwithstanding what was contained in the principal agreement, the assessee would pay Kirloskar Brothers, subject to a minimum of Rs. 10,000 in each and every year during the continuance of the principal agreement, a royalty equal to one per cent. of the net proceeds of the sale only of air compressors manufactured or to be manufactured by the assessee and that the assessee would not be liable to pay any royalty to Kirloskar Brothers on the sale of products other than air compressors manufactured by the assessee. The assessment year with which we are here concerned is 1963-64, the accounting year being the year ending March 31, 1963, The assessee paid a sum of Rs. 1,44,556 to kirloskar Brothers under the provisions of clause 5 of the principal agreement, and claimed the same as a revenue expenditure. The ITO disallowed the claim on the ground that the payment was capital in nature, since Kirloskar Brothers had parted with t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... judgment which appears to us to be determinative of the question is that of the Supreme Court in Travancore Sugars and Chemicals Ltd. v. CIT [1966] 62 ITR 566. The assessee was floated with a view to taking over the business assets of a company called " Travancore Sugars Ltd. " (which was being wound up and in which the State Government held the largest number of shares), the Government Distillery at Nagercoil and the business assets of the Government Tincture Factory at Trivandrum. An agreement was entered into between the Government of Travancore and the promoters of the assessee. Under this agreement, the assets of the aforesaid three concerns were agreed to be sold to the assessee. Clause 3 of the agreement provided that the cash consideration for the sale of assets of the Travancore Sugars Ltd. would be Rs. 3,25,000. Clause 4(a) provided that the cash consideration for the sale of the Government Distillery would be arrived at as a result of joint valuation by the engineers to be appointed by the parties. Clause 5(a) stated that the cash consideration for the sale of assets of the Government Tincture Factory would be the value according to the books. Apart from the cash conside ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d (2) the consideration that Government would be entitled to twenty per cent. of the net profits earned by the assessee in every year subject to a maximum of Rs. 40,000 per annum. The court observed that with regard to the second part of the consideration, three important points had to be noticed. They are (p. 571): " In the first place, the payment of commission of twenty per cent. on the net profits by the appellant in favour of the Government is for an indefinite period and has no limitation of time attached to it. In the second place, the payment of the commission is related to the annual profits which flow from the trading activities of the appellant-company and the payment has no relation to the capital value of the assets. In the third place, the annual payment of 20 per cent. commission every year is not related to or tied up, in any way, to any fixed sum agreed to between the parties as part of the purchase price of the three undertakings. There is no reference to any capital sum in this part of the agreement. On the contrary, the very nature of the payments excludes the idea that any connection with the capital sum was intended by the parties. It is true that the purcha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in a letter stated that he should get four annas per ton permanently on all coal despatched from the colliery every year, irrespective of any loss or gain to the assessee-company. The assessee was then incorporated, and a formal agreement of sale was entered into between it and the purchaser. The agreed price of Rs. 1,00,000, however, did not include valuation of the goodwill and mining rights and licences which were being transferred to the assessee-company along with the assets. Subsequently it was found impossible to pay to the seller a fixed dividend irrespective of the fact whether the assessee made any profit or not, and, therefore, a fresh agreement was executed under which the seller agreed to give up all the dividends to which he was entitled and to permit the assessee to convert the preference shares into ordinary shares. In consideration of this, the assessee agreed to pay a commission to the seller at the rate of four annas per ton of steam and rubble coal and three annas per ton of slack coal raised from the colliery and sold and rented by the assessee.The question that arose was whether the sum representing the commission paid by the assessee to the seller under the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... " a perpetual payment. The length of time during which a payment is to endure could be a very important factor in determining its character. It was much easier to treat a payment which was only going to extend over two years as really a payment of purchase price by instalments, than it was to treat payment which it was contemplated to be continued in perpetuity. The next element to consider was that the payments were related to turnover, and the sums paid in that respect were not dissimilar from royalties. The sum had not been fixed in reference to profits, but in reference to turnover, as was commonly done in the case of royalties on patents. The third thing to observe about the agreement was that the sums payable were not tied in any way or related in any way to any special sum whatsoever. Indeed, regarding the payment as a payment which may continue in perpetuity, it seemed impossible to the Master of the Rolls to say that it was to be regarded as payment by instalments of a capital sum. He posed the question: What is the capital sum? and said, " Not merely, therefore, is there no reference to or dependence upon any capital sum, but the very nature of the payments appears to exc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion to the judgment of the Court of Appeal in IRC v. Ramsay [1935] 20 TC 79. The assessee was a dental surgeon who had purchased the goodwill of the practice carried on by his late employer. He entered into an agreement with the widow whereunder the primary price to be paid by him for the goodwill, equipment and materials was pounds15,000, subject to increase or diminution as therein provided. The assessee was required under the agreement to pay to the widow a sum of pounds5,000 on account of the purchase price and during a period of ten years to pay to her in respect of the balance of the said purchase price a sum to be secured and payable in each and every year equal to 25 per cent. of the net profits of the practice for ten years. The assessee under the agreement would continue to remain liable to pay the capital sum computed as aforesaid in respect of each year of the said period of ten years notwithstanding that the sums so paid might in the aggregate amount to a greater sum than the balance of the primary price which in such case would be increased accordingly by the amount of such excess. Conversely, if the aggregate of the capital sums paid during the period amounted to a l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d partner's share was a capital income. In the agreement of partnership, it was agreed that on the death of one of the partners, the purchase money for the share of the deceased partner would be such a sum of money as the personal representatives of the deceased partner and the surviving partners might agree upon, and failing such agreement, the purchase money would be a sum equal to one-half of the share of profits for three years commencing from the first day of the month immediately following the death of such partner which would have been payable to him had he continued to be a partner during the said period of three years. The decision of the auditors of the firm as to the amount of the purchase money payable under the agreement was to be final and binding and no payment on account of such purchase money was required until the same had been actually ascertained. In the judgment of Lawrence J., it was erroneous to say that the payment made under the agreement consequent upon the death of one partner was not a capital payment because that partner's share was dependent upon what the profits of the business were for the three years succeeding his death. It was a fairly common meth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee subject to a minimum of Rs. 10,000 per year, for a period of twelve years commencing from the year in which the assessee starts making profits. The payment to be made every year is related to the turnover in air compressors in that year. Being a payment required to be made over a period of twelve years, it will depend upon the assessee's turnover during each of the twelve years. If we ask ourselves what is the purchase price predicated under the agreement, we are unable to give an answer, for the agreement does not state an ascertained price nor does it provide for an ascertainable price. This is an agreement to which the ratio of the judgment in Travancore Sugars and Chemicals Ltd.'s case [1966] 62 ITR 566 (SC) must squarely apply and the payments thereunder must, consequently, be characterised as being of a revenue nature which are allowable as deductions from the assessee's total income. We arrived at this conclusion not because the yearly payments under the agreement may fluctuate but because no ascertained or ascertainable capital sum is discernible in it. Accordingly, the question posed for our consideration is answered in the negative, that is, in favour of the ..... 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