1969 (11) TMI 16 - HC - Income Tax

Payment by way of commission - incurred in connection with the procurement of raw material for the business and trade of the assessee-company - spent by an assessee to run and maintain its business and as a part and parcel of its working capital can only be described as revenue expenditure - allowable as revenue expenditure

Issues Involved:

1. Whether the payment of Rs. 18,597 by way of commission to Mr. Prabhu Dayal Agrawal was allowable as revenue expenditure.
2. Whether the compensation of Rs. 70,000 paid to Mr. Prabhu Dayal Agrawal was allowable as revenue expenditure.

Issue-wise Detailed Analysis:

1. Payment of Rs. 18,597 as Revenue Expenditure:

The assessee-company, Dalmia Dadri Cement Ltd., claimed Rs. 18,597 paid to Mr. Prabhu Dayal Agrawal as revenue expenditure for the assessment year 1955-56. The Income-tax Officer initially allowed this amount as revenue expenditure. However, the Appellate Assistant Commissioner reversed this decision, classifying it as capital expenditure. On further appeal, the Income-tax Appellate Tribunal found in favor of the assessee-company, stating that the payment was for services rendered in the procurement of raw materials, not for promotional activities. The Tribunal noted that this expenditure had been consistently allowed as revenue expenditure in previous years without any special rights being secured by the agreement. The Tribunal concluded that the payment was in the nature of a middle-man's remuneration for services rendered and was thus admissible as revenue expenditure.

2. Compensation of Rs. 70,000 as Revenue Expenditure:

The assessee-company also claimed Rs. 70,000 paid to Mr. Prabhu Dayal Agrawal as compensation for terminating the agreement as revenue expenditure under section 10(2)(xv) of the Income-tax Act. The Income-tax Officer disallowed this amount, considering it a capital expenditure that absolved the company from an onerous burden. The Appellate Assistant Commissioner upheld this view. However, the Income-tax Appellate Tribunal allowed the deduction, reasoning that the payment was made to eliminate a recurring revenue expense and did not bring into existence any asset or enduring advantage for the business. The Tribunal held that the payment was for liquidating a recurring claim of a revenue nature and was thus admissible as revenue expenditure.

Legal Precedents and Reasoning:

The court referred to several legal precedents, including Assam Bengal Cement Company Ltd. v. Commissioner of Income-tax and State of Madras v. G. J. Coelho, to determine the nature of the expenditure. The court observed that if a lump sum payment is made to get rid of an annual business expense chargeable against revenue, it should be regarded as a business expense unless it brings in a capital asset. The aim and object of the expenditure determine its character, not the source or manner of payment.

The court noted that the revenue had consistently treated the payment to Mr. Prabhu Dayal Agrawal as revenue expenditure in previous years. There was no change in the facts and circumstances of the case to justify a different view for the assessment year 1955-56. The court also referred to H. A. Shah and Co. v. Commissioner of Income-tax, emphasizing the need for finality and certainty in tax litigation.

Conclusion:

The court concluded that both the payment of Rs. 18,597 and the compensation of Rs. 70,000 were allowable as revenue expenditure. The answers to the two questions referred to the court were in the affirmative. The Commissioner of Income-tax was directed to bear the costs of the assessee-company, with counsel's fee fixed at Rs. 250.

Judgment:

The judgment was agreed upon by both judges, and the questions were answered in the affirmative.

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