1992 (8) TMI 36 - HC - Income Tax

Summary

Issues Involved:
1. Whether the payment made to a rival bidder not to participate in an auction held regarding the right to vend arrack is opposed to public policy.
2. Whether such a payment is capital expenditure or a revenue expenditure.

Summary:

Re: Public Policy
The court had to determine if the payment of Rs. 5,00,000 to a rival bidder to withdraw from an auction was opposed to public policy. The court noted that public policy aims to protect and promote public welfare. It was emphasized that the trade in question was the vending of liquor, a trade not recognized as a fundamental right but rather a state-conferred privilege. The court highlighted that the auction's purpose was to maximize state revenue, and any attempt to reduce competition among bidders would harm public interest and public welfare. Therefore, the payment made by the assessee to eliminate a rival bidder was deemed contrary to public policy and could not be recognized as a valid payment for the purpose of the Income-tax Act.

Re: Capital Expenditure or Revenue Expenditure
The court examined whether the payment was a capital expenditure or a revenue expenditure. The distinction between the two types of expenditure is complex and context-dependent. The court referred to various judicial precedents and principles, noting that an expenditure made to obtain an asset used in a trade is generally capital expenditure, while expenditure incurred to earn current income is usually revenue expenditure. In this case, the payment was made to obtain the right to vend liquor, a privilege for one year. The court concluded that this expenditure was made at the threshold to set up the business and was thus a capital investment. The court rejected the assessee's contention that the payment had a direct impact on current income and should be treated as revenue expenditure.

Conclusion
The court answered both issues in favor of the Revenue, concluding that the payment was opposed to public policy and constituted capital expenditure. The broad question referred by the Appellate Tribunal was answered in the negative and against the assessee.