TMI Blog1985 (8) TMI 331X X X X Extracts X X X X X X X X Extracts X X X X ..... termining its business profits which the ITO and the two appellate authorities in due course rejected. On the application of the assessee, the dispute regarding the admissibility of the claim was referred to the High Court. It agreed with the Tribunal that " the assessee had acquired an asset of an enduring nature in lieu of the payment of the amount in dispute " yet the High Court held that the payment represented business expenditure and the claim of deduction was tenable under s. 10(2)(xv) of the Act. On reaching this conclusion, the court was of the view that consideration as to whether the payment made by the assessee did not form part of its real income was unnecessary and answered the reference in favour of the assessee. The Commissioner, on obtaining special leave, is in appeal before this court. The short facts relevant for appreciating the question for consideration are these: M/s. Bharat Barrel Drum Manufacturing Co. Ltd. (" Bharat Barrel " for short) gave its sole selling agency to a firm, Jalan Trading Co., by an agreement dated May 1, 1951, for two years with right of renewal. Assessee-respondent is a private company incorporated on October 16, 1952. Under a d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he payment of Rs. 7,93,837 is made by the assessee for acquisition of an asset or benefit of an enduring character and, therefore, is of a capital nature. In this the only relevant document to be considered, is the deed of assignment dated December 30, 1952. Examining the said deed and particularly clause 2 therein, which is already stated above, we think there is no doubt that the payment in question was made by the assessee to acquire the right to carry on the sole selling agency of Bharat Barrel Ltd., or in any case to acquire a benefit of an enduring nature. It is true that in this case, no ascertained sum is mentioned for acquiring the right or an enduring benefit. But, in our opinion, this factor alone is not a decisive factor in every case. The facts and the circumstances of every case have to be looked into and if on the whole it appears that what was acquired was an asset of an enduring benefit by expending a certain sum, the expenditure can well be held to be a capital expenditure and not revenue expenditure. In certain cases, it may well be that in conjunction with other facts, the fact that there is no ascertained sum mentioned in order to acquire the asset of an enduri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , and adopting the reasonings relied upon in that case to which we shall presently refer, came to hold : " In view of these circumstances, the Supreme Court held that the payment of the annual sum was not in the nature of capital expenditure but was in the nature of revenue expenditure. Each one of the three features adverted to by the Supreme Court is present in the instant case." and proceeded to conclude the matter by saying : " We take the view that the case before us is in material respects similar to Travancore Sugars' case [1966] 62 ITR 566 (SC)." The High Court did not examine the aspect relating to whether the payment made by the assessee did not form part of its real income by saying : " It is enough for our purpose that the payment is deductible under s. 10(2)(xv) of the Act." A four-judge bench of this court in Assam Bengal Cement Co. Ltd. v. CIT [1955] 27 ITR 34, indicated that the line of demarcation between capital expenditure and revenue expenditure is very thin. Several English decisions were referred to and the court approved the opinion of the Full Bench of the Lahore High Court in Benarsidas Jagannath, In re [1947] 15 ITR 185, where Mahajan J. (as he t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ital, it would be of the nature of revenue expenditure. These tests are thus mutually exclusive and have to be applied to the facts of each particular case in the manner above indicated. It has been rightly observed that in the great diversity of human affairs and the complicated nature of business operations, it is difficult to lay down a test which would apply to all situations. One has therefore got to apply these criteria one after the other from the business point of view and come to the conclusion whether on a fair appreciation of the whole situation, the expenditure incurred in a particular case is of the nature of capital expenditure or revenue expenditure in which latter event only, it would be a deductible allowance under section 10(2)(xv) of the Income-tax Act. The question has all along been considered to be question of fact to be determined by the income-tax authorities on an application of the broad principles laid down above and the courts of law would not ordinarily interfere with such findings of fact if they have been arrived at on a proper application of those principles." In that case before this court, a lease was obtained with certain stipulations including ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e agreement referred to above as modified, was allowable expenditure under s. 10 of the Act in the year under consideration. This court stated (p. 570 of 62 ITR): " It is often difficult, in any particular case, to decide and determine whether a particular expenditure is in the nature of capital expenditure or in the nature of revenue expenditure. It is not easy to distinguish whether an agreement is for the payment of price stipulated in instalments or for making annual payments in the nature of income. The court has to look not only into the documents but also at the surrounding circumstances so as to arrive at a decision as to what was the real nature of the transaction from the commercial point of view. No single test of universal application can be discovered for a solution of the question. The name which the parties may give to the transaction which is the source of the receipt and the characterization of the receipt by them are of little consequence. The court has to ascertain the true nature and character of the transaction from the covenants of the agreement tested in the light of surrounding circumstances." So far as these observations formulating the tests are concer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the payment of the annual sum of Rs. 42,480 in the present case is not in the nature of capital expenditure but is in the nature of revenue expenditure and the judgment of the High Court of Kerala on this point must be overruled." As we have already observed, the facts of this case were peculiar. There was a substantial amount of outright cash payment over and above which the indefinite annual payment had been stipulated. It is interesting to note that this court by its judgment in Travancore Sugars Chemicals Ltd.'s case[1966] 62 ITR 566 had sent down the matter to the High Court for a redisposal and the very matter again came before this court, this time at the instance of the Revenue and the judgment is reported in CIT v. Travancore Sugars Chemicals Ltd. [1973] 88 ITR 1 (SC). At page 10 of the Report, this court observed : " In considering the nature of the expenditure incurred in the discharge of an obligation under a contract or a statute or a decree or some similar binding covenant, one must avoid being caught in the maze of judicial decisions rendered on different facts and which always present distinguishing features for a comparison with the facts and circumstance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs and no more, the appeal deserved to be allowed. Mr. S. T. Desai for the assessee-respondent thereupon sought to raise the contention that once the assessee had paid 75% of its profits of the year, the amount claimed as a deduction was no more in its hands as income and on the principle of real income in the hands of the assessee, we should hold that the same was not income within the meaning of s. 10(1) of the Act. Initially, objection was raised to this move of Mr. Desai by learned counsel for the Revenue on the ground that such a plea had not been canvassed in the earlier stages of the matter. The question referred to the High Court did raise the issue and the High Court in the penultimate paragraph of its judgment had declined to go into this question by saying that it was sufficient for the disposal of the reference once it took the view that the payment was deductible under s. 10(2)(xv) of the Act. Mr. Desai wanted this aspect of the matter to be sent back to the High Court, but we are not inclined to do so in consideration of the fact that the assessment is for the year 1954-55 a period three decades away. Thereupon, counsel for the both sides agreed to, advance their argu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ount itself because the royalty is ascertained ultimately on the profits and does not go to add to the cost of the drums that are purchased from the manufacturers. Therefore, there can be no question of giving any deduction under s. 10(1) of the Act. The concept of 'real income' apparently based on the decision of the Bombay High Court in the case of Seth Motilal Manekchand v. CIT [1957] 31 ITR 735 has also no relevance because there is no question of any deviation of profits of the appellant company by any overriding title." The Appellate Tribunal, in answer to the reiteration of the points raised, said: "Shri Mistry next submitted that the amount in question is also deductible under s. 10(1) as a trading item and in any event what is to be determined is the assessee's real income and that can only be determined after deducting from the assessee's total income the amount paid to M/s. Jalan Trading Co. It was also stated that in the hands of the recipient, the said amount of Rs. 7,93,000 odd was assessed as revenue receipts and assessing the same in the hands of the assessee would amount to double taxation. In our opinion, this later submission of Shri Mistry can easily be di ..... X X X X Extracts X X X X X X X X Extracts X X X X
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