TMI Blog1968 (2) TMI 31X X X X Extracts X X X X X X X X Extracts X X X X ..... rs of motor-cars, motor-cycles, cycle-cars, motors, scooters, motor-buses and lorries, trucks, tractors, cycles, bicycles and carriages, launches, boats and ships, aeroplanes, hydroplanes and other vehicles and conveyance of all descriptions for carrying passengers or other personal goods, commodities, produce, cargoes and other things on land or sea or by air (all hereinafter comprised in the term motor and other things whether propelled or assisted by means of petrol, spirit, steam, gas, electrical, animal or other powers and all engines, chassis, bodies, turbines, tanks, tools, implements, accessories, and other things, materials and products used for, in or in connection with motors and other things. Inter alia, the articles enabled it to import into India Austin cars and other Austin products and to undertake progressive manufacture in India of such parts of Austin products and, for the purpose, an express provision was made in the articles, which is the charter of the company, to appoint Car Builders Limited, a private limited company, as its managing agents. Pursuant thereto, an agreement dated October 18, 1948, was entered into between the company and the managing agents. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecision of the Government whereby the assessee was to confine its activities to the progressive manufacture of Leyland commercial vehicles only. With this background and a defined phased programme before it, the company resolved even on June 19, 1954, to terminate the managing agency agreement and to pay them a sum of Rs. 2,50,000 in full and final settlement and discharge of all accounts and claims for compensation for loss of office or otherwise. The above resolution was produced before us which we have perused as it was necessary in the interests of justice to do so. The company could not, however, make considerable progress in implementing the manufacturing scheme approved by the Government of India. The then Minister for Commerce and Industry, in a conference held for the purpose, expressed so and suggested that Leylands should be invited to provide capital as and when required, subject to certain conditions, and alternatively assured the company that in case such financial assistance was not forthcoming, the Government would in such a contingency arrange the required capital subject to such conditions as may be necessary or required. The Minister made it clear that the Govern ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ppeal, opined that the termination of the agreement was necessary only to implement the programme. He rightly formulated two tests as envisaged under section 10(2)(xv) of the Indian Income-tax Act, 1922, namely, (1) the expenditure must not be capital, and (2) the expenditure must be laid out wholly and exclusively for the purposes of the business. He held that the second test was satisfied in the instant case, but was not satisfied that the first test has been fulfilled. His reason was that by Austins refusing to collaborate with the company in the manufacturing scheme, the company's existence was at stake as, according to him, the company's sole business was to import and assemble Austin cars and trucks. He proceeded to state that the managing agency agreement was entered into in order to continue the company's business. According to him, such an agreement was necessary because the Government would not accord its approval for the scheme otherwise. In the end he would conclude that the expenditure was incurred by the company to safeguard its framework, and relying upon the ratio in Van den Berghs Ltd. v. Clark held that the expenditure was on capital account and hence not an allow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to create any asset, tangible or intangible from which a return could be expected. The expenditure was made once and for all and is non-recurring and was not for any oblique purpose. Various tests have been formulated by courts in order to decipher the nature and quality of the expenditure of an assessee while considering claims by them for allowance of such expenditure as against the income under section 10(2)(xv). A clear-cut dichotomy cannot be laid down in the absence of a statutory definition of " capital and revenue expenditure ". Invariably it has to be considered from the point of view of the payer. In the ultimate analysis, the conclusion of the admissibility of an allowance claimed is one of law, if not a mixed question of law and fact. The word " capital " connotes permanency and capital expenditure is, therefore, closely akin to the concept of securing something tangible or intangible property, corporeal or incorporeal rights, so that they could be of a lasting or enduring benefit to the enterprise in issue. Revenue expenditure, on the other hand, is operational in its perspective and solely intended for the furtherance of the enterprise. This distinction, though cand ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... diture may be treated as properly attributable to capital when it is made not only once and for all, but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade ...... 3. Whether, for the purpose of the expenditure, any capital was withdrawn, or, in other words, whether the object of incurring the expenditure was to employ what was taken in as capital of the business. Again, it is to be seen whether the expenditure incurred was part of the fixed capital of the business or part of its circulating capital. Fixed capital is what the owner turns to profit by keeping it in his own possession. Circulating or floating capital is what he makes profit of by parting with it or letting it change masters. Circulating capital is capital which is turned over and in the process of being turned over yields profit or loss. Fixed capital, on the other hand, is not involved directly in that process and remains unaffected by it." Reliance was placed on the dicta of Lord Sands in Commissioners of Inland Revenue v. Granite City Steamship Co. Ltd., of Bowen L.J. in City of London Contract Corporation v. Styles, of Viscount Cave L. C. in Atherton v. British ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e ground that the payment formed part of the condition of the transfer of a business in favour of the assessee and, therefore, partook the nature of capital expenditure. Reference was also made to Van den Berghs Ltd. v. Clark. That was a converse case. The locus classicus on the subject as rendered by Viscount Cave L.C. in Atherton v. British Insulated and Helsby Cables Ltd. was relied on. It was held that the payment in the recipient's hands was not an income receipt. In Robert Addie Sons' Collieries Ltd. v. Commissioners of Inland Revenue, the facts were : " Under the terms of a mineral lease, a colliery company was obliged to restore to an arable state all ground occupied by it or damaged by its workings, or, at its option, to pay the lessor for all such ground not so restored, at the rate of thirty years' purchase of the agricultural value thereof. In the exercise of its option, the company paid the lessor a sum of pound 6,104, as representing the value of the damaged lands." The court held: "........ that such payment was in the nature of capital expenditure, and was not therefore a proper deduction in computing the company's liability to income-tax." Even so, Rowlat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ant when it is not expedient to keep him in the interests of the trade, is a proper deductible expense. According to him, the amount was paid to get rid of him for the sake of the good name of the company and they did not want any litigation or publicity or any scandal or anything of that kind, and hence they paid it for business reasons. He relied upon the classical statement of Lord Cave in Atherton v. British Insulated and Helsby Cables Ltd. and concluded: " It seems to me it is simply this, although the largeness of the figures and the peculiar nature of the circumstances perplex one, that this is no more than a payment to get rid of a servant in the course of the business and in the year in which the trouble comes." Lord Hanworth M.R., agreeing with the view of Rowlatt J., concluded : " It is a payment made in the course of business, dealing with a particular difficulty which arose in the course of the year, and was made not in order to secure an actual asset to the company but to enable them to continue, as they had in the past, to carry on the same type and high quality of business unfettered and unimperilled by the presence of one who, if the public had known about it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lationship in order to avoid losses occurring in the future through that relationship, whether pecuniary losses or commercial inconveniences, is just as much for the purposes of the trade as the making or the carrying into effect of a trading agreement, and, agreeing with the view of Lawrence J., the court held that the payments made in such circumstances were made for purposes of the trade and were admissible deductions in computing the income of the payer for purposes of income-tax. In fact, the decision in Van den Berghs Limited v. Clark was distinguished in this case and reliance was placed on B. W. Noble Ltd. v. Mitchell and Anglo-Persian Oil Company Ltd. v. Dale (H. M. Inspector of Taxes). This court had occasion to consider a similar case when large sums' were paid on the occasion of the termination of the managing agency agreement of a company. In P. Orr Sons v. Commissioner of Income-tax, Rajagopalan J., speaking for the court, held the view that such payments made to secure the termination of the managing agency and its attendant recurring annual liability to the company were not intended to bring in any capital asset, nor did it result in the acquisition of any capital ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , was not forthcoming. Therefore, on June 19, 1954, a resolution to terminate the managing agency agreement was passed resulting in an outgoing to the concern in the sum of Rs. 2,50,000. Thereafter, the Government of India began to whip up the programme and called upon the company to seek the financial assistance of Leylands besides technical collaboration so that the establishment of a premier motor industry in India may be a fait accompli. The Government also indi. cated that, in case finance from Leylands was not forthcoming, they would assist the company, provided there is no managing agent for the company. This contingency never occurred because Leylands gave the required financial assistance. But, in order to avoid any possible hurdle and primarily "or purposes of business expediency, they paid the sum of Rs. 2 50,000 to the managing agents. The termination agreement dated January 29, 1955, reflects clearly the mind of the company. By such a payment, the company got rid of an onerous responsibility under the managing agency agreement, benefited financially thereby by avoiding future payments and incidentally provided for a foreseeable contingency in case Leylands were disincl ..... X X X X Extracts X X X X X X X X Extracts X X X X
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