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TMI Blog1968 (9) TMI 26X X X X Extracts X X X X X X X X Extracts X X X X ..... manufacture of certain parts of diesel engines. Prior to that there was a firm consisting of Shri Desai and Shri Gaikwad doing the business of manufacturing certain parts of diesel engines. This firm used to purchase castings from M/s. Mysore Kirloskar Ltd. As there was some difficulty in getting timely supply of castings from M/s. Mysore Kirloskar Ltd., the assessee-company started its own foundry to make the castings. Shri B. V. Mahabale was first in the service of M/s. Mysore Kirloskar Ltd. as an engineer. He agreed to leave the service of M/s. Mysore Kirloskar Ltd. and join the assessee-company as a director, on the condition of the company paying him Rs. 40,000 being the amount which he would be required to pay to M/s. Mysore Kirloskar Ltd. as liquidated damages, before the expiry of the period of his contract with that concern. This condition was accepted by the assessee-firm, and, on 12th and 23rd December, 1960, payments totaling Rs. 40,100 were made, directly by the assessee-firm to M/s. Mysore Kirloskar Ltd. After this payment, Shri B. V. Mahabale left the service of M/s. Mysore Kirloskar Ltd. and joined the assessee-company on 1st March, 1961, on a monthly remuneration ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ire aspect. In deciding such cases, one should avoid the temptation to decide cases (as said by Cordozo) by matching the colour of one case against the colour of another. To decide, therefore, on which side of the line a case falls, its broad resemblance to another case is not at all decisive. What is decisive is the nature of the business, the nature of the expenditure, the nature of the right acquired, and their relation inter so, and this is the only key to resolve the issue in the light of the general principles, which are followed in such cases. In Assam Bengal Cement Co. Ltd. v. Commissioner of Income-tax, the principles laid down by a Full Bench of the Lahore High Court in Benarsidas Jagannath, In re which must be borne in mind for deciding whether the expenditure is "revenue" or "capital" expenditure, were approved by the Supreme Court. The Lahore High Court formulated the principles in the following words : " 1. Outlay is deemed to be capital when it is made for the initiation of a business, for extension of a business, or for a substantial replacemment of equipment : vide Lord Sands in Commissioners of Inland Revenue v. Granite City Steamship Company. In City of London ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s as distinguished from a recurring expenditure in the nature of operational expenses." He also quoted with approval the following observations of Lathem C.J. in Sun Newspapers Ltd. and Associated Newspapers Ltd. v. Federal Commissioner of Taxation: " When the words 'permanent' or 'enduring' are used in this connection it is not meant that the advantage which will be obtained will last for ever. The distinction which is drawn is that between more or less recurrent expenses involved in running a business and an expenditure for the benefit of the business as a whole " ......e.g ......--" enlargement of the goodwill company "--" permanent improvement in the material or immaterial assets of the concern. " It must be noted that the word "asset ", as Lord Atkinson pointed out in Atherton's case, is not confined to " something material " ; the asset or advantage may be of an impalpable or incalculable nature (see Assam Bengal Cement Co. Ltd. v. Commissioner of Income-tax). These are the principles which have to be applied in order to determine here whether the expenditure of Rs. 40,100 incurred by, the assessee-company was capital expenditure or revenue expenditure. If these principles ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee was a revenue expenditure which the assessee-company was entitled to deduct under section 37 of the Act. In our opinion, the cases cited by the learned counsel for the assessee are not of much assistance and are clearly distinguishable. In British Sugar Manufacturers Ltd. v. Harris (Inspector of Taxes) a company engaged in the manufacturing business agreed with two other companies to pay them a stated percentage of its " net profits " in consideration of their giving to the company the full benefit of their technical and financial knowledge and experience, and giving to the company and its directors, advice to the best of their ability respectively on all questions of or relating to manufacture and finance and disposal of the company's products. Greene M. R., presiding over the Court of Appeal, held that the payment made by the asseseee-company to the other two companies of a certain percentage of its net profits was a sum which the assessee was entitled to deduct as being " money wholly and exclusively laid out or expended for the purposes of trade ". He took the view that the agreement between the assessee-company and the other two companies was an agreement for remunera ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... entitled exclusively, even for the period of the agree ment, to the patents and trade marks of the Swiss company ; it had merely access to the technical knowledge and experience in the pharmaceutical field which the Swiss company commanded ; by making that technical knowledge available, the Swiss company did not part with any asset of its business, nor did the assessee acquired any asset or advantage of an enduring nature for the benefit of its business. Here, the assessee obtained the services of Shri Mahabale exclusively for its own benefit ; it was not as if the assessee allowed Shri Mahabale to continue in the service of M/s. Mysore Kirloskar Ltd. and then entered into an agreement with M/s. Mysore Kirloskar Ltd. for being allowed to draw, for the purpose of carrying on its business as manufacturer of certain parts of diesel engines, upon the technical knowledge and experience of Shri Mahabale in consideration of some periodical payment to M/s. Mysore Kirloskar Ltd. M/s. Mysore Kirloskar Ltd. parted with the asset, namely, the services, experience and technical knowledge of Shri Mahabale and the assessee-company acquired it. For all these reasons, our answer to the question pl ..... X X X X Extracts X X X X X X X X Extracts X X X X
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