TMI Blog1970 (3) TMI 41X X X X Extracts X X X X X X X X Extracts X X X X ..... loyed this P. V. Shah as its chief executive on a monthly salary of Rs. 2,000 plus entertainment and conveyance allowance of Rs. 400. Under the terms of his employment, he was give liberty to have private practice of consultation, survey, etc. The duration of the employment was fixed in the first instance at two years ending June, 1956, with an option in the employee to continue in service and employment for a further period of three years expiring June 30, 1959. The monthly salary was increased. P. V. Shah exercised the option to continue in service and in the assessment year 1958-59, in respect of the accounting year expiring on June 30, 1957, the assessee-company made a supplementary agreement dated March 28, 1957, in connection with the terms of employment of P. V. Shah. Before referring to the relevant contents of the agreement, the following facts require to be noticed : The assessee's sole business was of manufacturing of steel ribs required for making umbrellas. The assessee was the largest manufacturer of umbrella ribs in the whole of Asia. Initially, the assessee-company was importing all the machinery required for the manufacture of ribs from foreign countries at a ver ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... irectors resolved that P. V. Shah's full time attention and efforts were essential for the purposes of the assessee-company and that he should be paid suitable compensation for persuading him to work for the company only. The chairman was authorised to negotiate the matter further with P. V. Shah and make an agreement with him providing for P. V. Shah relinquishing his right of private practice to the maximum possible extent and concentrating his energy towards the development of the company. In another meeting of the directors held on March 26, 1957, the chairman informed the directors that P. V. Shah desired exemption from agreement not to continue to have private practice as regards Messrs. Metropolitan Springs Ltd. P. V. Shah was not prepared to mention any particular amount in consideration whereof he would agree to give up right of private practice. P. V. Shah attached considerable importance to the goodwill that he had created, the contacts he had made and the future he would be able to build up for his family by continuing his right of private practice. P. V. Shah had not been able to attend to his private practice on account of heavy pressure of the company's work and heav ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ge for the enduring benefit of the trade .... It can, therefore, be said that there is enough evidence in this case to come to the conclusion that the object of paying the amount in question to Mr. Shah was to buy off potential competitors and thus improve the goodwill of the assessee. " Now, these are the findings which are the contentions once again made in this reference in support of the order made by the Appellate Tribunal by Mr. Joshi on behalf of the revenue. The contentions made by Mr. Mehta for the assessee-company may be shortly stated as follows : It is patent on the facts and circumstances of the present case that the expenditure of Rs. 50,000 was made in connection with the modification of the terms of employment of service of P. V. Shah. The direct result of this fact was that the expenditure was made towards remuneration to be paid to P. V. Shah for the services to be rendered by him to the assessee-company as its employee. The largeness of the amount was irrelevant in making the finding that the payment was merely remuneration for services to be rendered and of the nature of salary. The total advantage of the payment was of the ordinary and normal nature of empl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cord there was no justification in the findings made by the Appellate Assistant Commissioner and the Appellate Tribunal that the purpose and object of the agreement of March 28, 1967, was to enhance the value of the goodwill of the assessee-company and to buy off potential competitors. His submission was that the true nature and object of the agreement of March 28, 1957, was merely a normal agreement of employment by a manufacturing concern of an electrical and mechanical engineer. This agreement had not secured asset of any kind to the assessee-company and no benefit of any lasting and/or enduring duration. Mr. Joshi's best argument in reply to these submissions made by Mr. Mehta was in the following words : The payment of Rs. 50,000 was made in order that the assessee-company may have freedom from activities of P. V. Shah which may be available to other concerns and industrial undertakings carrying on the same business as the assessee-company. Payment made for acquiring such a title and to secure itself (assessee-company) from the risk of P. V. Shah giving his advice to other competitive concerns in respect of designs of machinery for manufacturing steel ribs for manufacture of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and may consist in the getting rid of an item of fixed capital that is of an onerous character. (2) By 'enduring' is meant 'enduring in the way that fixed capital endures' and it does not connote a benefit that endures in the sense that for a good number of years it relieves the assessee of a revenue payment. A payment which frees an assessee from the liability to make an annual revenue payment is revenue expenditure. Thus, a sum paid by an assessee to free himself from a disadvantageous agency agreement, or a sum paid to an employee in commutation of an annual pension, is revenue expenditure, because it frees the assessee from the liability to make annual revenue payments. " Now, it is true that it has also been held that a sum paid by a company to a retiring director in consideration of the director's covenant not to compete with the company is capital expenditure. Similar expenditure for buying off potential competitors that improves the value of an assessee's goodwill has been considered an advantage for the enduring benefit of the trade and of the nature of capital expenditure. But, as is mentioned in all the cases, the question ultimately depends upon the facts and circumst ..... X X X X Extracts X X X X X X X X Extracts X X X X
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