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TMI Blog1971 (9) TMI 42X X X X Extracts X X X X X X X X Extracts X X X X ..... ection provided facilities to the truck operators operating in the Subzi Mandi Market, Delhi. According to the statement of the case, the modus operandi of the assessee-union was to charge commission at the rate of 5% on the gross booking Of the truck operators, who were members of the union, operating in the Subzi Mandi area. After keeping a percentage of 2 1/2% the assessee used to return the balance to "such members". During the assessment years under consideration the assessee under the terms of an agreement paid a sum of Rs. 8,160 as allowance to its constituent members. The question arose for determination whether the payment of Rs. 8,160 was a permissible deduc tion for the purpose of income-tax. The Income-tax Officer decided this question against the assessee. On appeal, the Appellate Assistant Commissioner decided the question in favour of the assessee. On further appeal, the Tribunal held that the above payment was in the nature of capital expenditure. The question reproduced above was, thereafter, on the application of the assessee, referred to this court. When the case came up for hearing before us on May 27, 1970, the learned counsel for the parties pointed out that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with different aspects of this question, his Lordship made a reference to the Full Bench decision of the Lahore High Court in In re Benarsidas Jagannath, and after enumerating the broad principles deducible from the decision, proceeded to observe as under: "This synthesis attempted by the Full Bench of the Lahore High Court truly enunciates the principles which emerge from the authorities. In cases where the expenditure is made for the initial outlay or for extension of a business or a substantial replacement of the equipment, there is no doubt that it is capital expenditure. A capital asset of the business is either acquired or extended or substantially replaced and that outlay whatever be its source whether it is drawn from the capital or the income of the concern is certainly in the nature of capital expenditure. The question however arises for consideration where expenditure is incurred while the business is going on and is not incurred either for extension of the business or for the substantial replacement of its equipment. Such expenditure can be looked at either from the point of view of what is acquired or from the point of view of what is the source from which the expend ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anufacture of cement. This condition was secured in consideration of the payment of Rs. 5,000 per annum and its benefit was to enure for the whole period of the lease. It was not a lump sum payment but was spread over the whole period of the lease and as such could be said to be a recurring payment. The court, however, held that the fact that it was a recurring payment was immaterial because one had to look to the nature of the payment which in turn was determined by the nature of the asset which the company had acquired. Proceeding from this angle, on page 47 of the report, the learned Judge observed: "The asset which the company had acquired in consideration of this recurring payment was in the nature of a capital asset, the right to carry on its business unfettered by any competition from outsiders within the area. It was a protection acquired by the company for its business as a whole. It was not a part of the working of the business but went to appreciate the whole of the capital asset and make it more profit-yielding. The expenditure made by the company in acquiring this advantage which was certainly an enduring advantage was thus of the nature of capital expenditure and was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... asset which the company had acquired ? It has acquired two chooses in action, the benefit of two restrictive covenants against competition, using that phrase again comprehensively, for which it has paid a total sum of pound 30,000. The danger against which these covenants protected the company was serious and imminent. It would be quite wrong to allow oneself to think for a moment that the company was not getting its money's worth. When these gentlemen left the board they were free to compete, not merely in Great Britain, but in Mexico, and indeed in the South Sea Islands. Against that danger the company has protected itself. What is the true business result of all that When these gentlemen left the company the goodwill of the company would immediately have become extremely vulnerable. When the company had the monopoly of their services it was in a very advantageous position. As soon as they became potential competitors there was ground for thinking that the goodwill of the company would receive a serious shock. The risk of competition and damaging competition was great. The company succeeded in protecting itself against that risk. In effect the company was buying off two potential ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a debt on the balance-sheet against him." The company claimed a deduction for these 600 pounds in computing its profits. The revenue contested the claim and the objection was upheld. It was held that since the effect of the payment was to put P under an obligation not to set up business in competition with the company the deduction was inadmissible. Shri S. B. Gupta, appearing for the assessee, however, contended that by making the payment for which deduction is claimed, the Union did not acquire any capital asset. This is not correct. As held by Bhagwati J. in Assam Bengal Cement Co. Ltd., the right to carry on business unfettered by competition from outsiders was in itself a protection acquired by the assessee for the business as a whole. It went to appreciate the whole of the capital assets and made it more profit yielding. Further, in the words of Bowen L. J. in City of London Contract Corporation v. Styles, the expenditure of this nature was used not for the purpose of "carrying on the concern" but "to acquire the concern" so that the assessee may carry on its business unhampered. The fact, therefore, that by this expenditure the assessee did not acquire any tangible capital ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt with a public charitable trust for the advance to him of sums up to Rs. 1 1/2 lakhs on payment of interest at 6% and 11/16ths of the profits of the business. He agreed that the coal raising contract would be carried on in accordance with the policy settled between him and the trust; the trust could withdraw its money at any time an stop further advances. The trust was also not liable for any losses. The assessee had to send monthly returns to the trust. In pursuance of this agreement, the assessee paid Rs. 72,963 and Rs. 75,526 during the assessment years in question and claimed deductions of these amounts from the income. On these facts, the Supreme Court found that in the commercial sense the payments were an expenditure wholly and exclusively laid out for the purpose of the assessee's business and were, therefore, deductible as revenue expenditure. This was because the assessee was held to have made those payments "for the purpose of carrying on his business". The case, therefore, is of no assistance to the assessee as the payment in the instant case was not made for the purpose of carrying on business but to acquire the rights of the competitors. Reference was also made by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to agree to quote uniform rates with the assessee, in regard to the various tenders given by the assessee as well as the competitors to obtain Government orders for printing and publishing work. There was thus no exclusion of the other competitors in so far as there was no bar to their submitting their individual tenders. In essence as found by the court also, this was a reciprocal agreement to share the profits. Expenses incurred for this purpose in these circumstances were held to be allowable under section 10(2)(ix) of the 1922 Act. Payments made by the assessee in the instant case with the sole object to eliminate completely those persons to whom the amounts were paid cannot be treated on the same level. No assistance can, therefore, be derived from Munshi Gulab Singh's case also. The learned counsel then concluded by reference to V. Damodaran v. Commissioner of Income-tax. In this case the assessee, a forest contractor, carried on business in the trade of timber and paid Rs. 2,577 to each of the two rival forest contractors, in order to persuade them not to compete in an auction of a coupe held by the Forest Department and thus secured a portion of the stock-in-trade of his ..... X X X X Extracts X X X X X X X X Extracts X X X X
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