TMI Blog2005 (8) TMI 72X X X X Extracts X X X X X X X X Extracts X X X X ..... nue expenditure or capital expenditure?" The aforesaid question arises in the facts and circumstances that may be briefly noticed by us: M/s. Apurva Enterprises was a partnership firm constituted under the instrument of partnership deed dated July 12, 1982. The partnership firm had three partners, namely (i) Narcinva Purxotoma Quenim; (ii) Smt. Crisnabai Vaman Quenim and (iii) Mandovi Hotels Private Limited. The partnership firm came into effect from April 1, 1982 and was engaged in the business of running hotels. Vide memorandum of understanding entered into between the parties on August 6, 1990, the parties decided that the two partners, namely, Narcinva Purxotoma Quenim and Smt. Crisnabai Vaman Quenim would disassociate from the partnership firm and the continuing partner Mandovi Hotels Private Limited would continue the business. The said memorandum of understanding incorporated the mutually agreed terms and conditions. Thereafter the dissolution deed was executed on September 4, 1990, between the three partners. The partners mutually decided to dissolve the partnership firm as from September 1, 1990. It was also agreed between the partners that all assets and liabilities o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deed was executed between the partners on September 4, 1990, whereby the partners decided to dissolve the partnership firm as from September 1, 1990. They also agreed that all the assets and liabilities of the partnership business shall be taken over by the partner Mandovi Hotels Private Limited and the business shall continue to be carried on by the said partner on and from September 1, 1990. Inter alia, the parties declared and agreed in the dissolution deed thus: "All the liabilities as on the said date have also been taken over by the continuing partner. The partnership business shall be continued solely by the party of the Third Part from the September 1, 1990, to the entire exclusion of the retiring partners. In consideration of the above, the party of the Third Part hereby agree and undertake to pay the retiring partners as provided hereunder. The continuing partner shall pay to the retiring partners annually a sum equivalent to 30 per cent, of the net profits of the business, subject to a minimum amount of Rs. 60,000 for a period of seven years, commencing from September 1, 1990." It was thus agreed upon between the partners that all the assets of the partnership b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the activities of the assessee-firm and it cannot be said to have relation to the capital value of the assets of the estate and also the payment so made is not related or tied up in any way to any fixed sum agreed between the parties as part of the consideration to the retiring partners for, disassociating from the firm. The expenditure thus, in the sum of Rs. 1,34,678 cannot be construed to be an expenditure in capital nature. Before the Income-tax Appellate Tribunal, various judgments were cited by the assessee as well as by the revenue in support of their case. Inter alia, the assessee heavily relied upon the judgment of the Supreme Court in the case of Travancore Sugars and Chemicals Ltd. v. CIT [1966] 62 ITR 566. The assessee also relied upon the judgments of the Supreme Court in the cases of Devidas Vithaldas and Co. v. CIT [1972] 84 ITR 277 and CIT v. Sitaldas Tirathdas [1961] 41 ITR 367. On the other hand, the revenue placed reliance on the judgment of the Supreme Court in the case of CIT v. Jalan Trading Co. P. Ltd. [1985] 155 ITR 536. Since the assessee has not put in appearance, we considered the aforesaid judgments with the assistance of learned counsel for the Reve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t to a maximum of Rs. 40,000 per annum. With regard to the second part of the consideration there are three important points to be noticed. In the first place, the payment of commission of twenty percent on the net profits by the appellant in favour of the Government is for an indefinite period and has no limitation of time attached to it. In the second place, the payment of the commission is related to the annual profits which flow from the trading activities of the appellant-company and the payment has no relation to the capital value of the assets. In the third place, the annual payment of 20 per cent commission every year is not related to or tied up, in any way, to any fixed sum agreed between the parties as part of the purchase price of the three undertakings. There is no reference to any capital sum in this part of the agreement. On the contrary, the very nature of the payments excludes the idea that any connection with the capital sum was intended by the parties. It is true that the purchaser may buy a running concern and fix a certain price and the price may be payable in a lump sum or may be payable by instalments. The mere fact that the capital sum is payable by instalme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing down production so as to prevent a steep fall in the prices was construed to mean for one of them to be out of production for 12 months only and not for good. On such construction, it was held that to call such an expenditure a capital expenditure would be contradiction in terms, for, it was not and was not intended to be one for acquiring a right of an enduring benefit or as an accretion to the capital or income earning structure of the business (Commissioner of Taxes v. Nchanga Consolidated Copper Mines Ltd. [1965] 58 ITR 241; [1964] AC 948 (PC)). In CIT v. Coal Shipments P. Ltd. [1971] 82 ITR 902 (SC), an agreement was arrived at between two companies exporting coal to Burma. The assessee-company agreed thereunder to pay, in consideration of the other company forbearing from exporting and procuring coal for its export by the assessee-company, five annas per ton (subsequently raised to Rs. 1-5-0 per ton). The amounts so paid to the other company were taxed in the hands of that company. The respondent-company claimed them as admissible business expenditure for the assessment year in question. The Revenue, on the other hand, claimed that the payments were for acquiring monopoly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onditioned by the renewal of the terms under which the licence was granted was short-lived. Such an expenditure was treated as of that class to which a premium on the grant of a lease belongs, which, admittedly, is not deductible. In Strick v. Regent Oil Co. Ltd. [1965] 43 TC 1 (HL). Lord Reid, however, limited the decision in Henriksen's case [1942] 24 TC 453; [1943] 11 ITR (Suppl.) 10 (CA), to its own special facts and expressed his disagreement with it if it was to be held to have laid down any general proposition. The expression enduring advantage' is, thus, a relative term, not enduring in the sense of its being permanent, but is sufficiently durable depending upon the nature of the terms upon which it can be acquired. So also the expression once and for all', which does not mean payment at one time of the whole amount, but includes payment of a lump sum as distinct from recurrent, distributed in periodic instalments. The other test sometimes applied is payment when it is referable to fixed capital or capital assets as against payment referable to circulating capital or stock-in-trade. But, this test also is not capable of being treated as of uniform application. Price paid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Government of 20 per cent, of the net profits earned by the company every year subject to a limit of Rs. 40,000 per annum and certain other payments were also undertaken. The 20 per cent, stipulation was reduced to 10 per cent, by a subsequent agreement. The question that fell for consideration was whether payment of Rs. 42,480 by the assessee-company to the Travancore Government in terms of the agreement referred to above as modified, was allowable expenditure under section 10 of the Act in the year under consideration. This court stated: '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 circumstance 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 w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ects like the object and obligations. The Supreme Court referring to the facts obtaining in Jalan's case [1985] 155 ITR 536 observed thus: "M/s. Jalan Trading Co., a partnership firm, had initially been appointed as the sole selling agent. On October 16, 1952, the assessee-company came to be incorporated and soon after incorporation by agreement, the rights of the firm were assigned to the assessee-company. Neither the Income-tax Officer nor the two appellate authorities and nor even the High Court went into the question as to whether the assessee was in fact separate from, and independent of, the partnership firm. It is true that the tenability of the claim of deducibility as a business expenditure of the amount was examined by taking it for granted that the payment had been made by the assessee to the firm. But the exact position not having been investigated, no finding has been recorded at any stage. The fact that the partnership and the assessee-company bear the same name and soon after incorporation, the agreement assigning the firm's rights in favour of the company had been entered, had obviously led the Income-tax Officer to doubt the bona fides." Jalan's case [1985] 155 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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