TMI Blog2005 (1) TMI 35X X X X Extracts X X X X X X X X Extracts X X X X ..... SAIN. JUDGMENT The judgment of the court was delivered by N.V. Balasubramanian J.- The Income-tax Appellate Tribunal has stated a case and referred the following three questions of law for our consideration under section 256(1) of the Income-tax Act, 1961 (hereinafter referred to as "the Act"): "1. Whether, on the facts and circumstances of the case, the Tribunal was right in law in holding that the compensation paid on termination of the agreement with the marketing distributor would be a capital expenditure? 2. Whether the Income-tax Appellate Tribunal was right in its finding that the compensation paid was towards the acquisition of profit-making apparatus? 3. Whether the Tribunal was right in deciding that the transfer of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld by the Commissioner of Income-tax (Appeals) and on further appeal by the Income-tax Appellate Tribunal. The assessee has challenged the order of the Appellate Tribunal and the Appellate Tribunal has stated a case and referred the questions of law set out earlier. The point that arises is whether the compensation of Rs. 2,40,000 paid to its marketing agents on the termination of their agreements in ten quarterly instalments commencing from the quarter ended on September 30, 1984, is a capital expenditure or revenue expenditure in the hands of the assessee. To appreciate the point, it is necessary to refer to certain facts. The assessee had entered into agreements with three selling agents for distributing its products for over 20 years. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d counsel for the assessee submitted that though this court in CIT v. T. I. and M. Sales Ltd. [2003] 259 ITR 116 and CIT v. Ambadi Enterprises Ltd. [2004] 267 ITR 702 (Mad) has held that the receipt in the hands of the distributors is a capital receipt, it need not be a capital expenditure in the hands of the assessee as it cannot be said that by the termination of agreements the assessee had obtained a benefit of enduring nature and the mere fact that a payment constitutes income or capital receipt in the hands of the recipient is not a material consideration in determining the question whether the payment is revenue or capital expenditure in the hands of the payer. Learned counsel for the assessee relied upon the decisions of the Supreme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on purchased loom hours from another member and the Supreme Court held that the price paid for the acquisition of loom hours was a revenue expenditure as by that process, no capital asset was acquired by the assessee, but the payment was made out of business expediency. However, on the facts of the case the amounts have been paid not only for the termination of the distributorship agreements, but also for the acquisition of the distributing agents' infrastructures and since a profit-making apparatus was acquired by the assessee on payment, the payment is a capital expenditure. As far as the decision of the Bombay High Court in CIT v. Glaxo Laboratories (India) P. Ltd. [1978] 114 ITR 110 is concerned, the decision has no application as in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee for a period of few years from the date of termination. We are unable to accept the submission of learned counsel for the assessee that no new asset was acquired by virtue of the termination. Further, the business of the distributorship agents is entirely different from the business of the assessee, though the agents might have dealt with the assessee's own products. As we have stated, it is a case of acquisition of a profit-making apparatus of distributorship agency for which amounts were paid to the distributors and hence, the Appellate Tribunal, in our view, was right in holding that the amount was capital in nature. Consequently, we answer the question of law, reframed by us, in the affirmative, against the assessee and in ..... X X X X Extracts X X X X X X X X Extracts X X X X
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