TMI Blog1945 (10) TMI 19X X X X Extracts X X X X X X X X Extracts X X X X ..... the decision of this Court the following questions of law:- (1)Whether in the circumstances of the case the payments made to (a) Messers. Feroze Din and Sons and (b) Messers. Uttar Chand Kapur and Sons were expenditure (not being in the nature of capital expenditure) incurred solely for the purpose of earning profits and gains of the business, and as such allowable under Section 10 (2)(ix) of the Income-tax Act before its amendment in 1939? (2)Whether in the circumstances of the case the subscriptions paid to certain schools were expenditure (not being in the nature of capital expenditure) incurred solely for the purpose of earning profits and gains of the business and as such allowable under Section 10 (2)(ix) of the Income-tax Act before its amendment in 1939? These two questions concern the assessment for the year 1938-39. (3)Whether in the circumstances of the case the payments made to (a) Messrs. Feroze Din and Sons and (b) Messrs. Uttar Chand Kapur and Sons expenditure (not being in the nature of capital expenditure) laid out wholly and exclusively for the purpose of business, and as such allowable under Section 10 (2)(xii)of the Income-tax Act. (4)Wheth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... other words a tripartite arrangement was arrived at by which the parties agreed not to underbid each other. Under this arrangement the assessee agreed to pay to his competitors certain sums of money. These payments were in the shape of a share in the estimated profits of the assessee in working the orders thus secured from Government. The estimate of profits was arrived at by deducting certain agreed cost contemplated to be incurred in the execution of the job from the amount of tendered price. This estimate did not take into consideration the actual profits that may be earned or realised by the assessee or the possible loss that may accrue to him. The compensation was of course payable when Government paid the bills. Counsel for the assessee gave these material facts to the Tribunal and the Tribunal accepted these facts and made the reference on the assumption that they were correct. The same learned counsel during the course of his arguments explained the precise situation to us. It was said at the Bar that the agreement was of a reciprocal nature. In case the competing firms obtained orders from Government at the agreed rates and executed the work which otherwise the assessee m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing rise to questions 2 and 4 are simple. The assessee paid certain amounts by way of subscription to various schools which agreed to prescribe for their classes school books published by it. The amount of subscription to each school was calculated after taking into consideration the number of boys in each class for which the firm's books would be prescribed. This mode of calculation furnished the assessee with a rough idea of the number of books that might be sold and the amount of profit likely to be earned. It was claimed by the assessee that the expenditure thus incurred was an allowable deduction as a legitimate business expenditure as it had been incurred in the interests of business and fell within the ambit of Section 10(2)(ix) of the old Act and Section 10(2)(xii) of the new Act. The Income-tax Officer and the Assistant Commissioner of Income-tax disallowed this claim on the ground that voluntary subscription paid was not in the nature of a commission on sale of books and was thus not a legitimate business deduction. The Tribunal, however, reached the conclusion that the payment was not in the nature of a voluntary subscription but was made with an end in view. It w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the liability should not be taxed as income in the hands of the assessee Lala Hira Lal but must be excluded from his assessable income. Accordingly the question formulated by the Income-tax Tribunal must be answered in the affirmative. For the reasons given by the Division Bench in the above mentioned case question No. 5 is answered in the affirmative. It may be observed that the learned counsel for the Commissioner of Income-tax did not challenge the correctness of the decision in C.R. 22 of 1941 before us and conceded that the answer to question No. 5 be given in the affirmative. In order to find a satisfactory solution to the problems stated in questions 1 and 3 it is necessary to cite the relevant provisions of the Act under which the expenditure incurred is claimed as deduction. Section 10(2) (ix) of the old Act is in these terms:- 10 (1) The tax shall be payable by an assessee under the head Business in respect of the profits or gains of any business carried on by him. (2) Such profits or gains shall be computed after making the following allowances, namely: - ****** (ix) any expenditure (not being in the nature of capital expenditure) incurred ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rk orders or to secure more work than would otherwise come are in the nature of capital or revenue expenditure. There can be no question but that the payments are made to shut out competition with a view to secure work which would enable the assessee to earn profits or to earn more profits than could otherwise be earned. This is the finding at which the Tribunal has arrived in regard to the purpose and object of these payments. The Tribunal has, however, employed the expression securing business in a wider and a popular sense as synonymous with the phrase securing any job or piece of work for the press. That, in my opinion, was not an apposite expression in the facts and circumstances of the present case. All that could be said was that the assessee in order to carry on his business of the printing press was by incurring this expenditure getting work to run his press to its full capacity and to his maximum advantage, but it could not be said that he was acquiring a new business or in other words was incurring this expenditure to acquire a concern. In this connection reference may be made to a few leading cases. The classical observations of Bowen, L.J., in The City of London ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ear and you get the receipts year by year, and the difference between the expenses necessary to earn the receipts of the year and the receipts of the year are the profits of the business for the purpose of the income tax. In my opinion the expenditure incurred in the present case is in the nature of an annual business expense incurred to run the press to its full capacity and to earn the maximum amount of profit. No part of it can be said to have been embarked to purchase the business. The sums paid to competing firms to tender the same rates as tendered by the assessee are paid with the sole purpose and object of earning substantial profits in running the printing press business. The whole object of this payment is to tender rates for work that bring in lucrative profits. Learned counsel for the petitioner firm cited the case of Guest, Keen and Nettlefolds v. Fowler [1910] 5 Tax Cas. 511, and argued that the rule laid down in that case furnished a good guide for the decision of the present case. In that case the Steel Hoop Manufacturers' Association was founded for the purpose of keeping up prices and thus earning larger profits by its members agreeing to adhere to fix ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n make an arrangement with their competitors that their competitors will not sell below a certain price, they will be able, or may be able at all events, to get that price or a higher price for their goods. That is part of the business part of the trade they are carrying on, to get the highest price they can for their goods. What I have to see is whether this money which was expended was wholly laid out or expended for that purpose that is for the purpose of selling their goods at the greatest possible, advantage......... The Association is mainly formed for the purpose of keeping up prices and thus earning larger profits. .......There was no other object whatever of the Association and, therefore it seems to me I am bound to find that this money was paid for the purpose of keeping up the price and thus earning the larger profits of the trade and thus the money was wholly or exclusively laid out or expended for the purposes of such trade. I am in agreement with the suggestion of the learned counsel that the opinion expressed by Bray, J., in the above-mentioned case furnishes a guide for deciding the present case. The sums were paid to the competing firms by the assessee i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ised several contentions in the alternative. Firstly, he argued that these payments were in the nature of capital expenditure and that they had been made to secure the business of the assessee. According to the learned counsel each printing or publishing job or a work order obtained by the assessee as a printer and publisher amounted to the acquisition of a new business and that being so the expenditure incurred for the acquiring of work was not incurred to carry on the business and was capital expenditure. I have sufficiently dealt with this matter in the earlier portion of this judgment. In my view the argument of the learned counsel is based on a wrong apprehension as to the true nature of the assessee's concern. For this contention learned counsel made reference to the case of Rao Saheb A.S. Alaganan Chetty v Commissioner of Income-tax [1938] 3 ITC 44. In that case the assessee was doing business as a carrying contractor. He paid the sum of ₹ 12,000 to the rival contractor to induce the latter not to compete with him. As a result of the non-competition of his rival he obtained the carrying contract at a rate higher than the previous year's rate enabling him to mak ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng profits in the conduct of the business, the payments cannot be deducted in estimating the profits of the business under Section 10(2) (ix) of the Indian Income-tax Act, 1922. There an agreement had been arrived at between the Tata Power Co., Ltd., and Tata and Sons Ltd., under which Tata and Sons Ltd., were appointed managing agents of Tata Power Co., Ltd., for 41 years on terms that they should receive a commission of 10 per cent. on the net profits of the company, subject to a minimum of Its. 50,000, whether the company made any profits or not, and other allowances. The agency was assignable. Tata Sons Ltd., also entered into agreements with two persons under which these two persons lent money to Tata Power Ltd., on terms that, in addition to interest, they were each to receive under their respective agreements 2 annas in the rupee in all the commission and remuneration earned by Tata Sons Ltd., under their agreement with Tata Power Co., Ltd. Tata Sons Ltd., assigned their rights and interests to the Tata Hydro-Electric Agencies Ltd., subject to their obligations to the two creditors for a cash consideration and shares of certain value. After the acquisition of the agency busi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... recognise and the decided cases show how difficult it is to discriminate between expenditure which is, and expenditure which is not, incurred solely for the purpose of earning profits and gains. In the present case their Lordships have reached the conclusion that the payments in question were not expenditure so incurred by the appellants. They were certainly not made in the process of earning their profits; they were not payments to creditors for goods supplied or services rendered to the appellants in their business ; they did not arise out of any transactions in the conduct of their business. That they had to make those payments no doubt affected the ultimate yield in money to them from their business but that is not the statutory criterion. They must have taken this liability into account when they agreed to take over the business. In short, the obligation to make these payments was under taken by the appellants in consideration of their acquisition of the right and opportunity to earn profits, that is, of the right to conduct the business, and not for the purpose of producing profits in the conduct of the business. If the purchaser of a business undertakes to the vendor as one ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le against the receipts for the year. Instances of such payments may be found in the gratuity of 1,500 paid to a reporter on his retirement which was the subject of the decision in Smith v. Incorporated Council of Law Reporting [1914] 3 KB 674 , and in the expenditure of 4, 994 in the purchase of an annuity for the benefit of an actuary who had retired which, in Hancock v. General Reversionary and Investment Company [1919] 1 KB 25, was allowed, and I think rightly allowed, to be deducted from profits. But when an expenditure is made, not only once and for all, but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade, I think that there is very good reason (in the absence of special circumstances leading to an opposite conclusion) for treating such an expenditure as properly attributable not to revenue but to capital. For this view there is already considerable authority. Thus, moneys expended by a brewing firm with a view to the acquisition of new licensed premises (Southwell v. Savill Brothers [1901] 2 KB 349 ); 'flitting expenses' incurred in transferring a manufacturing business to new premises (Granite Supply Association ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t its being purchased by persons outside the Association. It also made a grant to one of its members to enable that member to acquire a controlling interest in an outside competing business and bring its operations within the rules of the Association. The taxpayer sought to deduct from his trading profits for the purpose of income-tax assessment his share of the Association's expenses in each instance and it was held that in each instance the payment made by the Association had created for the members of the Association advantages of an enduring nature properly to be treated as capital, and in neither case was the deduction which was claimed allowable. That case again is distinguishable from the present on the ground that the expenditure incurred was incurred to purchase the undertaking of a competing company and the money spent was not used in the running of the business of the concern. Reference was also made to the case of Stott v. Hoddinott [1916] 7 Tax Cas. 85. In that case the assessee carried on the business of architect, surveyor and engineer and in order to secure contracts for the erection of mills it become necessary for him to take up shares of the milling companies ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etween the parties. The actual profit and loss of the concern does not affect these payments. In these circumstances this contention of Mr. Sikri is also untenable. Mr. Sikri in this connection placed reliance on two cases. The first of these is a Privy Council decision in Pondicherry Railway Co., Ltd. v. Commissioner of Income-tax, Madras [1931] 5 ITC 363 . At page 370 of the report the rule laid down by Lord Chancellor Halsbury in Gresham Life Assurance Society v. Styles [1892] 3 Tax Cas. 185 was cited: - The thing to be taxed, said his Lordship, is the amount of profits or gains. The word 'profits' I think is to be understood in its natural and proper sense-in a sense which no commercial man would misunderstand. But when once an individual or a company has in that proper sense ascertained what are the profits of his business or his trade, the destination of those profits or the charge which has been made on those profits by previous agreement or otherwise is perfectly immaterial. The tax is payable upon the profits realised and the meaning to my mind is rendered plain by the words ' payable out of profits.' As I have already observed the payment made ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nstruction of this arrangement there would be no question but that the payment could not be legitimately allowed. In my view, however, the construction placed on the agreement by Mr. Sikri cannot be accepted. Under this arrangement tenders are submitted to the Government for each piece of work by the competing firms by quoting identical rates but the work is executed by any one of the firms to whom it is eventually given by the Government. That firm executes the work and takes all the profit that accrues. In this profit the other firms have no share. For quoting identical rates in the tender a payment is made by the firm that obtains the work to the other firms on the basis of an artificial estimate. There is no partnership of any kind between the rival firms in the execution of the work or even in the ultimate profit and loss of that venture. That being so such an arrangement cannot be described as a quasi partnership agreement to share in the profits of a venture. That contention of Mr. Sikri, therefore, again is untenable and must be repelled. For the reason given above I would answer questions 1 and 3 in the affirmative. As regards questions 2 and 4 the matter to my mind ..... X X X X Extracts X X X X X X X X Extracts X X X X
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