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TMI Blog1992 (8) TMI 36X X X X Extracts X X X X X X X X Extracts X X X X ..... essee this sum was paid ; and, therefore, a rival bidder was bought over and this was a business expenditure incurred by the assessee. The assessing authority disallowed the claim of the assessee by holding that Shashidaran was never a bidder and, therefore, the payment was not in connection with the business of the assessee. The Appellate Commissioner reversed this order holding that the father of Shashidaran was connected with a number of businesses in Kerala and that Shashidaran happened to be the partner of his father during the relevant season and that the payment in question was made as a consideration for Menon's withdrawing from the bid. Therefore, this was a business expenditure. The Appellate Tribunal has affirmed this view taken by the Appellate Commissioner. Before the Appellate Commissioner as well as before the Appellate Tribunal the main question was whether the demand was opposed to public policy. It was held by the appellate authority and the Appellate Tribunal that in case the bid offered by the assessee in the auction was too low or for any other reason not acceptable, it was open to the authority holding the auction to refuse to accept the bid. When such a power ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rivilege to indulging in such a trade or business, different considerations should prevail. In the latter case, the State may engage in this trade of a pernicious character only because it is inevitable to do so having regard to the public interest such as the absolute need to raise revenue for the State which in turn is utilised for the public welfare. It may also be a case where the State engages itself in such a business or trade to minimise the public harm, which otherwise would result to the public, if the trade or business is carried on by the citizens at large. It is now quite firmly established that none has a fundamental right to carry on the trade in vending liquor. The right given to trade in this regard is actually a privilege conferred by the State and normally these privileges are conferred by auctioning the right to vend, in the case of arrack. In Jagadale and Sons v. State of Karnataka, AIR 1990 Kar 251 ; ILR 1990 Kar 101, a Bench of this court observed at page 119 ( at page 259 of AIR 1990 Kar): " It is, thus clear that none has a fundamental right to trade or do business in liquor. As in the case of gambling activities, though dealing in liquor has 'the external ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... undamental right is created by the purchase of a right or the privilege to vend liquor in an auction. The purpose of the auction is to enable the State to obtain the highest revenue possible for the benefit of the State. In Har Shankar v. Deputy Excise and Taxation Commissioner, AIR 1975 SC 1121, the above idea is conveyed by the Supreme Court, after referring to the principle stated in volume 30 of American Jurisprudence. At page 1132, the Supreme Court said : " There is no fundamental right to do trade or business in intoxicants. The State, under its regulatory powers, has the right to prohibit absolutely every form of activity in relation to intoxicants-its manufacture, storage, export, import, sale and possession. In all their manifestations, these rights are vested in the State and indeed without such vesting there can be no effective regulation of various forms of activities in relation to intoxicants. In American Jurisprudence, volume 30, it is stated that while engaging in liquor traffic is not inherently unlawful, nevertheless it is privilege and not a right, subject to governmental control ( at page 538 This power of control is an incident of the society's right to self- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... page 795 ) : The doctrine of public policy may be summarised thus : Public policy or the policy of the law is an illusive concept ; it has been described " as untrustworthy guide ", " variable quality ", " uncertain one ". " unruly horse ", etc. ; the primary duty of a court of law is to enforce a promise which the parties have made and to uphold the sanctity of contracts which form the basis of society, but in certain cases, the court may relieve them of their duty on a rule founded on what is called the public policy ; for want of better words Lord Atkin describes that something done contrary to public policy is a harmful thing, but the doctrine is extended not only to harmful cases but also to harmful tendencies ; this doctrine of public policy is only a branch of common law, and, just like any other branch of common law, it is governed by precedents ; the principles have been crystallised under different heads and though it is permissible for courts to expound and apply them to different situations, it should only be invoked in clear and incontestable cases of harm to the public ; though the heads are not closed and though theoretically it may be permissible to evolve new head ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e is of a capital nature or revenue nature. Despite the enunciation of those principles, it is not always easy to decide the question in the context of the circumstances of an individual case. Considerable difficulty is experienced in border line cases. It was in this connection that Hidayatullah 1. ( as he then was ) observed in Abdul Kayoom v. CIT [1962] 44 ITR 689, 703 (SC) that: 'None of the tests (laid down in various authorities) is either exhaustive or universal. Each case must depend on its own facts, and close similarity between one case and another is not enough, because even a single significant detail may alter the entire aspect. In deciding such cases, one should avoid the temptation to decide cases . . . by matching the colour of one case against the colour of another.' It may be apposite at this stage to refer to some of the broad tests which have been laid down to distinguish capital expenditure from revenue expenditure. In the case of Atherton v. British Insulated and Helsby Cables Ltd. [1925] 10 TC 155, 192 (HL), Lord Cave L.C. laid down the following criterion which has been referred to in most of the subsequent cases : 'But when an expenditure is made, not on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cogent ground or valid reason has been given to us in support of the contention that, even though the benefit from the arrangement to the respondent may not be of a permanent or enduring nature. The payments made in pursuance of that arrangement would still be capital expenditure. " It should be noted that in the above case the arrangement between the assessee and the rival exporter was not for any fixed term but could be terminated at any time and that the payments made to the rival were related to the actual shipment of coal in the course of trading activities of the assessee and were not considered related to or tied up in any way to any fixed sum agreed to between the parties. The Supreme Court, however, pointed out that payment made to ward off competition in business to a rival would constitute capital expenditure if the object Of making that payment is to derive an advantage by eliminating the competition over some length of time ; the same result would not follow if there is no certainty of the duration of the advantage and the same can be put to an end at any time. How long the period of contemplated advantage should be, in order to constitute enduring benefit, would depe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e subtlety between profit that is made ' out of ' assets and profit that is made ' upon ' assets or 'with' assets. It does not settle the question, for instance, to say merely that an expenditure has been made to acquire a 'source of income', as the appellant says here, unless one is clear that some forms of circulating capital itself, e.g., labour, raw material, stock-in-trade, are not themselves to be regarded as such a source. " At page 253, the factual basis is brought out thus: " What Nchanga did was to charge its 1958-59 production with the payment of this money in order to settle its share of the group's production programme in the way that suited it best. The payment was wholly related to and an incident of its output of the year, and it is of no moment for this purpose that the factors of the calculation that produced the sum were certain financial requirements of Bancroft itself. Nchanga was the assessee and Bancroft was the recipient of payments). The settled distinction between the two types of expenditure is brought out by the Supreme Court in Empire jute Co. Ltd. v. CIT [1980] 124 ITR 1. At page 10, the Supreme Court observed : What is material to consider is the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ree with the conclusion reached by the Andhra Pradesh High Court in this case. The decision of the Allahabad High Court in Neel Kamal Talkies v. CIT [1973] 87 ITR 691 supports the case of the Revenue in the instant case. Certain payments were made to a rival cinema exhibitor. The assessee agreed to pay every month for a period of five years to the rival operator so that the latter would not exhibit any film at his theatre. The Allahabad High Court held that it was a capital expenditure because the payment was made under an agreement which extended for five years and resulted in the elimination of competition. A Bench of the Rajasthan High Court also took a similar view in Bikaner Gypsum Ltd. v. CIT [1969] 73 ITR 778. The payments were made by the assessee to create a monopoly right in the assessee and the payments were by way of incurring legal expenditure. The High Court held that in undertaking the litigation, the assessee was paving the way to secure contracts of lease of other plots of land, to ward off competition and to earn further profits and, therefore, it was a capital expenditure. To the same effect is the view expressed by the Gujarat High Court in Gujarat Mineral Deve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l replacement of the equipment, it would again be capital expenditure. If the expenditure is incurred with a view to acquiring a capital asset, such expenditure would also be in the nature of capital expenditure. If any asset or advantage for the enduring benefit of the business is acquired or brought into existence, the amount spent, no matter from which source, would be in the nature of capital expenditure and not revenue expenditure. It is not necessary in all cases that the amount must be paid once and for all because in a given case the payment may be spread over a period mutually agreed upon. The test is that if the expenditure is incurred in the direction of acquisition of a capital asset, or advantage for the enduring benefit of the business, such expenditure would be in the nature of capital expenditure even if it is not incurred once for all and is spread over a period mutually agreed upon. It would depend on the aim and object of the expenditure for (f the expenditure is incurred for the acquisition of a capital asset, it would be in the nature of capital expenditure : but if, on the other hand, it is incurred for running the business or working it with a view to produci ..... 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