TMI Blog1990 (12) TMI 292X X X X Extracts X X X X X X X X Extracts X X X X ..... advertisement had also been issued by, the partnership calling for applications for filling up the post of ink chemist. While matters stood thus, an agreement was entered into on February 14, 1972, between the assessee-company and the partnership and the terms of the agreement, inter alia, were as follows : "(1) Chelpark has been engaged in the manufacture and sale of writing ink under the brand name 'Quink' in the territory of India in the course of which it has established a good market for its products ; (2) Advani has been formed and established for the purpose of manufacturing writing inks and the sale thereof similar to those made and sold by Chelpark and is thus a competitor of Chelpark ; (3) Chelpark desires to avoid the competition from Mr. Advani and has, therefore, negotiated a settlement with Advani on the terms and conditions hereinafter set out : (4) In consideration of Chelpark paying to Advani by way of compensation a sum of Rs. 1,00,000 (Rs. one lakh only), Advani hereby undertakes : (a) that it shall forthwith discontinue and shall not recommence at any time within a period of five years from the date of this agreement at any place in India, either dire ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fits earned by the assessee. Thus regarding the expenditure as an item of capital expenditure, the Income-tax Officer added back this amount. On appeal by the assessee before the Appellate Assistant Commissioner, on a consideration of the terms of the agreement and the fact that Mr. Advani had also left the shores of India, he took the view that the assessee had obtained an advantage of enduring nature by preventing a potential competitor from continuing a business similar to the business activity of the assessee through the payment of compensation and that advantage or benefit was of an enduring nature. The disallowance was thus upheld. On further appeal before the Tribunal, it took into account the terms of the agreement as well as the deed of dissolution and concluded that the payment of Rs. 1,00,000 by the assessee to the partnership secured to the assessee an enduring advantage to its business in that a powerful competitor had been eliminated for period of five years by payment of this amount and, therefore, the departmental authorities were justified in disallowing the amount paid by the assessee as a capital expenditure. Under section 256(2) of the Income-tax Act, 1961 (here ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a competitive business was harmful to the assessee and the agreement was the outcome of the prospect of powerful competition from the partnership and a desire on the part of the assessee to protect itself against that disadvantage. Further, the departure of Mr. Advani from the assessee-company and the prospect of his making available his experience and expertise in the manufacture and marketing of ink to his wife and daughters who are the partners of the firm would have rendered the goodwill of the assessee-company vulnerable, as the assessee, when it commanded the benefit of the services of Mr. Advani, was in an advantageous position. There was thus a positive detriment to the assessee-company due to the competition from the partnership and against such damaging competition, the assessee-company obtained the benefit of a restrictive covenant against such powerful competition. That resulted in the assessee buying the potential competitor which was a positive detriment owing to such competition and had also enabled the assessee not only to safeguard its goodwill but also to enhance it. The aim of the payment of Rs. 1,00,000 by the assessee to the partnership was to secure advantage ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ween the members, placing a restriction on the number of working hours per week for which the member-mills were entitled to work and it was also further provided that the allotment of hours of work per week would be transferable amongst the member-signatories. The assessee incurred an expenditure of Rs. 2,03,255 in purchasing the loom hours and claimed this amount as revenue expenditure which was upheld by the Tribunal, but viewed differently by the High Court on reference. The Supreme Court, on a consideration of the terms of the working time agreement, found that the effect of the purchase of loom hours by the assessee was to relax the restriction on the operation of the looms to the extent of the number of working hours per week transferred and the amount spent represented consideration to work the looms for a longer number of hours and that it was difficult to characterise such expenditure as one incurred on capital account. It has also been pointed out that the test of enduring benefit is not a certain or conclusive test and cannot be applied mechanically without reference to the facts and circumstances of the given case and that there may be cases where the expenditure, even ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... P. Ltd. [1971] 82 ITR 902 (SC). In that case, payments were made to ward off competition in business to a rival dealer on the basis of a verbal agreement. The question arose whether such expenditure would be capital or revenue. While holding that a payment to ward off competition in business to a rival dealer would constitute capital expenditure, if the object is to derive an advantage by eliminating 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 an end to at any time. It was also laid down that the length of the period contemplated in order to constitute an advantage of enduring benefit would depend upon the circumstances and the facts of each case. This decision, far from supporting the stand of the assessee, assists the Revenue, when applied to the factual situation obtaining in this case. A payment made to ward off competition in business to a rival dealer would, according to the Supreme Court, constitute, capital expenditure if the aim and object of such payment was to eliminate competition over some length of time. Admittedly, in this case, though the agreement stipulate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... yment was not for grant of permission to carry on mining operations, but was towards removal of constructions which obstructed the mining operations and the payment so made was for the purpose of enabling the assessee to carry on its business in the mining area already leased out to it and, therefore, there was no question of acquisition of any capital asset. We are of the view that this decision, based as it is on the terms of the lease and the factual position that there was no acquisition of any capital asset, is of no assistance to the assessee. We may now make a reference to Associated Portland Cement Manufacturers Ltd. v. Kerr (H. M. Inspector of Taxes) [1945] 27 TC 103 (CA), relied on by learned counsel for the Revenue. The assessee-company paid certain amounts to two of its retiring directors who had exceptional knowledge of the cement industry and important business contacts, on the basis of covenants entered into with them that they would not, after their retirement from the assessee-company, carry on or be concerned with, in the manufacture or sale of cement, in any part of the world. The assessee claimed that the amounts so paid by it were in the nature of revenue exp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... capital expenditure, while, if it is made not for the purpose of bringing into existence any such asset or advantage, but for running the business or working it with a view producing the profits, it is revenue expenditure and it is only in those cases where this test is of no avail, that the test of fixed or circulating capital and the consideration of the question whether the expenditure incurred was part of the fixed capital of the business or part of its circulating capital may be resorted to. The Supreme Court further observed that what has to be looked into is the character of the payment and not whether a payment is made in a lump sum or in instalments. With reference to the payments made towards the protection fee in respect of the entire district also, the Supreme Court took the view that, by such payment, the assessee secured protection against all competitors in the whole of the district and the capital asset which the company had acquired under the lease; thereby appreciated and the expenditure was made for the purpose of acquiring an appreciated capital asset and the period of five years over which the payment spread did not make any difference to the nature of the acqu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd the expenditure would, therefore, be of a capital nature. This decision also recognises that payments made by the assessee in order to ward off a rival competitor and thereby to secure protection from competition and self-preservation would amount to capital expenditure. We hold that this principle would equally apply to this case. In Gujarat Mineral Development Corporation Ltd. V. CIT [1983] 143 ITR 822 (Guj), the assessee carried on the business of mineral development, extraction of ores, etc., after securing a mining lease from the Government in respect of certain land and with reference to the land situated adjacent to the land held by the assessee for mining purposes, another mining company had a prospecting licence and had made an application for granting of a mining lease in respect of the land adjacent to that of the assessee. Its attempts having failed, it filed a suit and also filed a writ petition and obtained certain orders by which the Government was restrained from granting the lease to any other party. Meanwhile, the assessee also applied for a mining lease in respect of the same land. However, the assessee, with a view to avoiding competition from the exploitatio ..... X X X X Extracts X X X X X X X X Extracts X X X X
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