TMI Blog1988 (2) TMI 15X X X X Extracts X X X X X X X X Extracts X X X X ..... 000 made by the assessee to Pioneer Construction Company, Vijayawada, under the "dissolution deed" dated January 1, 1966, was allowable as deduction in computing the income of the assessee for the assessment year 1968-69 ?" The first question arises out of the assessment proceedings for the assessment year 1969-70 and the second and third questions arise in respect of the assessment years 1967-68 and 1968-69. It is common ground that the answer to the second and third questions will depend upon what view we take to answer question No. 1. All these three questions arise out of a payment of Rs. 50,000 made by the assessee-company, Pioneer Engineering Syndicate, to Pioneer Construction Company, Vijayawada, hereinafter referred to as "the company", in terms of the same deed dated January 1, 1966, which is described as a deed of dissolution. All these questions have been referred in accordance with the directions of this court under section 256(2) of the Income-tax Act, 1961. The assessee is a partnership firm which was originally constituted under an instrument of partnership deed dated April 1, 1962. The construction company which has been referred to by the Tribunal as the Vija ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... "5. The continuing partners shall have the right to execute and exploit the pending contracts and the commitments or acceptances so far made in the matter of execution of contracts or on matters connected therewith. The continuing partners agree to pay the Pioneer Construction Company, Vijayawada, a sum of rupees fifty thousand only every year for the calendar years 1966, 1967 and 1968 in consideration of the existing agreement between the two firms regarding finance and technical services. This amount is payable in two equal instalments on the 30th June and 31st December every year. The Pioneer Construction Company shall not be entitled to any other payment other than the payment mentioned above." In terms of clause 5 reproduced above, the assessee-firm paid Rs. 50,000 to the Vijayawada firm for the financial years 1966-67 to 1968-69. For each of these years, the assessee-firm claimed the said payments as deductions. This claim was allowed by the Income-tax Officer for the assessment years 1967-68 and 1968-69. However, for the assessment year 1969-70, the Income-tax Officer disallowed the deduction treating the payment as capital expenditure. In respect of the order of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessment year 1968-69, the Tribunal also allowed the appeal filed by the assessee against the revisional order of the Commissioner of Income-tax. That is how questions Nos. 2 and 3 have been referred for consideration. Learned counsel appearing on behalf of the Revenue has contended before us that the payment of Rs. 50,000 per year for the three years in question was made for getting rid of huge payments which was a liability recurring every year and for reorganisation of the assessee's business. The argument was that consequent upon the fresh agreement of reconstitution of the partnership when two persons who were partners of the Vijayawada firm ceased to be partners of the assessee-firm, the assessee-firm had got itself rid of the control exercised by the Vijayawada firm and, consequently, the assessee-firm must be considered as having obtained an enduring advantage by payment of the lump sums in question. When it was pointed out to learned counsel for the Revenue that it was not the case of the Revenue before the Tribunal that the payment was made as part of the reorganisation of the assessee's business with a view to get rid of the control of the Vijayawada firm, learn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lease of its rights to get higher remuneration and, therefore, a capital receipt. It will be noticed from that judgment that the amount of remuneration originally agreed to be paid was reduced and the amount was paid by way of compensation during the subsistence of the managing agency and, therefore, it was considered to be capital expenditure in character. The other case, J. K. Cotton Manufacturers Ltd. v. CIT [1975] 101 ITR 221 (SC), was a case in which the termination of the managing agency was not found to be in terrorem but was voluntary so as to obtain an enduring or recurring benefit and payment of the compensation was not dictated by commercial expediency since there was absolutely no necessity to terminate the managing agency and the appellant wanted to benefit both the firms in which the family had major interest. The compensation paid to the outgoing agents was, therefore, found to be capital expenditure. It is, however, important to point out that in that decision, the Supreme Court considered the earlier decision in CIT v. Ashok Leyland Ltd. [1972] 86 ITR 549 (SC). In Ashok Leyland Ltd.'s case, it was found that the managing agency was terminated on business considerat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1 ITR) : "But when an expenditure is made, not only once and for all, but with a view to bringing into existence as 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. Therefore, even according to the decision cited on behalf of the Revenue, if there is a payment made on the ground of commercial expediency and if such payment does not result in the acquisition of any capital asset or an enduring benefit, merely because such payment is made to get rid of the liability which is much larger, the outgoing amount cannot be considered as capital in nature. Ultimately, the conclusion as to whether a particular outgoing is capital or revenue in character must be decided with reference to the facts of each particular case. Learned counsel also brought to our notice a decision of the Punjab and Haryana High Court in Dalmia Dadri Cement Ltd. v. CIT [1969] 74 ITR 484. That was a case of termination of a managing agency which was to continue till May 25, 1968. The managing agency was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gs the case within the principle laid down in this test. What is material to consider is the nature of the advantage in a commercial sense and it is only where the advantage is in the capital field that the expenditure would be disallowable on an application of this test. If the advantage consists merely in facilitating the assessee's trading operations or enabling the management and conduct of the assessee's business to be carried on more efficiently or more profitably while leaving the fixed capital untouched, the expenditure would be on revenue account, even though the advantage may endure for an indefinite future. The test of enduring benefit is, therefore, not a certain or conclusive test and it cannot be applied blindly and mechanically without regard to the particular facts and circumstances of a given case." The approach indicated by the Supreme Court in Empire Jute Co. Ltd.'s case (1980] 124 ITR 1, must now be the approach and it would not, therefore, be enough to merely ascertain whether a particular expenditure has resulted in any advantage of an enduring character. The advantage, as pointed out by the Supreme Court, must be in a commercial sense and further must be in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Supreme Court in Ashok Leyland's case [1972] 86 ITR 549, that in the ordinary case, payment to get rid of a servant when it is not expedient to keep him in the interest of trade would be a deductible expenditure and a payment made to remove the possibility of a recurring disadvantage cannot be considered as a payment made to acquire an enduring advantage. The payment in the instant case clearly appears to us to be made on grounds of commercial expediency and to facilitate the carrying on of the business and must, therefore, be treated as having been incurred fully and exclusively for the purposes of the trade. As we have already pointed out, there was no benefit of any enduring character in the capital field which accrued to the assessee. In our view, the Tribunal was justified in treating the payment of Rs. 50,000 as being revenue in character. Consequently, question No. 1 has to be answered in the affirmative and against the Revenue. Consequent upon the view which we have taken on question No. 1, questions Nos. 2 and 3 have also to be answered in the affirmative and against the Revenue and, accordingly, all the questions are answered against the Revenue. The Revenue to pay cost ..... X X X X Extracts X X X X X X X X Extracts X X X X
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