TMI Blog1981 (8) TMI 7X X X X Extracts X X X X X X X X Extracts X X X X ..... a going concern, they came forward to settle the claims of the foreign buyers. The claimants included the U.S.SR. Trade Representative and two firms in the U.S.A. The payments made by the firm towards meeting the claims by these foreign customers amounted in all to Rs. 1,28,384. This amount was paid by the firm in the account year ended December 31, 1965. In their relevant assessment to income-tax for the year 1966-67 the firm claimed the payment of Rs. 1,28,384 as a business outgoing. The ITO rejected the claim and added back the amount while making the assessment. This assessment was confirmed in appeal by the AAC. The assessee appealed further to the Tribunal. The Tribunal held that the amount paid was an item of business expenditure wholly and exclusively incurred by the assessee-firm for the purpose of their business. The Tribunal further held that the expenditure was not of a capital nature. Aggrieved by this decision of the Tribunal, the Department demanded a case from the Tribunal. The Tribunal complied with this requisition and made a reference to this court on the following question of law: " Whether, on the facts and in the circumstances of the case, Rs. 1,28,384, be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ms of these purchasers arose out of short deliveries effected by Mr. Georgepolous at a time when the business was that individual's sole proprietary concern. The learned counsel accordingly urged that the liability to answer the claims of these buyers, if at all, would be only that individual's as the then proprietor of the business. The point which the learned counsel wished to make was that it was not necessary for the purposes of the assessee's business, either under contract or under any other legal obligation, to discharge the claims made by its predecessor's buyers. Since there was no legal necessity for the payment, the money laid out, according to the standing counsel, cannot be allowed as the assessee-firm's own expenditure in business. The argument of the learned counsel is easily met by reference to the statutory requirement for allowance of business expenditure under the residuary head of allowance laid down by s. 37 of the I.T. Act, 1961. Under this head, there is no requirement that an item of expenditure or outgoing must be incurred or laid out with a view to earn the profits ; nor is there any requirement that the expenditure must be incurred in order to meet an o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d doctrine as contrasted with the narrower view of the provision for allowance which was propounded again, in a very oft quoted passage in tax discussions, namely, that of Lord Davey in Strong and Co. of Romsey Ltd. v. Woodifield [1906] 5 TC 215 (HL). In that case, Lord Davey construing the relevant rule in Sch. D of the United Kingdom Income-tax Act, observed that (p. 220): "It is not enough that the disbursement is made in the course of, or arises out of, or is connected with, the trade or is made out of the profits of the trade. It must be made for the purpose of earning the, profits " Even in the United Kingdom, this view of the deduction provision is not now much favoured. Indeed, the Royal Commission on the Taxation of Profits and Income, in its final report, made a pointed criticism of the expression of opinion contained in Lord Davey's judgment. The Commission observed that Lord Davey's words amount to a gloss upon the statutory words " wholly and exclusively for the purposes of the trade ". In the opinion of the Royal Commission, for the purposes of earning the profits" cannot be a good interpretation of "for the purposes of the trade since the earning of the profits i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en enforced, they would, in all propriety, be enforced not against the assessee-firm but only as against the former owner of the business, because they related to that period. That the claims related to the sole proprietary business and not to the assessee-firm and related to an earlier phase of the concern, is only another way of arguing that the assessee-firm was riot bound, as of necessity, to meet these expenses. But if the element of commercial expediency was fully present, as the assessee-firm's sole motivation, and this has been pointed out by the Tribunal with reference to the need to keep up the business reputation and the like, then the fact that the claims related to a period when the business was that of the sole proprietor cannot make for the disallowance of the expenditure under s. 37 of the I.T. Act. The next argument which the learned standing counsel addressed was that this expenditure was, in any case, capital in nature. In this argument, the learned counsel made an attempt to establish that, in some way, this payment of Rs. 1,28,383.85 made by the assessee to the trade representative of the U.S.S.R. and the two firms in the United States really formed part and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as to make payments only under revenue account and not as part and parcel of the aggregate purchase price for which they had acquired the entire business as a going concern. Mr. Jayaraman referred to some decided cases in which an assessee having acquired an existing business had made a payment to the former owner, or to the former owner's account and claimed the payment as deductible item of expenditure in the computation of his own subsequent profit from the acquired business. Where the payment is made straightaway to the vendor, it is part of the price for acquisition of the business, and hence, capital expenditure. But where the consideration consists in the discharge by the purchaser of a liability of the vendor, the payment would still partake of the character of capital expenditure, because the discharge of the vendor's liability is part of the agreed purchase consideration. The line of cases cited by the standing counsel on this point included CIT v. D. L. F. Housing Construction (P.) Ltd. [1981] 128 ITR 773, of the Delhi High Court; V. N. V. Devarajulu Chetty Co. v. CIT [1950] 18 ITR 357 (Mad), of our High Court and Western Mechanical Industries Pvt. Ltd. v. CIT [1977] ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and the other on the point whether it was an item of revenue or capital expenditure. On the first point, the learned judge relied on the dictum of Viscount Cave in Atherton v. British Insulated and Helsby Cables Ltd. [1925] 10 TC 155 (HL), and held that in the circumstances of the case, even though the taxpayer was under no legal liability to make the payments, he had done so with a view to preserve his business. The learned judge was not unalive to the possibility that the taxpayer-firm, as between its own partners, might choose to record these outgoings as being under capital accounts. But all the same he held that in the computation of the taxpayer's trading profits for purposes of income-tax it would not be incorrect to record the outgoings as falling under the revenue account, since the payments were made in order to ensure the continuance of supplies, of the working force and of the shopping accommodation. As we earlier indicated, we derive substantial support from this English decision. There is only a minor difference, on facts, between that case and the one before us. But the difference is quite immaterial for decision on principle. In the case before Croom-Johnson J., t ..... 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