TMI Blog1981 (4) TMI 26X X X X Extracts X X X X X X X X Extracts X X X X ..... incurred for the business of the assessee. The amount was paid as a result of a tripartite agreement and the parties to the agreement were, (1) the assessee, (2) Surat Cotton Spinning Weaving Mills (P) Ltd., the proprietors of Navin Glass Products, hereinafter referred to as " Navins ", and (3) Window Glass Ltd. All these three companies were engaged in the manufacture of wired and figured glasses. The purpose, the motivation and the manner of payment would better be understood in the light of the language used in the agreement. It would, therefore, be material to refer to the relevant portion of the agreement. In the recital clause, after setting out the names of the parties, it is stated as follows: "WHEREAS the above three companies have come to the conclusion that there is tremendous excess productive capacity within the country for making wired and figured glasses in relation to the demand for these types of glasses (which provides scope for utilisation of only about 25% of the total installed capacity) and losses are being incurred in this line of business by all of these companies and, therefore, to save the Wired and Figured Glass industry from further heavy losses and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on of their rolled glass plant to anybody so as to permit the buyer or lessee or transferee to use the plant in India for manufacture of the products, and there should be a condition made with such buyer, lessee or transferee that he will not manufacture in India from this plant the products during the subsistence of this agreement. If any such buyer, lessee or transferee makes in India any of the products during the tenure of this agreement the same will constitute a breach of the provisions of this agreement by Navins as referred to in clause 7 hereafter." Clauses 5A. 5C, 5D, 5G, 5-1 and 5K read as follows: " 5A. Navins also agree to sell to HPG and Windows and HPG and Windows agree to buy by September 15, 1968, in the proportion of half and half Navins stocks which are at present insured and will remain so at least till September 15, 1968, at a price of Rs. 21,54,385.75 arrived at as per Schedule A less the glass value of Navins' despatches from May 17, 1968, till the actual date of the purchase of the stocks by HPG and Windows, such prices to be paid by HPG and Windows in equal shares to Navins immediately on the date the sale is effected. Till the date the requisite paym ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0% at any godown outside its factory at Baroda. " Clauses 9, 11 12 are relevant and those read as follows: " 9. In, case of default of payment of any instalment of compensation of Rs. 12 1/2 lakhs payable by each of HPG and Windows to Navins on the dates fixed for payment as per clause 2, the party in default, i.e., either HPG or Windows as the case may be shall be liable to pay forthwith the whole or balance of the said sum of Rs. 12 1/2 lakhs payable by each of HPG and Windows. " " 11. This agreement shall be deemed to have commenced on May 17, 1968. The provisions of this agreement shall be operative for a period of 5 years from the date of its commencement unless earlier terminated by mutual consent in writing of all three parties. 12. Any modification of this agreement shall be expressed in writing and signed by all three signatories to this agreement; otherwise it shall not be operative." Therefore, it is important to bear in mind, whatever may have been the motivation, the purpose, as the preamble indicated, was to prevent the company from going into " possible annihilation ", as the demand for this particular type of glasses provided a scope for the utilisa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rers of cement. The assessee had obtained for that purpose lease of certain limestone quarries from the Govt. of Assam for a period of 20 years for certain half yearly rents and royalties. At the time the lease was obtained, the assessee had just been formed. Under the deed, the lessor placed the assessee under certain special restrictions both as to the actual operations of the business and as to the sale of its products. In addition to the rents and royalties, the assessee agreed to pay the lessor annually a sum of Rs. 5,000 during the whole period of the lease as a " protection fee " and in consideration of that payment the lessor undertook not to grant any lease, permit or prospecting licence regarding limestone to any other party in respect of a neighbouring group of limestone quarries without a condition that no limestone should be used for the manufacture of cement. The assessee also agreed to pay Rs. 35,000 annually for five years as " further protection fee " and the lessor in consideration of that payment gave a similar undertaking in respect of another group of quarries. The question was whether in computing its profits the assessee was entitled to deduct the sums of Rs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing "a certain sum to the agents but there was a subsidiary term that the agents would not set up business of the same kind in competition. Expenditure laid out in the first and third class of cases has been held to be revenue expenditure, while that in the second class has been held to be of a capital nature. The cases relied on by Mr. Mitra belong to the first and third classes except two cases of this court which, will require special consideration." Therefore, the learned Chief justice put a second category of cases where a competitor was eliminated. Now, this decision of the Calcutta High Court went up in appeal before the Supreme Court and was affirmed by the Supreme Court in the decision in the case of Assam Bengal Cement Co. Ltd. v. CIT [1955] 27 ITR 34, where after setting out the principle that should be applicable in determining the allowability of expenditure, the court referred to the decision of the Full Bench of the Lahore High Court in the case of In re Benarsidas Jagannath [1947] 15 ITR 185 and observed the principles laid down at page 45 of the report. These principles have often been repeated by us and it is not necessary to reiterate those again over here. But ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the period of the lease unless determined in the manner provided in the last part of the clause. It provided protection to the company against all competitors in the whole of the Khasi and Jaintia Hills District and the capital asset which the company acquired under the lease was thereby appreciated to a considerable extent. The sum of Rs. 35,000 agreed to be paid by the company to the lessor for the period of 5 years was not a revenue expenditure which was made by the company for working the capital asset which it had acquired. It was no part of the working or operational expenses of the company. It was an expenditure made for the purpose of acquiring an appreciated capital asset which would no doubt by reason of the undertaking given by the lessor make the capital asset more profit yielding. The period of 5 years over which the payments were spread did not make any difference to the nature of the acquisition. It was none the less an acquisition of an advantage of an enduring nature which enured for the benefit of the whole of the business for the full period of the lease unless terminated by the lessor by notice as prescribed in the last part of the clause. This again was the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a certain temporary advantage, the arrangement did not bring about any capital addition to the assessee according to the tests laid down and, therefore, this was not an acquisition of an asset of enduring advantage. There the arrangement was not for any particular period. Furthermore, the arrangement could be brought to an end unilaterally by any one of the contracting parties. This decision also went up to the Supreme Court in the case of CIT v. Coal Shipments P. Ltd. [1971] 82 ITR 902. There the Supreme Court emphasised that though an enduring advantage need not be of an everlasting character, it should not be so transitory and ephemeral that it could be terminated at any time at the volition of any one of the parties. We have noticed that, in the instant case before us, though the agreement was terminable by agreement between the parties such termination required consent in writing of all the parties and it could not be unlike the facts in the case of Coal Shipments Co's case, termination at the volition of any one of the parties. The court also noted that payment made to ward off competition in business to a rival would constitute capital expenditure if the object of making th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... relevant to the assessment year 1960-61 and claimed to deduct that amount as revenue expenditure. The Tribunal held that the expenditure incurred by the assessee was revenue in nature and, hence, deductible in computing the assessee's profits. On a reference, the High Court of Calcutta held that the amount paid by the assessee for purchase of loom hours was in the nature of capital expenditure and, was, therefore, not deductible under s. 10(2)(xv) of the Indian I.T. Act, 1922. The Supreme Court, however, reversed the decision of the High Court and held that the allotment of loom hours under the working time agreement to different mills constituted not a right conferred but merely a contractual restriction on the right of every mill to work its looms to their full capacity, and purchase of loom hours by mills had, therefore, the effect of relaxing the restriction on the operation of looms to the extent of number of working hours per week transferred to it so that the transferee mill could work its looms for, longer hours than permitted under the working time agreement and increase its profitability. The expenditure incurred by the assessee for the purpose of removing restriction on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly or more profitably while leaving the fixed capital untouched, the expenditure would be on revenue account, even though the advantage might endure for an indefinite future. The test of enduring benefit was, therefore, not a certain or conclusive test and it could not be applied blindly and mechanically without regard to the particular facts and circumstances of a given case. The Supreme Court reiterated what was an outgoing of capital and what was an outgoing on account of revenue depended on what the expenditure was calculated to effect from a practical and business point of view rather than upon the juristic classification of the legal rights, if any, secured, employed or exhausted in the process. The question, the Supreme Court emphasised, must be viewed in the larger context of business necessity or expediency. In our opinion, the facts in this case with which we are concerned were entirely different but the principles reiterated by the Supreme Court would be applicable. The expenditure must be viewed in the larger context of business necessity or expediency and must be examined from the practical point of view. In this connection, it is significant to bear in mind that the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Now, it is obvious that by purchase of such quota right, the assessee would be able to acquire more raw material and that would increase the profitability of his profit-making apparatus, but the amount paid for purchase of such quota right would indubitably be revenue expenditure, since it is incurred for acquiring raw material and is part of the operating cost. Similarly, if payment has to be made for securing additional power every week, such payment would also be part of the cost of operating the profit-making structure and, hence, in the nature of revenue expenditure, even though the effect of acquiring additional power would be to augment the productivity of the profit-making structure. On the same analogy payment made for purchase of loom hours which would enable the assessee to operate the profit-making structure for a longer number of hours than those permitted under the working time agreement would also be part of the cost of performing the income earning operations and hence revenue in character. When dealing with cases of this kind, where the question is whether expenditure incurred by an assessee is capital or revenue expenditure, it is necessary to bear in mind what ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ector towards the construction of Deoni Dam and Deoni-Dam Majhala Road which had been completed in 1952-53 ; and (ii) a contribution of Rs. 50,000 to the State of Uttar Pradesh towards meeting cost of construction of roads in the area around its factory under a sugarcane development scheme under which 1/3rd of the cost of construction of the road was to be met by the Central Govt., 1/3rd by the State Govt. and 1/3rd by the sugar factories and the sugarcane growers. The question was whether these two amounts were deductible in computing the assessee's profits under s. 10(2)(xv) of the Indian I.T. Act, 1922. It was held that the sum of Rs. 22,322 was not deductible expenditure under s. 10(2)(xv) because the amount was contributed long after the dam and the road were constructed and there was nothing to show that the contribution of the amount had anything to do with the business of the assessee or that the construction of the dam and the road was in any way advantageous to the assessee's business: it could not be said that the said sum had been laid out wholly and exclusively for the purpose of the assessee's business. Therefore, this amount we are not concerned with. Because, in our ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... esh agreement it was extended for another period of two years from October 1, 1964, with a provision for further extension for a similar period. Pursuant to the agreement with the embassy, the assessee-firm incurred expenditure during the accounting period relevant to the assessment year 1963-64, out of which the sum of Rs. 3,361 represented expenses for construction of additional bathrooms. The Tribunal held that the sum of Rs. 3,361 was capital expenditure because it had been incurred to improve the building to conform to the requirements of the embassy and the improvements made were of an enduring character and would be available to the assessee even if and when the embassy vacated the premises and the mere fact that the lease from the co-owners did not specify the period of the lease did not make the advantage limited to a short duration because, apart from the safeguard of rent laws, the fact that the partners of the firm owned the property ensured the continuity of its tenure for the foreseeable future. In those circumstances, it was held to be expenditure of a capital nature. If the ratio of the said decision is made applicable to the facts of the present case then, of cours ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was the cost of acquiring a source of income and, therefore, a capital asset and disallowed it as an admissible item in the computation of the taxable profit of the assessee-company for the year ended March 31, 1959. It was held by the judicial Committee that the compensation paid was an allowable deduction in determining the assessee-company's taxable income. The expenditure bought only the Tight to have B out of production for 12 months and had no true analogy with an expenditure for the purpose of acquiring a business or the benefit of a long term or enduring contract. It bore a fair comparison with monetary levy on the production of a given year. What the assessee company 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. It was a cost incidental to the production and sale of the output of their mine; as such, the Privy Council reiterated, this true analogy was with an operating cost. It resembled an outlay of a business " in order to carry it on and to earn a profit out of this expense as an expense of carrying it on. Now, there is, it must be emphasised, a si ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the profit-earning process and not for acquisition of an asset or a right of a permanent character, the possession of which was a condition to the carrying on of the business, the expenditure might be regarded as a revenue expenditure. Here, we have the declared intention of the parties that the expenditure in consideration was incurred, if not as a condition for the carrying on of the business, but with a view to prevent what the parties have described as annihilation from business. The expenditure secured an advantage longer than the year in question and might even go to secure such goodwill in the glass field for the assessee by sterilising the operation of a competitor for as long as five, years with the profit-earning apparatus of the assessee-company got vastly improved. Our attention was also drawn to the decision in the case of IRC v. Carron Company [1968] 45 TC 18, where Lord Reid observed at pp. 67 and 68 as follows: " I turn now to the more difficult question whether this expenditure ought to be charged to income or capital account. The case for charging it to capital might appear to be strengthened by the magnitude of the sums involved, but again I do not think i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was accordingly decided to petition for a supplementary charter under which, inter alia, (a) responsibility for management could be vested in a board of directors so that management could proceed on lines similar to that of a company incorporated under the Companies Acts, (b) the limitation of the company's borrowing powers to pound 25,000, the restrictions on the issue and transfer of shares and the restriction of voting rights would all be removed, and (c) the members' liability would be limited. A number of the points covered by the proposed charter had little to do with the company's trade. The company petitioned for the supplementary charter in December, 1959, but proceedings were suspended pending the outcome of an action by a shareholder claiming that the procedure adopted in deciding to petition was invalid. After winning the action before the Lord Ordinary and in the First Division of the Court of Session, the company was advised that its prospects of success in the House of Lords were dubious, and the shareholder threatened to raise a further action on new grounds which would once more indefinitely postpone consideration of the petition. Consequently, the company settl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion, the observations of Lord Reid made in the aforesaid decision cannot be applied to the facts and circumstances of this case where, by eliminating competition from the field of operation in which the assessee was operating the assessee gained sufficient foothold in the business and obtained sufficient capital for a purpose no (sic) longer than one year in question, and for a five year which will ensure and help the company far beyond five years. The fact that the agreement was terminable with the consent of all the parties, in writing, does not, in our opinion, affect the position. By arrangements or with the consent of all the parties it could be terminated. Indeed, even a company with the consent of the shareholder or by the order of the court can be wound up but acquisition of capital asset would nevertheless remain to be capital asset for the assessee. In that view of the matter, we are of the opinion that the expenditure in question must be considered to be capital expenditure in the background of the facts of this case; The profit making apparatus was improved: it was improved to last beyond the year in question and the business was to be carried on unfettered by rival com ..... X X X X Extracts X X X X X X X X Extracts X X X X
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