TMI Blog1978 (1) TMI 53X X X X Extracts X X X X X X X X Extracts X X X X ..... section 18(3) of the Industrial Disputes Act, 1947. The actual terms and contents of the said memorandum of settlement are, however, not available in the records before us. It appears that the assessee-company had gifted to the Government of Bihar the hospital it had constructed together with the land by a deed of gift dated the 29th January, 1962. Clause 8(d), which was an integral part of the settlement, stipulated that the assessee should give a sum of Rs. 50,000 to the Government for the purpose of purchasing equipment for the workers' hospital built by the assessee when it would be taken over by the Government. The said clause reads as follows : " Clause 8(d). Hospital : It is agreed that the company will pay to the Government of Bihar in the Department of Labour and Employment a sum of Rs. 50,000 (rupees fifty thousand) for the purchase of equipment for the workers' hospital built by the company when it is taken over by the Government. The union agrees and confirms that no disputes, matters of demands of whatsoever nature in respect of the workers' hospital, are outstanding between the union and the company on execution of this memorandum of settlement. " It appears, there ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1961 ? " As we have mentioned before, the real controversy before the Tribunal was whether the expenditure should be allowed as a revenue expenditure or it was capital and cannot be allowed. The question will have to be determined in the light of section 37(1) of the Income-tax Act, 1961, which reads as follows : " (1) Any expenditure (not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head ' Profits and gains of business or profession'. " It is well settled that the aforesaid section, which is similar to section 10(2)(xv) of the Indian Income-tax Act, 1922, enacted affirmatively what was stated in the negative form in the English statute and was substantially in pari materia with the English enactment. Therefore, the courts should consider the English authorities as aid to the interpretation of the said provision. (See the observations of the Supreme Court in the case of Indian Molasses Co. (Pvt.) Ltd. v. Commissioner o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ture should have been wholly and exclusively laid out for earning profits as such. Even an expenditure which is not for earning of profits as such but indirectly facilitates the carrying on of the business, may, in certain circumstances, as we shall notice later, be considered to be expenditure of revenue nature. The Master of the Rolls observed that where one found that there was a continuous business demand, one might, on business principles, summarize that continuous business and on prudent grounds one might make a payment which covered more than the particular year, then one would be able to show that the sum had been spent prudently in order to obviate the continuous business demand and, hence, that was the sum wholly and exclusively laid out in the earning of the profits. After discussing the relevant authorities the Master of the Rolls observed that the expenditure in question was a capital expenditure and not to be treated as necessary expenditure wholly or exclusively for the purpose of seeking profits and, therefore, upheld the decision of Rowlatt J. Warrington L.J. observed that what the company had really done in that case was to create a permanent charitable fund appli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or it was easy to imagine many cases in which a payment, though made once and for all, would properly be chargeable against the receipts for a year. But Viscount Cave L.C. further observed that when an expenditure was made not only once and for all but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade, he was of the view that there was good reason in the absence of any special circumstances leading to an opposite conclusion for treating such an expenditure as properly attributable not to revenue but to capital. In the case of Anglo Persian Oil Co. Ltd. V. Dale (H. M. Inspector of Taxes) [1931] 16 TC 253 (CA), there were agreements made in 1910 and 1914 and under the said agreements the assessee-company had appointed another limited company as its agents in Persia and the East for a period of years, upon terms, inter alia, that the agents would be remunerated by commission at specified rates. With the passage of time, the amounts payable to the agents by way of commission increased far beyond the amounts originally contemplated by the company and, after negotiations between the parties, the agreements were cancelled in 1922 and the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the distinction between the facts of that case and the facts in the case of Atherton's [1925] 10 TC 155 (HL) and emphasised that Cave L.C. in his speech had indicated that a payment made to secure a contented and efficient staff would, in the absence of special circumstances pointing to a contrary conclusion, be attributable to capital. But Donovan J. emphasised that in the forefront of Atherton's case [1925] 10 TC 155 (HL) was the initial large outlay that was made to establish the fund, a feature which his Lordship thought, was of crucial importance in that case and which was absent entirely in the case before his Lordship. The learned judge further went on to observe that one had only to read the judgments in Atherton's case [1925] 10 TC 155 (HL) to see how large a part that initial payment had played in that decision. Counsel for the revenue in the instant case before us emphasised this aspect of the matter in aid of his submission that the initial large payment to start a scheme which brings in an advantage or a privilege in favour of the company is a factor indicating that the expenditure in question is capital in nature. Our attention was also drawn to the decision in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of capital nature and not deductible. The Special Commissioners held that the payments were of a revenue nature. On further appeal, the Court of Appeal held that the payments could not be alowed as revenue outgoings. After discussing several authorities Lord Reid observed at page 31 of the report that when one comes to intangible assets there was much more difficulty. To help the conduct of his business a trader obtains a right to do something on someone else's property or on an obligation by someone to do or refrain from doing something, or makes a contract which affects the way in which he conducts his business. And the right or obligation or the effect of the contract might endure for a short or a long period of years. The question then arises whether the sum which one pays for that advantage is capital or a revenue expense. At page 35 of the report, Lord Reid observed that there is a good deal of authority on the question of what kind of asset or advantage Lord Cave's words in Atherton's case [1925] 10 TC 155 (HL) would cover. Broadly, it seemed to have been accepted that these would not extend to cover any payment to get rid of a handicap or a disadvantage. Counsel for the re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the decisions of the Supreme Court in the case of Assam Bengal Cement Co. Ltd. v. Commissioner of Income-tax [1955] 27 ITR 34. In that case, the assessee-company had acquired from the Government of Assam, for the purpose of carrying on the manufacture of cement, a lease of certain limestone quarries for a period of 20 years for certain half-yearly rents and royalties. In addition to the rents and royalties the assessee company had 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 to any person any lease, permit, or prospecting licence for limestone in a group of quarries without a condition that no limestone should be used for the manufacture of cement. The assessee had also agreed to pay Rs. 35,000 annually for 5 years as a further protection fee and the lessor in consideration of that payment gave a similar undertaking in respect of the whole district. The question was whether in computing the profits of the assessee the sum of Rs. 5,000 and Rs. 35,000 paid to the lessor by the assessee could be deducted under section 10(2)(xv) of the Indian Income- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at capital expenditure cannot be attributed to revenue and vice versa. Secondly, it is equally clear that a payment in a lump sum does not necessarily make the payment a capital one. It may still possess revenue character in the same way as a series of payments Thirdly, if there is a lump sum payment but there is no possibility of a recurrence, it is probably of a capital nature, though this is by no means a decisive test. Fourthly, if the payment of a lump sum closes the liability to make repeated and periodic payments in the future, it may generally be regarded as a payment of a revenue character (Anglo-Persian Oil Co. Ltd. v. Dale [1931] 16 TC 253 (CA)] and, lastly, if the ownership of the money whether in point of fact or by a resulting trust be still in the taxpayer, then there is acquisition of a capital asset and not an expenditure of a revenue character. Side by side with these principles, there are others which are also fundamental. The income-tax law does not allow as expenses all the deductions a prudent trader would make in computing his profits. The money may be expended on grounds of commercial expediency but not of necessity. The test of necessity is whether the in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dusthan Motors Ltd. [1968] 68 ITR 301, the Calcutta High Court found that the money that was spent was not so much to bring about any asset or advantage of enduring benefit to itself but to run the business efficiently and conveniently. In that case, what happened was that the location of a factory of a motor car manufacturing company was a long distance away from the main trunk road, but there was an approach road from the main trunk road to the factory premises of the assessee, which road belonged to the Government of West Bengal. The said approach road fell into disrepair and began to cause transportation difficulties to the assessee. The Government was not prepared to meet the expenses for the repair of the road. Thereupon, the assessee offered to contribute a sum of Rs. 39,770, for the improvement of the said approach road. The assessee paid the said amount to the Government and claimed the amount as expenditure deductible under section 10(2)(xv) of the Indian Income-tax Act, 1922. The Income-tax Officer treated the expenditure as capital expense and disallowed the claim for deduction. It was held that the money was spent not so much to bring about any asset or advantage of en ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the provision of section 18(3) of the Industrial Disputes Act, 1947, referred to hereinbefore. It is true that if the annual sums had to be spent for meeting the workers' expenses for treatment at the hospital, the same would have merited deductions as revenue expenditure. From that point of view, it is true that by incurring this expenditure of Rs. 50,000 the company was getting rid of the liability or the obligation to make recurring annual payments. If this was the only aspect of the matter, then on the principles discussed in the aforesaid decisions, it might have been possible to bold that the expenditure incurred, in the instant case, was a revenue expenditure. But, in this case, not only the company incurred this expenditure for getting rid of the obligation to make recurring annual expenses for meeting the treatment of its workers but also for getting an advantage or a privilege which indeed can be considered to be an asset for an indefinite period to have its workers treated at no expense or at concessional expense. If this is an asset or a benefit then, and as it endures for a considerable length of time or for an indefinite time, it can certainly be considered to be an ..... X X X X Extracts X X X X X X X X Extracts X X X X
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