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TMI Blog1975 (8) TMI 8X X X X Extracts X X X X X X X X Extracts X X X X ..... section and selling section. The assessee-company acquired the manufacturing section of the firm on April 1, 1959, for a sum of Rs. 5 lakhs. By an agreement dated January 5, 1960, the selling section of the firm was sold to the assessee-company making the sale effective from October 1, 1959. The selling section was purchased by the assessee-company as a going concern with effect from October 1, 1959, together with all its then stock-in-trade, out-standing and other assets, as per the balance-sheet attached therewith including the benefit of its pending contracts and orders as on 1st October, 1959, and of the quota rights and licences held by them in respect of the business of the said unit in the premises at 5-D Vulcan Insurance Building, Churchgate, Bombay, in consideration of the purchasers paying to the vendors a sum of Rs. 3,39,294.38 and a commission of ten per cent. on the value of the pending contracts and orders entered into by the vendors and also in consideration of the purchasers taking over the liabilities of the vendors in respect of the said unit. The commission was paid at the rate of 10% on the value of the pending contracts which had been transferred to and taken o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aken over by the assessee-company from the firm was not an admissible deduction. On second appeal by the assessee-company before the Tribunal, it was contended on its behalf that the payment of commission was essentially on revenue account, being payment in respect of trading contracts taken over by the assessee-company from the vendors and executed by the assessee-company. It was also contended that even if pending contracts were taken over as part of the transfer of business, there was nothing in principle against the payment relating to contracts being of revenue nature as a result of the arrangement between the parties. It was pointed out by the assessee-company that it had paid such commission at much higher rates to outside parties whose contracts it had executed and the mere fact that the payment of commission to the firm was made a part of the agreement for the taking over of the selling section as a going concern would not convert the payment into a capital payment. On the other hand, it was contended on behalf of the revenue that the payment of commission was a part of the purchase consideration and, as such, it was properly disallowed as capital cost. On behalf of the r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and completion of the contracts that were taken over by the assessee-company. He pointed out that such commission has to be paid for a trading asset similar to the stock-in-trade and was, therefore, rightly claimed to be a revenue expenditure. He also emphasised the fact that other merchants have been paid commission at a larger percentage by the assessee-company and there was no reason for the taxing authorities and the Tribunal to take the view that the commission paid to the firm for the two years should not be treated as one made on revenue account. In any event he submitted that when a business is taken over as a going concern, just as a stock-in-trade will have to be valued as a trading asset, so also the benefit of pending contracts shall have to be treated on the same footing and, if not the whole of the amount claimed by the assessee-company, at least a reasonable amount should be earmarked as a revenue expenditure pertaining to taking over of such trading asset like pending contracts. An item of disbursement is regarded as a capital expenditure when it is referable to fixed capital or capital assets. It is revenue expenditure when it is referable to circulating capital o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -sheet attached here-with including the benefit of its pending contracts and orders as on 1st October, 1959, and of the quota rights and licences held by them in respect of the business of the said unit in the premises at 5-D, Vulcan Insurance Building, Churchgate, Bombay, in consideration of the purchasers paying to the vendors a sum of Rs. 3,39,294.38 and a commission of ten per cent. on the value of the pending contracts and orders entered into by the vendors as hereinafter mentioned and also in consideration of the purchasers taking over the liabilities of the vendors in respect of the said unit." Clauses 1 and 2 which form the operative part of this agreement are relevant and they are as under : " NOW IT IS HEREBY RECORDED CONFIRMED AND DECLARED by and between the parties hereto as follows :-- 1. That the vendors have sold to the purchasers and the purchasers have purchased from the vendors the said unit as a going concern as on the 1st day of October, 1959, together with all its then assets of the vendors comprised in the said unit, namely, stock-in-trade, outstandings, benefits of pending contracts and orders, and of the quota rights and licences held by the vendors in re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of 10% upon completion of the contracts on the footing that it is a payment for transfer of the benefit of the rights under the pending contracts. Actually such payment of commission is in respect of every item of assets of the firm as a going concern other than what is possibly referred to in the statement, annexure "A", to the agreement. When such is the position, the Tribunal was right in holding that the consideration paid under this agreement covers the business as a whole although this amount is to a certain extent dependent upon the value of the contracts executed. It is clearly one consideration for the transfer of the business as a whole and could not be allocated to various assets of the business transferred. The Tribunal was, therefore, justified in proceeding on the basis that the business was transferred as a whole and the consideration was paid for the business as a whole. It was not possible to separate the unexecuted contracts from the rest of the assets sold. The mere fact that such commission is payable to the firm upon execution and completion of the contracts or orders will not convert it into a payment for a trading asset like stock-in-trade. There is nothing ..... X X X X Extracts X X X X X X X X Extracts X X X X
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