TMI Blog1973 (9) TMI 33X X X X Extracts X X X X X X X X Extracts X X X X ..... unting period relevant to the assessment year 1962-63, the assessee paid a total sum of Rs. 15,497 to Shri B. Nagi Reddy as per the terms of the agreement dated November 15, 1958, and claimed the said amount as a business expenditure. The Income-tax Officer disallowed the claim, as in his opinion the amount in question constituted consideration for the purchase of the business and was, therefore, in the nature of capital expenditure. The assessee preferred an appeal to the Appellate Assistant Commissioner who, however, confirmed the disallowance made by the Income-tax Officer. Aggrieved against the said decision the assessee went before the Appellate Tribunal. It was contended before the Tribunal by the assessee as follows : (1) that there was no outright sale of the business of "Chandamama Publications" by Shri Nagi Reddy in favour of the assessee under the agreement dated November 15, 1958, but that it was only a lease of the business with the permission to use the goodwill and that the payment in question is only in the nature of a royalty for the use of the goodwill of the business; and (2) that even if there was an outright sale of the business by Shri Nagi Reddy to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... de enough to include the question as to whether there was a sale of the business by Shri Nagi Reddy to the assessee and that even if the reference on the second question is held to be incompetent, that question has to be considered while answering the first question. We are inclined to agree with the learned counsel for the assessee that the first question is wide enough to comprehend the question as to whether there was an outright purchase of business by the assessee. Thus, the first question referred in T. C. No. 87 of 1968 and the only question in T. C. No. 175 of 1969 relate to the nature of the annual payments made by the assessee to Shri Nagi Reddy during the assessment years 1962-63 and 1963-64, i.e., whether the expenditure is of a revenue or capital nature. The contention of the assessee both before the Tribunal as well as before us is that there is no outright purchase of business by the assessee from Shri Nagi Reddy and that, in any event, the annual payment made in pursuance of the agreement dated November 15, 1958, can only be taken as a revenue expenditure. The Tribunal held that the transaction entered into by the assessee with Shri Nagi Reddy on November 15, 195 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The Supreme Court expressed that the agreement in that case is not one for payment of the price stipulated in instalments and that the real nature of the transaction has to be gathered not only from the concerned instruments but also from the surrounding circumstances ; and the colour which the parties may give to a particular transaction which is the source of receipt and the characterisation of the receipt by themselves are of little consequence. The Supreme Court again considered a similar question in Devidas Vithaldas Co. v. Commissioner of Income-tax. In that case the Supreme Court expressed: "In distinguishing between capital and revenue expenditure, the courts have applied in different cases different tests. None the less, it is recognized that none of them by itself is conclusive, and the determination one way or the other has to be made on the facts and circumstances of each case." Dealing with the acquisition of a running business it expressed the view that the acquisition of the goodwill of a business will amount to an acquisition of a capital asset and, therefore, its purchase price would be a capital expenditure and that it will not make any difference wheth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rights from another in consideration of the assessee adjusting the commission it earned towards certain debts due by him. The question arose was whether the amounts so adjusted was a revenue or capital expenditure. The Supreme Court held that the payment amounted to a capital expenditure as it was a case of application of income to discharge a liability incurred not in the course of running the business, but undertaken for the purpose of acquiring the sole selling agency right which was an asset of a capital nature. Both the above decisions do not touch the aspect which we have to consider here. In those cases it was definitely found that the amounts in question were spent for acquiring either capital assets or an advantage of an enduring nature and there was no question of the payment depending on the profits earned. The view taken by Sikri C.J. in his dissenting judgment in Devidas Vithaldas Co. v. Commissioner of Income-tax of course supports the stand taken by the revenue. The learned Chief Justice said at page 292: " I am unable to see how a mode of payment of purchase price of any capital asset can convert a capital payment into a revenue payment in the hands of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... profits earned cannot be treated as of capital nature. The purchase consideration should, therefore, be taken to consist of two elements, one of a capital nature and another of an income nature. The fact that some of the elements of sale consideration are of a capital nature does not in the least bit point to the periodical payments which are indefinite depending on the profits of the company being also of a capital nature. Wheatcroft in his treatise, The Law of Income Tax, Sur Tax and Profits Tax, at page 1152, sets out the following three types of cases where the purchase price may be paid periodically or in instalments and the points of distinction between them: " First, there are cases where all the payments must be treated as income of the recipient and the payer is entitled to deduct tax on payment and to a deduction in computing his total income. Secondly, there are cases where the payments are all treated as capital and are neither taxable to the recipient nor deductible in computing the payer's total income. Thirdly, there are cases where the payments must be dissected into an income content and a capital content so that the former part is taxable and deductible whilst ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Further, it is seen that the payments are related to the future profits of the business run by the assessee, and it is not tied up or related in any way to any special sum whatsoever. The payments calculated at a certain percentage of profit of business for an indefinite period cannot be treated as payments by instalments of a capital sum. The very character and nature of the said payments suggest that no idea of connecting these payments with any specified capital sum was ever present in the minds of the contracting parties. In these circumstances, we find no difficulty in holding that the payments are of revenue character and that there are no elements present which would justify us in attributing to these payments a capital character. The payments are to be made for an indefinite period until they were commuted by mutual agreement. Though the payments are fixed with reference to the profits, they are indirectly related to the turnover. The payments were not related to any specified sum which was agreed upon by the parties as purchase price of the business. Such circumstances were taken to indicate that the payments are of revenue nature in Commissioners of Inland Revenue v. 36 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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