1994 (12) TMI 7 - HC - Income Tax

Business Expenditure, Compensation On Termination, Revenue Expenditure, Revenue Receipt, Surtax Liability, Tax Liability, Weighted Deduction

Summary

Issues Involved:
1. Whether the receipt of Rs. 5,00,000 by the assessee was a revenue receipt or a capital receipt.
2. Whether the surtax liability was allowable as revenue expenditure.
3. Whether the assessee was entitled to weighted deduction under section 35B of the Income-tax Act, 1961, on Rs. 20,607 being the expenditure in respect of insurance, freight, and inspection.

Issue-wise Detailed Analysis:

1. Whether the receipt of Rs. 5,00,000 by the assessee was a revenue receipt or a capital receipt:

The court analyzed whether the payment of Rs. 5,00,000 received by the assessee from BME for terminating their agreement was a capital receipt or a revenue receipt. The assessee argued that the amount was a capital receipt as it was compensation for the cessation of a business relationship that produced an income stream. The Revenue contended that it was a revenue receipt.

The court examined the nature of the agreement and the impact of its termination on the assessee's business. The agreement with BME was one of many activities of the assessee, who was engaged in widespread business activities. The termination of the agreement did not affect the trading structure or the source of income of the assessee. The court concluded that the sum received was in the nature of a revenue receipt, as the termination of the agreement was a normal incident of business and did not impair the trading structure of the assessee.

The court distinguished this case from other judgments cited by the assessee, where compensation for termination of managing agency agreements was considered a capital receipt due to the impairment of the trading structure or loss of a source of income. Here, the court found that the termination did not result in such impairment or loss.

2. Whether the surtax liability was allowable as revenue expenditure:

The court stated that the controversy regarding the surtax liability being allowable as revenue expenditure was covered by the judgment in the case of Lubrizol India Ltd. v. CIT [1991] 187 ITR 25. Based on this precedent, the court answered the question in the affirmative, in favor of the Revenue and against the assessee.

3. Whether the assessee was entitled to weighted deduction under section 35B of the Income-tax Act, 1961, on Rs. 20,607 being the expenditure in respect of insurance, freight, and inspection:

The court noted that the controversy regarding the weighted deduction under section 35B was covered by two judgments: Forbes Forbes Campbell and Co. Ltd. v. CIT [1994] 206 ITR 495 and M. H. Daryani v. CIT [1993] 202 ITR 731. In line with these judgments, the court answered the question in the affirmative, in favor of the Revenue and against the assessee.

Conclusion:

The court concluded that the receipt of Rs. 5,00,000 by the assessee was a revenue receipt, not a capital receipt. The court also affirmed that the surtax liability was not allowable as revenue expenditure and that the assessee was not entitled to a weighted deduction under section 35B for the specified expenditures. All questions were answered in favor of the Revenue and against the assessee, with no order as to costs.