1990 (12) TMI 292 - HC - Income Tax

Summary

Issues Involved:

1. Whether the sum of Rs. 1,00,000 paid to Advani Inks Corporation under the agreement dated February 14, 1972, is a capital expenditure or revenue expenditure.

Summary:

1. Nature of Expenditure:
The primary issue was whether the payment of Rs. 1,00,000 by the assessee to Advani Inks Corporation should be classified as capital expenditure or revenue expenditure. The Income-tax Officer, Appellate Assistant Commissioner, and Tribunal all concluded that the payment was capital expenditure. The court noted that the character of the expenditure must be determined based on the facts and circumstances of each case, not by rigid tests.

2. Agreement Analysis:
The agreement between the assessee and Advani Inks Corporation aimed to avoid competition from Advani, who had significant experience and expertise in the ink industry. The agreement included a restrictive covenant preventing Advani from manufacturing and selling ink for five years, which provided the assessee with an enduring advantage by eliminating a powerful competitor.

3. Enduring Benefit:
The court emphasized that the payment resulted in an enduring benefit for the assessee by safeguarding its goodwill and eliminating competition. Despite the five-year term, the dissolution of the partnership and Mr. Advani leaving India indicated a permanent elimination of competition, thus providing a lasting advantage.

4. Precedent Cases:
The court referenced several cases, including *Empire Jute Co. Ltd. v. CIT* and *CIT v. Coal Shipments P. Ltd.*, to illustrate that the test of enduring benefit is not absolute but relevant based on the case's specifics. The court also cited *Associated Portland Cement Manufacturers Ltd. v. Kerr* and *Assam Bengal Cement Co. Ltd. v. CIT*, which supported the view that payments to eliminate competition and secure enduring benefits are capital expenditures.

5. Conclusion:
The court concluded that the payment of Rs. 1,00,000 was capital expenditure. It was made to ward off damaging competition from a potential competitor, securing the assessee's business activities and providing an enduring advantage. The court answered the question in favor of the Revenue, affirming that the expenditure was capital in nature and not deductible as revenue expenditure. The Revenue was entitled to costs of Rs. 500.