1989 (9) TMI 33 - HC - Income Tax

Summary

Issues Involved:
1. Admissibility of Rs. 37,500 as a deduction in computing the income of the assessee-firm for the assessment year 1976-77.
2. Whether the payment of Rs. 37,500 was part of the acquisition of a capital asset of an enduring nature or related to the carrying on or conduct of the business.

Summary:

Issue 1: Admissibility of Rs. 37,500 as a Deduction
The court examined whether the payment of Rs. 37,500 made by the assessee-firm under an agreement dated July 1, 1976, was an admissible deduction in computing the income for the assessment year 1976-77. The Income-tax Officer, Commissioner of Income-tax (Appeals), and the Tribunal had all disallowed the claim, considering it as capital expenditure. The court analyzed the nature of the payment, which was for the "use and utilisation of the trade name, pending import licences, contracts and other trading benefits and advantages." The court concluded that this payment facilitated the day-to-day trading operations and was intended to increase profits, without acquiring any asset or right of a permanent nature. Therefore, the payment was deemed revenue expenditure and allowable as a deduction.

Issue 2: Nature of the Payment
The court considered whether the payment of Rs. 37,500 was part of the acquisition of a capital asset of an enduring nature or related to the carrying on or conduct of the business. The court referred to various tests and principles established by previous judgments, including the "enduring benefit" test and the distinction between fixed and circulating capital. The court noted that the payment was for the use of certain rights and trading benefits, which facilitated the business operations and did not result in the acquisition of any asset or right of a permanent nature. The court held that the expenditure was revenue in nature, as it was related to the profit-making process and not for acquiring an asset or a right of permanent character.

Conclusion:
The court answered the first question in the affirmative, allowing the deduction of Rs. 37,500 as revenue expenditure, and the second question in the negative, ruling that the payment was not for the acquisition of a capital asset of an enduring nature. Both questions were answered in favor of the assessee and against the Revenue, with each party bearing its own costs.