1987 (11) TMI 66 - HC - Income Tax

Summary

Issues:
1. Whether the Tribunal was right in allowing the bonus payment in excess of 8 1/3% as a deduction from the income of the assessee for the assessment year 1975-76?
2. Whether the Tribunal was correct in holding that the previous owner did not have a liability higher than 8 1/3% as bonus?
3. Whether the payment of bonus in excess of the statutory minimum was considered capital expenditure in the hands of the assessee?

Analysis:
The case involved a private limited company that purchased a business in 1973 and agreed to settle with labor for bonus claims preceding the purchase. The dispute over the bonus rate was resolved, and the assessee agreed to pay bonus at 19%. The assessee claimed the entire bonus amount as revenue expenditure. The Tribunal disallowed the claim for the assessment year 1974-75 but allowed it for 1975-76, treating the amount as revenue expenditure. The court held that the bonus payment for the period preceding the purchase was capital expenditure, following the principle established in CIT v. Kameshwar Singh. The court consolidated the questions into one, determining that the bonus paid in excess of the statutory minimum was capital expenditure, ruling in favor of the Revenue.

The court emphasized that all liabilities and assets were considered in the purchase price, including the bonus liability. The payment for the bonus period preceding the purchase was not for earning profits but to obtain the business, making it capital expenditure. The court applied the Privy Council's principle that sums paid to acquire a business are not revenue expenditure. The court rephrased the questions to focus on whether the bonus payment was revenue or capital expenditure. The court concluded that the bonus paid in excess of the statutory minimum was capital expenditure, ruling against the assessee and in favor of the Revenue.

The judgment highlights the distinction between revenue and capital expenditure in the context of bonus payments preceding a business purchase. It underscores the importance of considering the nature of transactions to determine the character of expenditure. The court's decision aligns with established legal principles and precedents, emphasizing the capital nature of expenses incurred to acquire a business. The judgment provides clarity on the treatment of bonus payments in taxation, ensuring consistency and adherence to legal principles in such matters.