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Issues:
1. Allowability of payment under agreements dated June 18, 1937, and January 28, 1947, under section 10 of the Income-tax Act. The judgment by the Kerala High Court involved a reference by the Income-tax Appellate Tribunal regarding the allowability of a payment made by the assessee to the Travancore Government under agreements dated June 18, 1937, and January 28, 1947, for the assessment year 1958-59. The agreements involved the purchase of assets from the Government by the assessee, with clause 7 of the agreements specifying additional payments based on net profits earned. The court analyzed the nature of these payments, considering whether they constituted revenue or capital expenditure. The court highlighted that for expenditure to be deductible under section 10(2)(xv) of the Income-tax Act, it should not be of a capital nature. The court concluded that the payments made under the agreements were capital in nature, as they were part of the purchase price for acquiring the assets, not for carrying on the business. Therefore, the court ruled against the assessee, holding that the payments were not allowable under section 10 of the Income-tax Act. The court emphasized the significance of the wording in the new clause 7 of the agreements, which specified that ten percent of the "net profits" would be payable, with "net profits" defined as the audited profits assessed to income-tax in the State of Travancore. This definition indicated that the payment was not intended to affect the income-tax assessment. The department argued that the payment under clause 7 represented a division of earned profits between the assessee and the Government, making it non-deductible. The court, however, did not delve into this argument, as it had already determined the nature of the expenditure as capital. The judgment also mentioned the case of British Sugar Manufacturers Ltd. v. Harris, but deemed it unnecessary to evaluate such contentions given the conclusion reached. The court directed that a copy of the judgment be forwarded to the Appellate Tribunal as required by the relevant provision of the Income-tax Act. The judgment provided a detailed analysis of the agreements, the nature of the payments made under them, and the criteria for determining the deductibility of expenditure under the Income-tax Act. It clarified the distinction between revenue and capital expenditure, ultimately deciding that the payments in question were capital in nature and therefore not allowable under the specified section of the Act.
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