1931 (12) TMI 14 - HC - Income Tax

Summary

Issues:
1. Deduction claimed under Section 10(2)(ix) of the Indian Income Tax Act for payment made in pursuance of an agreement.
2. Interpretation of clauses in the agreement for the purchase of rights and privileges of a patent medicine.
3. Taxability of the payment made as capital expenditure or lawful deduction under the Income Tax Act.

Analysis:
1. The petitioners, a limited company engaged in the manufacture and sale of a patent medicine, claimed a deduction of a sum paid to the inventor under Section 10(2)(ix) of the Indian Income Tax Act. The payment was made as per an agreement for the purchase of rights and privileges related to the medicine. The company argued that the payment was solely for earning profits. However, the court analyzed the agreement and held that the payment was part of the consideration for the purchase of the medicine and thus constituted capital expenditure, not a lawful deduction.

2. The agreement between the company and the inventor contained two key clauses regarding payment. The first clause specified a fixed amount to be paid in yearly installments for the purchase of rights, while the second clause outlined a royalty payment based on sales of the medicine. The court emphasized that both clauses must be construed together as providing the consideration for the purchase. It was established that the payment made under the second clause was not a separate consideration but part of the overall purchase price, making it taxable as capital expenditure.

3. The court rejected the argument that the payment under the second clause was not related to the purchase of the medicine because it was based on an indefinite quantity of sales. It was clarified that while the exact amount due under the royalty clause was uncertain at the time of the agreement, it became definite and ascertainable once sales commenced. Therefore, the contention that the payment was not part of the purchase consideration was deemed invalid, leading to the conclusion that the payment was not a sum lawfully deductible under Section 10(2)(ix) of the Income Tax Act.

Judgment:
The court held that the payment made as royalty under the agreement was not eligible for deduction under Section 10(2)(ix) of the Indian Income Tax Act. The decision was based on the interpretation of the clauses in the agreement, which established the payment as part of the capital expenditure for the purchase of the patent medicine. The costs were awarded to the Commissioner.