1966 (9) TMI 44 - SC - Income Tax

Whether, on the facts and in the circumstances of the case, the payment of ₹ 42,480 by the assessee to the Travancore Government under the agreements dated Jane 18, 1937, and January 28, 1947, was allowable under section 10 of the Income-tax Act ? Held that - It is not, however, possible for us to finally determine this appeal because the High Court has not dealt with the other questions arising in this reference. Even if the payment of the commission to the Government by the assessee is not capital but revenue payment, certain other questions arise for consideration in this case. It is necessary that the High Court should consider all these aspects of the case before furnishing an answer to the question of law referred to it. For these reasons we allow this appeal, set aside the judgment of the High Court of Kerala dated August 20, 1963, and remand the case for being reheard and dealt with in accordance with the directions given in this judgment. Appeal allowed by way of remand.

Issues Involved:
1. Nature of the payment to the Government (capital expenditure or revenue expenditure)
2. Whether the payment constitutes a diversion of profits by a paramount title
3. Whether the transaction should be treated as a joint venture
4. Compliance with section 10(2)(xv) of the Income-tax Act

Issue-wise Detailed Analysis:

1. Nature of the Payment to the Government (Capital Expenditure or Revenue Expenditure):
The appellant argued that the payment of Rs. 42,480 was revenue expenditure allowable under section 10(2)(xv) of the Income-tax Act. The appellant contended that the annual payments were not part of the purchase price of the assets, pointing to clauses 3, 4(a), and 5(a) of the agreement, which provided separate and full considerations for the purchase of assets. The High Court had held that the payment constituted capital expenditure and was not allowable under section 10(2)(xv). However, the Supreme Court concluded that the payment was revenue expenditure. The Court noted that the payment was for an indefinite period, related to annual profits from trading activities, and not tied to any fixed sum agreed as part of the purchase price. The Court referenced the decision in *Commissioners of Inland Revenue v. 36/49 Holdings Ltd. (in liquidation)*, where a similar payment structure was deemed revenue expenditure. Thus, the judgment of the High Court on this point was overruled.

2. Whether the Payment Constitutes a Diversion of Profits by a Paramount Title:
The appellant argued that the payment to the Government was a diversion of profits by a paramount title, relying on the decision in *Raja Bejoy Singh Dudhuria v. Commissioner of Income-tax*. In that case, a court decree had directed a specific payment, which was considered a diversion of income before it became the assessee's income. The Supreme Court noted that this issue required further examination by the High Court to determine if the payment was indeed a diversion of profits by a paramount title.

3. Whether the Transaction Should Be Treated as a Joint Venture:
The respondent contended that the transaction should be treated as a joint venture with an agreement to share profits between the appellant and the Government. The Supreme Court did not provide a final determination on this issue but directed the High Court to consider this aspect during the rehearing.

4. Compliance with Section 10(2)(xv) of the Income-tax Act:
The respondent argued that the payment was out of the profits of the appellant on the condition of profits being earned, not a payment made to earn profits. The appellant countered that the payment was wholly and exclusively laid out for the purpose of business. The Supreme Court referenced decisions such as *Pondicherry Railway Co. Ltd. v. Commissioner of Income-tax* and *Indian Radio and Cable Communications Co. Ltd. v. Commissioner of Income-tax*, indicating that the High Court needed to examine whether the requirements of section 10(2)(xv) were satisfied.

Conclusion:
The Supreme Court allowed the appeal, set aside the judgment of the High Court of Kerala dated August 20, 1963, and remanded the case for rehearing. The High Court was directed to consider all aspects, including whether the payment constituted a diversion of profits by a paramount title, whether the transaction was a joint venture, and whether the requirements of section 10(2)(xv) were met. The parties were ordered to bear their own costs up to this stage.

Appeal allowed. Case remanded.

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