1989 (8) TMI 100 - AT - Income Tax

Summary

Issues Involved:
1. Whether the payment of Rs. 99 lakhs to GEC was a revenue expenditure or a capital expenditure.
2. Whether the protocol dated 28-1-1972 was superseded by clause 13 of the agreement dated 10-2-1972.
3. Whether the decision to pay Rs. 99 lakhs was commercially expedient and in the best interest of the business.

Issue-wise Detailed Analysis:

1. Revenue vs. Capital Expenditure
The main contention was whether the payment of Rs. 99 lakhs to GEC should be treated as a revenue expenditure or a capital expenditure. The assessing officer and the Commissioner of Income-tax (Appeals) held that the payment was either voluntary and not motivated by business considerations or was capital in nature. However, the tribunal found that the payment was made to facilitate the carrying on of MICO's business throughout the Northern region, which was a revenue expenditure. The tribunal cited several cases, including CIT v. Ashok Leyland Ltd. [1972] 86 ITR 549 (SC) and J.K. Cotton Mfrs. Ltd. v. CIT [1975] 101 ITR 221 (SC), where similar payments were considered revenue expenditures. The tribunal concluded that MICO did not acquire any advantage in the capital field but merely changed its method of business, making the payment a revenue expenditure.

2. Supersession of Protocol by Clause 13
The tribunal examined whether clause 13 of the agreement dated 10-2-1972 had the effect of superseding the protocol dated 28-1-1972. The Commissioner (Appeals) held that the protocol was rendered ineffective by clause 13, which superseded all prior agreements. However, the tribunal found that the protocol was a policy measure for the phased takeover of the Northern region and was not entirely superseded by clause 13. The tribunal emphasized the importance of the intention of the parties and cited Abdulla Ahmed v. Animendra Kissen Mitter AIR 1950 SC 15 and Union of India v. D.N. Revri & Co. AIR 1976 SC 2257, which allow extrinsic evidence to ascertain the real effect of a clause. The tribunal concluded that the protocol was still in effect and was respected by both parties.

3. Commercial Expediency and Business Interest
The tribunal analyzed whether the decision to pay Rs. 99 lakhs to GEC was in the best interests of MICO's business. The tribunal noted that MICO had long-standing business relations with GEC and wanted to ensure a smooth takeover without litigation. The need to take over the entire Northern region in 1977, instead of in phases, was driven by sales-tax advantages in Delhi and the practical difficulties of an instantaneous takeover. The tribunal found that the decision was commercially expedient and beneficial, citing Eastern Investments Ltd. v. CIT [1951] 20 ITR 1 and F.E. Dinshaw Ltd. v. CIT [1959] 36 ITR 114, which state that payments made on the grounds of commercial expediency should be treated as revenue expenditures. The tribunal also found that the compensation paid was reasonable and the decision was bona fide, with no extraneous considerations involved.

Conclusion
The tribunal held that the payment of Rs. 99 lakhs to GEC was a revenue expenditure, the protocol dated 28-1-1972 was not superseded by clause 13 of the agreement dated 10-2-1972, and the decision to pay the amount was commercially expedient and in the best interest of MICO's business. The appeal was allowed in part, and the claim for the deduction of Rs. 99 lakhs was accepted.