1971 (10) TMI 6 - SC - Income Tax

Capital/Revenue Expenditure - assessee paid certain amounts to competitor in business - expenditure were allowable u/s 10(2)(xv) because the arrangement between the assessee and the competitor was not for any fixed term - Revenue s appeal is dismissed

Issues Involved:
1. Whether the payments made by the assessee to M/s. H. V. Low & Co. Ltd. were of a capital nature and thus not allowable under section 10(2)(xv) of the Indian Income-tax Act, 1922.

Issue-wise Detailed Analysis:

1. Nature of Payments Made by Assessee:
The primary issue was whether the payments made by the assessee to M/s. H. V. Low & Co. Ltd. were of a capital nature and thus not allowable as business expenditure under section 10(2)(xv) of the Indian Income-tax Act, 1922. The respondent claimed these payments as business expenditure for the assessment years 1951-52 to 1955-56. The Income-tax Officer disallowed the claim, stating there was no written agreement and the payments were not made for the purpose of the assessee's business. Additionally, it was held that even if the payments were made to keep M/s. H. V. Low & Co. Ltd. from the Burma trade, they were to secure a monopoly and hence not allowable as revenue expenditure.

2. Tribunal's Findings:
The Tribunal required the respondent to provide an affidavit to support its claims. Sir Walter Michelmore, a director of the managing agents of the respondent-company, filed an affidavit and was examined orally. The Tribunal remanded the case to the Income-tax Officer for further verification. The Tribunal formulated two points for decision:
1. Were the payments made for the purpose of the assessee's trade in terms of the alleged agreement?
2. Did the assessee acquire a monopoly by such payment?

Both questions were answered in favor of the respondent. The Tribunal found that the payments were made in pursuance of the agreement and were in the interest of the respondent's trade. The agreement was acted upon, and M/s. H. V. Low & Co. Ltd. supplied coal to the respondent for shipment to Burma. The Tribunal held that the respondent did not acquire monopoly rights and the payments were made to carry on the trade in a more facile and profitable manner. The expenditures were attributable to revenue and not to capital, thus permissible under section 10(2)(xv) of the Act.

3. High Court's Decision:
The High Court held that the arrangement between the respondent and M/s. H. V. Low & Co. Ltd. was not likely to have an enduring beneficial effect. The arrangement could be terminated at any time and did not create any monopoly or capital advantage for the assessee. The High Court concluded that the respondent was entitled to claim the deduction of the expenditures under section 10(2)(xv) of the Act.

4. Supreme Court's Analysis:
The Supreme Court upheld the findings of the Tribunal and the High Court. The Court noted that the payments were made in pursuance of the agreement, according to which M/s. H. V. Low & Co. Ltd. assisted the respondent in procuring coal for shipment to Burma and refrained from exporting coal to Burma during the agreement's subsistence. The Court found no merit in the appellant's contention that the payments were capital expenditure. The Court emphasized that the arrangement was not for any fixed term and could be terminated at any time, thus not providing an enduring benefit. The payments were related to the actual shipment of coal in the course of trading activities and had no relation to the capital value of the assets. The Court referred to various judicial decisions to distinguish capital expenditure from revenue expenditure, concluding that the payments in question were revenue in nature.

5. Judicial Precedents:
The Court referred to several judicial decisions to elucidate the principles distinguishing capital expenditure from revenue expenditure, including:
- Atherton v. British Insulated and Helsby Cables Ltd.: Expenditure bringing into existence an asset or advantage of enduring benefit is capital expenditure.
- Robert Addie and Sons' Collieries Ltd. v. Commissioners of Inland Revenue: Expenditure necessary for acquiring property or rights of a permanent character is capital expenditure.
- Assam Bengal Cement Co. Ltd. v. Commissioner of Income-tax: Payments for protection fees creating an enduring benefit for the lease period were held as capital expenditure.
- Travancore Sugars and Chemicals Ltd. v. Commissioner of Income-tax: Payments related to annual profits from trading activities were held as revenue expenditure.

Conclusion:
The Supreme Court dismissed the appeals, concluding that the payments made by the assessee to M/s. H. V. Low & Co. Ltd. were revenue expenditures and thus allowable under section 10(2)(xv) of the Indian Income-tax Act, 1922. The appeals were dismissed with costs.

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