1972 (8) TMI 5 - SC - Income Tax

Application of income to discharge a liability incurred not in the course of running the business but a liability undertaken for the purpose of acquiring the sole selling agency right which was indisputably an asset of capital nature - appeal by assessee is dismissed

Summary

Issues:
1. Interpretation of agreement between parties regarding assessable income.
2. Determination of whether a specific sum represented an expenditure under section 10.

Issue 1 - Interpretation of agreement regarding assessable income:
The case involved an appeal against the judgment of the Allahabad High Court concerning the interpretation of an agreement dated July 31, 1956, between the British India Corporation (BIC) and the appellant company. The key questions referred to the court were whether a sum retained by BIC and adjusted to the credit of another company was the assessable income of the appellant company, and whether this sum represented an expenditure under section 10 of the Indian Income-tax Act, 1922. The appellant, a private limited company, was appointed as the sole selling agent of the Kanpur Cotton Mills in place of another firm, and certain financial arrangements were made regarding outstanding dues. The court analyzed the nature of the payment made by the appellant in consideration of acquiring the sole selling agency rights and concluded that the payment was of a capital nature, even though it was made through deductions out of the commission due to the appellant.

Issue 2 - Determination of expenditure under section 10:
The court examined the real nature and purpose of the payment made by the appellant to BIC in the form of deductions out of its commission. It emphasized that the character of the expenditure, whether capital or revenue, depends on the objective of the payment and not on the quantum or manner of payment. The court cited previous judgments to support the distinction between capital and revenue expenditure, highlighting that payments made for acquiring or bringing into existence an asset or advantage for the enduring benefit of the business constitute capital expenditure. In this case, the payment by the appellant was considered capital expenditure as it was made to acquire the sole selling agency right, which was deemed an asset of capital nature. The court dismissed the appeal, upholding the judgment of the High Court against the appellant.

In conclusion, the Supreme Court analyzed the agreement between the parties, the nature of the payment made by the appellant, and the implications of the financial arrangements in determining the assessable income and expenditure under section 10 of the Income-tax Act. The court emphasized the distinction between capital and revenue expenditure based on the purpose of the payment and upheld the decision against the appellant, dismissing the appeal with costs.