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1966 (2) TMI 6 - HC - Income TaxWhether on proper interpretation of the agreement dated July 31, 1956, between the British India Corporation and the appellant-company, the letters of K and the letters of the managing director, the sum of ₹ 43,333 retained by the British India Corporation and adjusted by it to the credit of S Co. was the assessable income of the applicant-company - Held, Yes
Issues Involved:
1. Whether the sum of Rs. 43,333 retained by the British India Corporation and adjusted to the credit of Sharma & Co. was the assessable income of the applicant-company. 2. Whether the sum of Rs. 43,333 represented an expenditure under section 10. Issue-Wise Detailed Analysis: Issue 1: Assessable Income The court examined whether the Rs. 43,333 retained by the British India Corporation (BIC) was income that accrued or arose to the assessee-company. The key points considered were: - Nature of Income: The court noted that income under section 4(1)(a) and (1)(b) of the Income-tax Act includes income received, or income accrued or arisen though not received. The Rs. 43,333 was part of the trade discount or commission, which is considered profits and gains of business. - Accrual of Income: The court discussed the meaning of "accrue," which implies a natural growth or result, and concluded that the disputed amount had indeed accrued to the assessee. The court emphasized that the retention by BIC was akin to the assessee receiving the amount and then paying it back. - Diversion vs. Application of Income: The court distinguished between diversion of income at source and application of income after accrual. It concluded that the case involved application of income after accrual, not diversion. The income had accrued to the assessee, and the retention by BIC for adjustment was an application of that income. - Legal Precedents: The court cited several cases to support its conclusion, including: - Bejoy Singh Dudhuria v. Commissioner of Income-tax: Distinguished as a case of diversion. - Commissioner of Income-tax v. Shoorji Vallabhdas & Co.: Emphasized that income which has accrued cannot be excluded from taxation even if it is applied to discharge an obligation. - Nizam's Guaranteed State Railway Co. v. Wyatt: Affirmed that income is taxable regardless of its subsequent application. The court concluded that the Rs. 43,333 was assessable income of the assessee since it had accrued to them and was merely retained by BIC for adjustment purposes. Issue 2: Expenditure Under Section 10 The court analyzed whether the Rs. 43,333 could be considered an expenditure under section 10 of the Income-tax Act: - Nature of Expenditure: The court discussed the distinction between capital and revenue expenditure. It noted that expenditure for acquiring an asset or advantage for the enduring benefit of the business is capital expenditure, whereas expenditure for running the business is revenue expenditure. - Contractual Obligations: The Rs. 43,333 was part of a larger debt incurred by the assessee in consideration of Sharma & Co. relinquishing its sole selling agency rights. This debt was for acquiring the business of sole selling agency, making it a capital expenditure. - Legal Precedents: The court referred to several cases to determine the nature of the expenditure: - Assam Bengal Cement Co. Ltd. v. Commissioner of Income-tax: Established that expenditure for acquiring an enduring benefit is capital expenditure. - Commissioner of Income-tax v. Panbari Tea Co. Ltd.: Clarified that the mode of payment (lump sum or instalments) does not change the nature of the expenditure. - Indian Radio and Cable Communications Co. Ltd. v. Commissioner of Income-tax: Held that payment for securing an advantage for future operations is capital expenditure. The court concluded that the Rs. 43,333 represented a capital expenditure as it was incurred for acquiring the sole selling agency business, and not for the purpose of running the business. Conclusion The court answered: 1. Question 1: In the affirmative, stating that the Rs. 43,333 was assessable income of the applicant-company. 2. Question 2: In the negative, stating that the Rs. 43,333 represented a capital expenditure and not an expenditure under section 10. The judgment was sent to the Income-tax Appellate Tribunal, Allahabad Bench, with costs assessed at Rs. 1,000.
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