1967 (11) TMI 26 - HC - Income Tax

Payments made by the assessee to nominees - held that payments were not capital expenditure -expenditure were incurred for carriage of business in a more facile and profitable manner -allowable as deduction u/s 10(2)(xv)

Summary

Issues Involved:
1. Admissibility of payments as business expenditure.
2. Nature of payments: Revenue or capital expenditure.

Issue-wise Detailed Analysis:

1. Admissibility of Payments as Business Expenditure:

The assessee, Coal Shipments (Private) Ltd., claimed certain payments made to Messrs. H. V. Low & Co. Ltd. as admissible business expenditure. These payments were made under an arrangement where H. V. Low & Co. Ltd. would not export coal to Burma and would assist the assessee in the export business. The Income-tax Officer disallowed the claim on the grounds that there was no written agreement to prove the arrangement and that the payments were made to secure a monopoly, thus not allowable as revenue expenses. The Appellate Assistant Commissioner upheld this decision. However, the Appellate Tribunal, after examining the oral testimony and affidavit of Sir Walter Michelmore, found that the payments were made in the interest of the assessee's business and were not ex gratia. The Tribunal also found that the agreement was acted upon and that the payments were made under a valid arrangement, thus allowing the appeal and modifying the assessment by excluding the sums claimed by the assessee as business expenditure.

2. Nature of Payments: Revenue or Capital Expenditure:

The core issue was whether the payments made by the assessee to Messrs. 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. The Tribunal held that the payments were not made to secure a monopoly in the trade, as the shipment of coal to Burma was under an Open General Licence, allowing all traders to export coal. The Tribunal observed that the arrangement did not create any enduring benefit or capital advantage for the assessee. The payments were made to carry on the trade in a more facile and profitable manner and were thus considered as revenue expenditure. The High Court agreed with the Tribunal, stating that the arrangement was a temporary measure and did not bring about any capital advantage. The expenditure was made for the purpose of carrying on the business more conveniently and profitably, thus qualifying as revenue expenditure.

The High Court referred to the Supreme Court's tests in Assam Bengal Cement Co. v. Commissioner of Income-tax, which distinguish between capital and revenue expenditure based on the nature and purpose of the outlay. The Court concluded that the payments were not made to acquire a capital asset or enduring benefit but were operational expenses aimed at facilitating the business. Therefore, the payments were allowable as revenue expenditure under section 10(2)(xv) of the Indian Income-tax Act, 1922.

Conclusion:

The High Court answered the question in the negative, in favor of the assessee, holding that the payments were revenue expenditure and thus allowable as business expenditure. The assessee was entitled to costs, and the question was answered in the negative.