1967 (12) TMI 25 - HC - Income Tax

Payment made by the assessee to the Travancore Govt. - expenditure laid out wholly and exclusively for the purpose of the business and ascertained with reference to profits - hence allowable u/s 10

Summary

Issues Involved:
1. Whether the payment was a diversion of profits by paramount title.
2. Whether the payment was allowable under section 10(2)(xv) of the Income-tax Act.

Issue-wise Detailed Analysis:

1. Diversion of Profits by Paramount Title:

The court examined whether the payment of Rs. 42,480 by the assessee to the Travancore Government was a diversion of profits by paramount title. The Supreme Court had previously noted that the payment was not capital in nature but revenue. The court referred to the principle that an amount diverted by an overriding title before it reaches the assessee is deductible, whereas an amount applied after it reaches the assessee is not deductible.

The court analyzed several precedents, including:
- Raja Bejoy Singh Dudhuria v. Commissioner of Income-tax: The Privy Council held that maintenance payments charged on the estate were diverted before becoming income in the hands of the assessee.
- Commissioner of Income-tax v. Sitaldas Tirathdas: The Supreme Court distinguished between obligations applied out of income and those that divert income before it reaches the assessee.

The court concluded that the payment to the Government was a diversion of income before it became income in the hands of the company. The payment was a contractual obligation that diverted a portion of the income to the Government, making it a deduction by superior title.

2. Allowability under Section 10(2)(xv) of the Income-tax Act:

The court considered whether the payment was an allowable deduction under section 10(2)(xv) of the Income-tax Act, which allows deductions for expenses wholly and exclusively laid out for business purposes.

The court referred to several cases:
- Poona Electric Supply Co. Ltd. v. Commissioner of Income-tax: The Supreme Court held that statutory profits, which are regulated by law, must be deducted to ascertain real profits.
- British Sugar Manufacturers Ltd. v. Harris (Inspector of Taxes): The Court of Appeal held that payments made to earn profits are allowable deductions.
- Tata Hydro-Electric Agencies Ltd. v. Commissioner of Income-tax: The Privy Council held that payments made for acquiring the right to conduct business are not deductible as they are not made in the process of earning profits.

The court concluded that the payment was an expenditure laid out wholly and exclusively for the purpose of the business. The payment was essential for the company to operate and earn profits, making it an allowable deduction under section 10(2)(xv).

Judgments Delivered by Judges:

- Raghavan J.: Concluded that the payment was a diversion of profits by paramount title and an allowable deduction under section 10(2)(xv).
- Isaac J.: Disagreed, holding that the payment was an application of profits and not an allowable deduction under section 10(2)(xv).
- K. K. Mathew J.: Agreed with Raghavan J., holding that the payment was an allowable deduction and a diversion of profits by paramount title.

Final Judgment:
In conformity with the majority opinion, the court answered the question in the affirmative, in favor of the assessee, and directed both parties to bear their respective costs.