1969 (3) TMI 10 - HC - Income Tax

Company paid Rs. 6 lakh to managing agent as compensation for premature termination of managing agency - payment of Rs. 6 lakhs was only a capital expenditure and therefore, not a permissible deduction u/s 10(2)(xv)

Summary

Issues Involved:
1. Whether the payment of Rs. 6,00,000 to the managing agents was deductible under section 10(2)(xv) of the Indian Income-tax Act, 1922.
2. Whether the payment was in the nature of capital expenditure.

Detailed Analysis:

1. Deductibility under Section 10(2)(xv):
The primary issue was whether the sum of Rs. 6,00,000 paid by the assessee-company to the managing agents was deductible as a business expenditure under section 10(2)(xv) of the Indian Income-tax Act, 1922. This section allows deductions for any expenditure laid out or expended wholly and exclusively for the purposes of the business, provided it is not capital expenditure or personal expenses.

The assessee-company argued that the payment was made for business purposes and should be considered a normal trading expenditure. The Income-tax Officer, however, disallowed the claim, suspecting that the transaction was not bona fide and was merely a pre-planned arrangement. The Appellate Assistant Commissioner and the Appellate Tribunal later found the transaction to be bona fide and deductible under section 10(2)(xv).

The Tribunal concluded that the expenditure was incurred wholly and exclusively for the purpose of the business of the company, noting that no new managing agent was appointed after the termination of the previous managing agency.

2. Nature of Capital Expenditure:
The second issue was whether the payment of Rs. 6,00,000 was in the nature of capital expenditure. The Tribunal initially considered that the advantage gained by the company was of an enduring nature, suggesting it was capital expenditure.

The High Court examined the distinction between capital and revenue expenditure, referencing various legal precedents. The Court noted that capital expenditure generally results in the acquisition of an asset or advantage of enduring benefit to the business. In contrast, revenue expenditure is typically recurring and directly related to the day-to-day operations of the business.

The Court cited several English and Indian cases to illustrate the principles governing this distinction. For instance, in British Insulated and Helsby Cables Ltd. v. Atherton, it was held that expenditure made to bring into existence an asset or advantage of enduring benefit is capital expenditure. Similarly, in Assam Bengal Cement Co. Ltd. v. Commissioner of Income-tax, the Supreme Court held that payments made for acquiring an advantage of enduring nature were capital expenditures.

Applying these principles, the High Court found that the payment of Rs. 6,00,000 resulted in an enduring benefit for the assessee-company. The termination of the managing agency agreement, which was assignable and had no successor appointed, created a clear advantage of enduring nature for the company. This advantage was akin to acquiring a fixed asset.

Conclusion:
The High Court concluded that the payment of Rs. 6,00,000 was in the nature of capital expenditure and was not deductible under section 10(2)(xv) of the Indian Income-tax Act, 1922. The question was answered in favor of the revenue and against the assessee. There was no order as to costs.

Separate Judgments:
- R. S. NARULA J. concurred with the judgment.