1970 (3) TMI 41 - HC - Income Tax

Payment made to an employee in lumpsum in consideration of future service without right to private practice - whether it is capital expenditure or revenue expenditure - held that is is revenue in nature

Summary

Issues Involved:
1. Nature of Payment: Whether the payment of Rs. 50,000 made by the assessee-company to Shri P. V. Shah is a capital or a revenue payment.

Detailed Analysis:

Nature of Payment:
The primary issue in this case is to determine whether the payment of Rs. 50,000 made by the assessee-company to Shri P. V. Shah is classified as a capital expenditure or a revenue expenditure. This question arises under section 66(1) of the Indian Income-tax Act, 1922.

Background and Circumstances:
The assessee-company, engaged in the manufacturing and selling of umbrella ribs, employed P. V. Shah, a qualified mechanical and electrical engineer, as its chief executive after his retirement from the Western Railway. Initially, Shah was allowed to engage in private practice. However, in March 1957, the company entered into an agreement with Shah, compensating him Rs. 50,000 to relinquish his right to private practice (except with Metropolitan Springs Ltd.) until the end of his employment term on June 30, 1959.

Arguments by the Assessee-Company:
The assessee-company claimed that the Rs. 50,000 payment was a revenue expenditure, arguing that it was essentially remuneration for services rendered by Shah as an employee. The company contended that the payment was part of modifying the terms of Shah's employment, and the amount, though large, was irrelevant to its nature as salary. The assessee emphasized that the payment did not result in acquiring any asset or enduring benefit but was merely a cost of retaining a skilled professional.

Arguments by the Tax Authorities:
The tax authorities, including the Appellate Assistant Commissioner and the Appellate Tribunal, rejected the assessee's claim, asserting that the payment was capital expenditure. They argued that the payment was made to prevent Shah from offering his expertise to potential competitors, thereby stifling competition and enhancing the company's goodwill, which constitutes an enduring benefit.

Legal Precedents and Principles:
Both parties referred to the leading case of Atherton v. British Insulated & Helsby Cables Ltd., where it was established that expenditure made to bring into existence an asset or an advantage for the enduring benefit of trade is capital expenditure. However, the phrase "enduring" has been subject to interpretation, and it was noted that not all benefits lasting several years qualify as capital expenditure.

Court's Analysis:
The court examined the true nature and purpose of the payment. It found that the payment was towards remuneration and salary for Shah, who agreed to relinquish his private practice. The court noted that the incidental benefit of preventing Shah from advising competitors did not create any lasting or enduring asset for the company. It emphasized that there was no evidence that other competent engineers were unavailable to competitors, and Shah's continued advice to Metropolitan Springs Ltd. further weakened the argument that the payment stifled competition.

Conclusion:
The court concluded that the payment of Rs. 50,000 was revenue expenditure. It determined that the payment was for modifying the terms of employment and did not result in acquiring any asset or enduring benefit for the company. Consequently, the court answered the reference question in favor of the assessee-company, stating, "It is revenue payment." The Commissioner of Income-tax was ordered to pay costs.

Summary:
The High Court of Bombay ruled that the payment of Rs. 50,000 made by the assessee-company to P. V. Shah was a revenue expenditure. The court found that the payment was essentially remuneration for services and did not result in any lasting or enduring benefit for the company. The court rejected the tax authorities' argument that the payment was made to stifle competition and enhance goodwill, concluding that the payment was part of modifying the terms of employment and should be treated as revenue expenditure.