1971 (9) TMI 42 - HC - Income Tax

Assessee is the Truck Operators Union in the status of association of persons - commission paid on gross bookings received from members whether such payment is capital or revenue in nature held that payment was of a capital nature because, it was paid to avoid competition and it was paid to only such members whose trucks were not booked

Issues Involved:
1. Whether the payment of Rs. 8,160 in each of the years under consideration was of a capital nature and not a permissible deduction for the purpose of income-tax.

Issue-wise Detailed Analysis:

1. Nature of Payment (Capital vs. Revenue Expenditure):
- Facts of the Case: The assessee, a Truck Operators Union, paid Rs. 8,160 to its constituent members during the assessment years 1961-62 and 1962-63. The payment was made to members whose trucks were not booked to ward off competition and maintain a monopoly in procuring trucks for vendors.
- Tribunal's Finding: The Tribunal held that the payment was in the nature of capital expenditure.
- Legal Question: Whether the payment was a permissible deduction under income-tax law as revenue expenditure or capital expenditure.
- Supreme Court's Guidance: The demarcation between capital and revenue expenditure is thin and context-specific. Expenditure for acquiring or bringing into existence an asset or advantage for enduring benefit is capital expenditure. Conversely, expenditure for running the business or working it to produce profits is revenue expenditure.
- Relevant Case Law:
- Assam Bengal Cement Co. Ltd. v. Commissioner of Income-tax: Payments for protection against competition were deemed capital expenditure as they provided enduring benefits.
- Behari Lal Beni Parshad v. Commissioner of Income-tax: Payments to competitors to secure business contracts were considered capital expenditure.
- Associated Portland Cement Manufacturers Ltd. v. Commissioners of Inland Revenue: Payments to retiring directors to prevent competition were held to be capital expenditure.
- Application to Current Case: The payment of Rs. 8,160 was made to ward off competition, thereby enhancing the value of the assessee's business assets. This expenditure was not for carrying on the business but to acquire the right to operate without competition, making it capital expenditure.

2. Argument by Revenue:
- Position: The payment was made to eliminate competition, thus enhancing the value of the existing assets and making them more profit-yielding.
- Supporting Case Law: Deverell Gibson Hoare Ltd. v. Rees, where payments to prevent competition were held inadmissible as revenue expenditure.

3. Argument by Assessee:
- Position: The Union did not acquire any capital asset through the payment, arguing it should be considered revenue expenditure.
- Counter-Argument: The right to operate without competition is a capital asset, as it enhances the business's profitability and value.
- Supporting Case Law:
- Poona Electric Supply Co. Ltd. v. Commissioner of Income-tax: Payments under statutory compulsion were not part of taxable profits. However, this case was distinguished as the payment by the assessee was voluntary.
- Dharamvir Dhir v. Commissioner of Income-tax: Payments made for carrying on business were deductible as revenue expenditure. This was distinguished as the payment in the current case was to acquire rights of competitors.
- Badridas Daga v. Commissioner of Income-tax: Embezzled money was deductible as it was incidental to business. This was distinguished as the current payment was not incidental but to ward off competition.
- R. S. Munshi Gulab Singh and Sons v. Commissioner of Income-tax: Payments to competitors were deductible as revenue expenditure. Distinguished as the current case involved complete elimination of competitors.
- V. Damodaran v. Commissioner of Income-tax: Payments to prevent competition at an auction were business expenditure. Distinguished as there was no detailed discussion in the judgment to support the assessee's contention in the current case.

Conclusion:
- Court's Decision: The payment of Rs. 8,160 was of a capital nature and not a permissible deduction for income-tax purposes.
- Reasoning: The payment was made to eliminate competition, thereby enhancing the business's value and profitability, which qualifies it as capital expenditure.
- Final Answer to the Question: The Tribunal was right in holding that the payment of Rs. 8,160 in each of the years under consideration was of a capital nature and not a permissible deduction for income-tax purposes.
- Costs: Each party to bear its own costs.

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