1972 (6) TMI 7 - HC - Income Tax

Assessee paid sums totalling Rs. 21,600 to sixteen individuals who were prospective bidders at the auction in order to prevent them from competing with the petitioners at the auction - assessee was entitled to deduct as revenue expenditure the said sum of Rs. 21,600

Summary

Issues:
- Deductibility of the sum of Rs. 21,600 as revenue expenditure for the assessment year 1964-65.
- Determination of whether the expenditure is in the nature of capital expenditure.
- Evaluation of whether the expenditure was laid out or expended wholly and exclusively for the purposes of the business.

Analysis:
The case involved a registered firm engaged in ferry contracting business, where the petitioners paid sums to prevent competition at an auction for the right to ferry across the river Godavari. The primary issue was whether the sum of Rs. 21,600 paid to deter other bidders qualified as a deductible revenue expenditure for the assessment year 1964-65. The Tribunal allowed a portion of the amount but disallowed the rest, leading to the reference to the High Court for a decision.

The High Court applied the principles of capital versus revenue expenditure to determine the nature of the payment made by the assessee. Various tests were considered, including the distinction between fixed and circulating capital, and whether the expenditure aimed at acquiring or running the business. The court emphasized that each case must be evaluated based on its specific facts and circumstances, without rigid principles.

The court distinguished cases where lump sum payments secured long-term advantages from the present case, where the right to ferry was for only one year. Citing precedents like Assam Bengal Cement Co. Ltd. and M. A. Jabbar, the court highlighted that the short-term nature of the contract influenced the classification of the expenditure. The court also referenced Commissioner of Taxes v. Nchanga Consolidated Copper Mines Ltd. and V. Damodaran v. Commissioner of Income-tax to support its reasoning.

Ultimately, the court concluded that the expenditure was revenue in nature, incurred for the purpose of enhancing business profits during the specific year of the ferry contract. The decision was based on a holistic view of the business necessity and commercial trading principles. As a result, the court allowed the deduction of the sum of Rs. 21,600 as revenue expenditure for the assessment year 1964-65. The Commissioner of Income-tax was directed to bear the costs of the reference to the assessee, including the advocate's fee.