1971 (9) TMI 53 - HC - Income Tax

Assessee entered into an agreement with M/s. Prakash Talkies Distributors under which it was agreed that in consideration of the assessee s paying a sum of Rs. 600 per month for a period of 5 years to M/s. Prakash Talkies Distributors the latter would not exhibit any film at Virendra Talkies - agreement enured for a period of 5 years. The benefit accruing to the assessee was a benefit which extended for the period of 5 years. It resulted in the elimination of competition. In our opinion the payment made is of a capital nature

Summary

Issues: Determination of whether a specific sum paid by a partnership firm qualifies as capital expenditure.

Analysis:
The judgment by the High Court of Allahabad involved the question of whether a payment made by a partnership firm, under an agreement to eliminate competition, should be considered as capital expenditure. The firm owned a cinema and entered into an agreement with another party to prevent them from exhibiting films at a competing cinema for a period of five years. The Income-tax authorities initially rejected the claim for deduction of the payment, considering it as capital expenditure. The Tribunal upheld this decision, leading to the reference to the High Court.

The High Court referred to various legal precedents to determine the nature of the expenditure. It was highlighted that expenditure may be treated as capital when it is made to bring into existence an asset or advantage for the enduring benefit of the trade. The Court cited cases such as Atherton v. British Insulated and Helsby Cables Ltd., Assam Bengal Cement Co. Ltd. v. Commissioner of Income-tax, and others to establish the principle that expenditure for acquiring an enduring advantage is of a capital nature.

The Court also discussed cases like Behari Lal Beni Parshad v. Commissioner of Income-tax and Mohanlal Hargovind v. Commissioner of Income-tax, where payments to eliminate competition were considered as capital expenditure. Additionally, the judgment referred to Commissioner of Taxes v. Nchanga Consolidated Copper Mines Ltd., where a payment for a temporary right was deemed revenue expenditure due to the lack of enduring benefit.

In analyzing the specific case before them, the High Court emphasized that the payment made under the agreement resulted in the elimination of competition for a period of five years, thus providing an enduring benefit to the assessee. Consequently, the Court concluded that the payment in question was of a capital nature. Therefore, the High Court answered the referred question in the affirmative, stating that the Commissioner of Income-tax is entitled to costs.

In conclusion, the judgment by the High Court of Allahabad established that the payment made by the partnership firm to eliminate competition was deemed as capital expenditure based on legal precedents and the enduring benefit derived from the agreement.