1971 (12) TMI 21 - HC - Income Tax

Assessee secured sole right to clear the goods of one through Mineral Products & Co. of Calcutta - Whether the commission paid by the assessee to the Mineral Products & Co. was allowable as a business expense laid out wholly and exclusively for the purpose of its business - benefit acquired was during the course of business in relation to one of the many transactions of the assessee and it had lasted only for a short duration with no permanent lasting benefit to the assessee. Therefore, the expenditure cannot be treated as capital in nature

Summary

Issues:
- Allowability of commission paid as a business expense
- Determination of capital expenditure vs. revenue expenditure

Analysis:
The judgment pertains to a reference under section 66(1) of the Indian Income-tax Act of 1922 regarding the allowability of commission paid by an assessee to a procuring agent as a business expense. The assessee, a firm operating as shipping agents, had entered into an agreement with a procuring agent to secure business from a specific client. The commission paid was in relation to the procurement of a specific contract for handling iron ore belonging to the client. The Income-tax Officer initially disallowed the commission as a capital expenditure, considering it akin to an acquisition of goodwill. However, the Tribunal reversed this decision, stating that the payment should be treated as ordinary brokerage for securing additional business and constitutes revenue expenditure under section 10(2)(xv) of the Income-tax Act.

The key issue revolved around determining whether the commission paid was of a capital or revenue nature. The Tribunal emphasized that the contract with the procuring agent was specific to procuring business from the client for a limited duration, and did not confer any enduring benefit or right akin to a capital asset. The Tribunal highlighted the distinction between capital and revenue expenditure, emphasizing that the main test is the permanency of the benefit acquired. The Tribunal rejected the department's contention that the commission should be treated as a capital expenditure, citing previous cases where payments for procuring licenses or leases were considered capital in nature due to their enduring benefits, which was not the case here.

The judgment discussed the nature of capital and revenue expenditure, citing precedents to differentiate between payments that lead to permanent benefits and those that are part of regular business operations. The court rejected the department's reliance on cases involving licenses and leases, stating that the present situation involved a specific transaction within the regular course of business, with no lasting benefit beyond the contract's duration. Ultimately, the court ruled in favor of the assessee, allowing the commission paid as a revenue expenditure. The court awarded costs to the assessee and clarified that the payment was not of a capital nature, but rather a routine business expense.