1972 (10) TMI 5 - SC - Income Tax

Manufacturing Concern - Diversion By Overriding Title - commission paid at a fixed percentage of the net profits as per the agreement between the company and the Government is spent wholly and exclusively for the purpose of the business - allowable expenditure

Issues Involved:
1. Nature of the expenditure (capital vs. revenue)
2. Applicability of Section 10(2)(xv) of the Income-tax Act
3. Diversion of profits by paramount title
4. Joint venture and profit-sharing agreement

Issue-wise Detailed Analysis:

1. Nature of the Expenditure (Capital vs. Revenue):
The primary issue was whether the payment of Rs. 42,480 by the appellant to the Travancore Government constituted capital expenditure or revenue expenditure. The Supreme Court had previously held that the payment was not capital expenditure but revenue expenditure, as the payment was for an indefinite period, related to annual profits from trading activities, and not tied to any fixed sum or capital value of the assets. The court noted, "In view of these facts we are of opinion that the payment of the annual sum of Rs. 42,480 in the present case is not in the nature of capital expenditure but is in the nature of revenue expenditure."

2. Applicability of Section 10(2)(xv) of the Income-tax Act:
The appellant argued that the payment was allowable under Section 10(2)(xv) of the Income-tax Act as it was an expenditure wholly and exclusively laid out for the purposes of business. The court emphasized that once an expenditure is determined to be of a revenue nature, it is deductible under this section. The court stated, "The expenditure of a capital nature is certainly not an expenditure which is deductible for computing profits though it may be an expenditure wholly and exclusively laid out for the purposes of the business, etc."

3. Diversion of Profits by Paramount Title:
The court considered whether the payment of commission was a diversion of profits by a paramount title, meaning the profits were diverted before they reached the assessee. The court clarified that income can be diverted at source, making it not the income of the assessee, but if the income is applied to discharge an obligation after it reaches the assessee, it is not deductible. The court concluded, "Where income is diverted at source so that when it accrues it is really not the income of the assessee but is somebody else's income, the question as to whether that income falls under sub-section (2) of section 10 does not arise."

4. Joint Venture and Profit-Sharing Agreement:
Initially, there was a contention that the transaction should be treated as a joint venture with an agreement to share profits between the appellant and the Government. However, this contention was not pressed before the High Court. The court noted, "Before that High Court the second contention whether the transaction should be treated as a joint venture with an agreement to share profits was not pressed and therefore that matter was not considered."

Conclusion:
The Supreme Court dismissed the appeal, affirming that the payment of Rs. 42,480 was a revenue expenditure and deductible under Section 10(2)(xv) of the Income-tax Act. The court held that the payment was not capital expenditure and was wholly and exclusively laid out for the purposes of business. The appeal was dismissed with costs, both in the Supreme Court and the High Court. The court concluded, "Viewing it from any point of view, whether as a revenue expenditure or as an overriding charge of the profit-making apparatus or as laid out and expended wholly and exclusively for purposes of trade, the answer must be in the affirmative and against the revenue."

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