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TMI Blog1949 (2) TMI 8X X X X Extracts X X X X X X X X Extracts X X X X ..... fell to be decided was whether the payment of a sum of ₹ 6,698 made by the assessee during the relevant year of account to one Mr. N.M. Mitchell Innes constituted a revenue expenditure properly allowable as an admissible deduction under Section 10(2)(xii) of the Act. The identical question arose in the other appeal 14(1) E.P.T.A.A. No. 9 which arose out of the respondent's excess profits tax assessment for the corresponding chargeable accounting period ending 31st March, 1943. 4. The circumstances in which the payment of ₹ 6,698 happened to be made are these. The assessee is a firm of exchange brokers. Mr. N.M. Mitchell Innes and Mr. A.C. Daubeny also were carrying on business in co-partnership as exchange brokers under the name and style of Halford Smith and Company. On the 22nd October, 1919, there was an agreement (Ex. A) between Mr. N.M. Mitchell Innes and Mr. A.C. Daubeny of the first part and the then partners of the firm of Piggot Chapman and Company (assessee) of the other part. It was agreed in terms of this agreement that the firm of Halford Smith and Company shall sell to the assessee-firm the goodwill and the business of the exchange brokers carried o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h the firm as an exchange broker in consideration whereof he was to receive a certain annuity per annum during his lifetime and his wife after his death. This amount of annuity was fixed at 1,250 for three years after which it was to be reduced to 600 provided that the same should be reduced further when the brokerage earned by the firm from Messrs. Ralli Brothers shall be less than a certain amount. In terms of this second agreement which was the agreement in force at the relevant time the assessee-firm paid to Mr. N.M. Mitchell Innes during the accounting period ₹ 6,698 as the annuity payable under the agreement referred to above as a consideration for Mr. Mitchell Innes agreeing not to compete with the firm as an exchange broker. 5. On these facts the Income-tax Officer held that the payment of ₹ 6,698 was an expenditure of a capital nature and accordingly disallowed the assessee's claim to admit it to deduction under Section 10(2)(xii). On appeal the Appellate Assistant Commissioner maintained the disallowance for precisely the same reason. The disallowance was made for the purposes both of the income-tax assessment and the excess profits tax assessment. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f anything of a kind which could rightly be described as a new asset or as an addition to the fixed capital of the firm. The acquisitions derived from the payment were metaphysical rather than physical. 7. On these findings of the Tribunal the following question of law arises in each case and we refer the same to the High Court of Judicature at Fort William in Bengal, as required by Section 66(1):- Whether, in the circumstances of the case, the sum of ₹ 6,698 paid out to Mr. Mitchell Innes wholly and exclusively for the purposes of the business, was a revenue expenditure so as to be allowable as an admissible deduction under Section 10(2)(xii) of the Income-tax Act (as it stood before its amendment in 1946). S. K. Gupta and J. C. Pal, for the Commissioner P. K. Sen Gupta, for the assessee. JUDGMENT MOOKHERJEE, J.- This is a reference under Section 66(1) of the Income-tax Act. On an application by the Commissioner of Income- tax, Calcutta, the following question of law has been formulated by the Tribunal for answer by this Court:- Whether, in the circumstances of the case, a sum of ₹ 6,698 paid out to Mr. Mitchell Innes wholly and exc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssrs. Halford Smith Co., in favour of the assessee-firm. The goodwill of the firm Halford Smith Co., was to be absolutely transferred in favour of the assessee-firm. The consideration mentioned in the agreement was ? 4,000 for transferring the four seats in the association above-mentioned and for the sale of the goodwill. It was further agreed that Mitchell Innes would not in future and at any time work as exchange broker or in any way compete with the assessee-firm, and the consideration for such agreeing not to enter into competition with the assessee-firm as exchange brokers in Calcutta were annuities payable during the lifetime of Mitchell Innes to him and after his death to his wife. The payment of the annuities was made contingent and payable only and so long as the brokerage earned from Messrs. Ralli Brothers and two other firms was not less than the double of the amount of such payment of annuity in each year. In certain circumstances the annuity was to be proportionately reduced and if the firm Ralli Brothers ceased to carry on business in Calcutta the annuities would forthwith cease. The question referred by the Tribunal is whether the payment of the annuity as u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing more profits by getting more customers, the assessee thought fit to keep Mr. Mitchell Innes out of his way. There is no question of the acquisition of a new business in this case, nor can it by any stretch of imagination be suggested that the annual sums constitute a price paid for the acquisition of something which is analogous to the goodwill of Mr. Mitchell's business. There is no warrant for the supposition and, indeed, the agreement cannot countenance any such suggestion. Further, it is not possible to hold that the expenditure brought into existence an advantage for the enduring benefit of the assessee's trade within the meaning of the expression used by Lord Cave and later explained by Lord Justice Romer. The expenditure did not result in the acquisition of anything of a kind which could rightly be described as a new asset or as an addition to the fixed capital of the firm. The acquisitions derived from the payment were metaphysical rather than physical. We may at this stage deal with one of the contentions raised, based upon an interpretation of clause 2 of the agreement dated 23rd February, 1927. It was argued that the annuity payable was a consideration fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssible to lay down satisfactory tests in a general way for differentiating between capital and revenue expenditure. Bearing these in mind we may proceed to consider how far and to what extent some or more of these principles may be attracted to the facts of the present case. In determining whether a particular item of expenditure comes under the category of capital or revenue it is necessary to consider carefully the nature of the concern, the ordinary course of business usually adopted by such firms, the object with which an expense is incurred and the actual effect thereof. It is only then that it can be decided under what category a particular expenditure falls. In the case now before us the goodwill of the firm in which Mitchell Innes was interested had for a separate consideration been transferred to the assessee Piggot Chapman Co. entitling the latter to the benefit of the connections of Mitchell Innes with Messrs. Ralli Brothers. The annuity, which is made payable to Mitchell Innes and to his wife, is in consideration of Mitchell Innes not entering into competition during his lifetime with Piggot Chapman Co. There is no question that under this latter provisio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rm carrying on business of printing and publishing books entered into an agreement with certain rival firms to pay them in certain proportion a share of the estimated profits of the assessee in so far as they executed Government orders and that also in consideration of such rival firms quoting uniform rates with the assessee in the tenders invited by Government. The question was whether the amount so paid by the assessee to the other firms could be characterised as expenditure incurred solely for the purpose of such business. Mahajan, J., observes at page 86:- All that could be said was that the assessee, in order to carry on his business of the printing press, was by incurring this expenditure getting work to run his press to its full capacity and to his maximum advantage, but it could not be said that he was acquiring a new business or, in other words, was incurring this expenditure to acquire a concern. The classical observation of Bowen, L.J., in City of London Contract Corporation v. Styles# are quoted with approval. You do not use it (capital) for the purpose of your concern which means, for the purpose of carrying on your concern but you use it to acquire the concern. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s supplied or services rendered to the appellants in their business; they did not arise out of any transactions in the conduct of their business. That they had to make those payments no doubt affected the ultimate yield in money to them from their business but that is not the statutory criterion. They must have taken this liability into account when they agreed to take over the business. In short, the obligation to make these payments was undertaken by the appellants in consideration of their acquisition of the right and opportunity to earn profits, that is of the right to conduct the business, and not for the purpose of producing profits in the conduct of the business. If the purchaser of a business undertakes to the vendor as one of the terms of the purchase that he will pay a sum annually to a third party, irrespective of whether the business yields any profits or not, it would be difficult to say that the annual payments were made solely for the purpose of earning the profits of the business. In passing it may be noticed again that the mere fact that a payment is a lump sum or a recurring one cannot by itself determine conclusively the nature of the expenditure. The charact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Associated Portland Cement Manufacturers Limited v. Kerr*, which follows the observations of Lawrence, J., in Collins v. Joseph Adamson Co.**, where the point for decision was about the nature of payment made by a company to a retiring director in restraint of future competition by him. Macnaghten, J., explained the ratio dicidendi of a decision to which he was himself a party [Deverell, Gibson and Hoare Limited v. Rees] and indicated that the particular director had sold his connection as a printer and afterwards was paid ? 600 which was regarded as an unwarranted withdrawal of capital because the company could not properly reduce its capital without the sanction of the Court; although at page 471 of the report observations are made which imply that the learned Judge thought that the said director had received the aforesaid amount of ? 600 in consideration of an obligation not to compete with the company, as a matter of fact, however, there was no consideration for the payment. The earlier case, Deverell, Gibson and Hoare Ltd. v. Rees, also cannot be of any help as the facts are different. But the later case of 1945 already referred to is of some assistance. In Collins v. Jos ..... X X X X Extracts X X X X X X X X Extracts X X X X
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