9911796707
TMI Blog1971 (10) TMI 6X X X X Extracts X X X X X X X X Extracts X X X X ..... which exported coal from India to Burma before the Second World War. Amongst the other exporters were Messrs. Karamchand Thapar & Bros. Ltd., Messrs. Macneill Barry Ltd., Messrs. Andrew Yule & Co. Ltd. and Messrs. H. V. Low & Co. Ltd. The shipment of coal to Burma Railways before the war was the subject of open tender. After the cessation of hostilities in 1946, it became possible to resume the export of coal to Burma. In order to overcome the difficulties in the conduct of the trade following the war, the members of the coal trade in Bengal formed an association styled Coal Exporters and Charterers Association. The respondent-company as well as Messrs. H. V. Low & Co. Ltd. were two of the major members of the said association. When Messrs. H. V. Low & Co. Ltd. learnt of the resumption of coal export to Burma by the respondent in 1946, they also expressed an intention to export coal to Burma. Thereupon, the two companies came to an understanding and arrived at a mutual arrangement or agreement on the following lines: (i) M/s. H. V. Low & Co. Ltd. would not export coal to Burma during the subsistence of the agreement. (ii) M/s. H. V. Low & Co. Ltd. would assist the respondent in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d two points for its decision: (1) Were the payments made for the purpose of the assessee's trade in terms of the alleged agreement? (2) If the answer to the above question is in the affirmative, did the assessee acquire a monopoly by such payment? Both the questions were answered in favour of the respondent by the Tribunal. It was held that the payments were made in pursuance of the alleged agreement in the interest of the respondent's trade. The version of the respondent about its agreement with M/s. H. V. Low & Co. Ltd. was accepted. According to the agreement, M/s. H. V. Low & Co. Ltd. agreed to assist the respondent in procuring coal for export to Burma whenever asked to do and further agreed not to export coal to Burma during the subsistence of the arrangement. The agreement was found to have been acted upon and it was held that M/s. H. V. Low & Co. Ltd. supplied varying quantities of coal to the respondent for shipment to Burma. It was further held that the respondent-company did not acquire any monopoly rights to carry on Burma trade and the impugned payments were made to carry on the trade in a more facile and profitable manner. The Tribunal found that the arrangemen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ently no attempt was made either in the High Court or in this court to assail them. The payments which were made by the respondent to M/s. H. V. Low & Co. Ltd., it would thus appear, were because of the assistance rendered by them for shipment of coal to Burma and for abstaining from exporting coal to Burma during the subsistence of the agreement. So far as the payment is concerned which was made to M/s. H. V. Low & Co. Ltd. for assistance to the respondent in procuring coal for shipment to Burma, it was admittedly an item of revenue expenditure. The controversy between the parties has centered on the point as to whether that part of the payment which was made because of M/s. H. V. Low & Co. Ltd. having agreed not to export coal to Burma during the subsistence of the agreement constituted capital expenditure or revenue expenditure. Mr. Desai on behalf of the appellant contends that, as the payment was made for warding off competition by rival coal exporter, the payment should be held to be a capital expenditure. The fact that there was no certainty of the duration of the arrangement between the respondent and M/s. H. V. Low & Co. and the same could be terminated at any time, acco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The courts have to bear in mind, according to the dictum laid down in the above case, whether it was an expenditure forming "part of the cost of the income-earning machine or structure" as opposed to part of "the cost of performing the income-earning operations". In that case, the House of Lords dealt with a fund which had been created by the respondent company as a nucleus of a pension fund for its employees. After handing over the money to trustees for the employees, the company claimed that the money should be charged to revenue. The claim of the company was rejected by the House of Lords on the ground that the payment of money created for itself an enduring benefit or advantage which was of a capital nature. In the case of Robert Addie and Sons' Collieries Ltd. v. Commissioners of Inland Revenue, Lord President Clyde gave the following test: "It is necessary accordingly to attend to the true nature of the expenditure, and to ask one's self the question, is it a part of the company's working expenses?--is it expenditure laid out as part of the process of profit earning?--or, on the other hand, is it a capital outlay?--is it expenditure necessary for the acquisition of prop ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not be of a permanent or enduring nature, the payments made in pursuance of that arrangement would still be capital expenditure. Such a contention indeed was repelled by the Judicial Committee in the case of Commissioner of Taxes v. Nchanga Consolidated Copper Mines Ltd. The respondent-company in that case together with two other companies--Bhokana Corporation Ltd. and Bancroft Mines Ltd.--formed a group for carrying on the business of copper mining. Following a steep fall in the price of copper in the world market the group, in common with other producers, decided voluntarily to cut their production by 10 per cent. In effecting the cut, it was agreed that Bancroft Mines Ltd. should cease production for one year and that the respondent-company and Bhokana Corporation Ltd. should undertake between them the whole group programme for the year reduced by the overall cut of 10 per cent. It was further agreed to pay a sum to Bancroft Mines Ltd. to compensate it for the abandonment of the production for the year. The question arose whether the compensation which the respondent-company had paid to Bancroft Mines Ltd. was expenditure of a capital nature. The Judicial Committee held that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of that payment gave a similar undertaking in respect of the whole district. It was held by this court that, as a result of the annual payment of the amounts of Rs. 5,000 and Rs. 35,000, there enured an advantage to the appellant for the whole period of the lease and as such it was capital expenditure. Apart from the above, we find that the payments made to M/s. H. V. Low & Co. Ltd. were related to the actual shipment of coal in the course of the trading activities of the respondent and had no relation to the capital value of the assets. The payments were not related to or tied up in any way to any fixed sum agreed to between the parties. The dictum laid down by this court in Travancore Sugars and Chemicals Ltd. v. Commissioner of Income-tax in the circumstances is attracted. The appellant-company in that case was to take over the assets of a sugar manufacturing concern, a distillery and a tincture factory of the Government of Travancore. The promoters of the appellant-company in that connection entered into an agreement with the Government. The cash consideration for the sale of the assets of the sugar manufacturing concern was Rs. 3.25 lakhs, that for the sale of the distillery ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase price of the three undertakings. There is no reference to any capital sum in this part of the agreement. On the contrary, the very nature of the payments excludes the idea that any connection with the capital sum was intended by the parties." The above observations, in our opinion, have a direct bearing on the present case. Mr. Desai has referred to the following observations of Lord Greene in Henriksen (Inspector of Taxes) v. Grafton Hotel Ltd.: "It appears to me that there can be no difference in principle between a payment out-and-out for monopoly value and a payment in respect of a term. Each licence granted for a term must stand by itself, since an application for its renewal falls to be treated as an application for a new licence. This is what I mean when I say that there is a false appearance of periodicity about these payments. Whenever a licence is granted for a term, the payment is made as on a purchase of a monopoly for that term. When a licence is granted for a subsequent term, the monopoly value must be paid in respect of that term, and so on. The payments are recurrent if the licence is renewed; they are not periodical so as to give them the quality of payme ..... X X X X Extracts X X X X X X X X Extracts X X X X
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