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TMI Blog1972 (10) TMI 5X X X X Extracts X X X X X X X X Extracts X X X X ..... on business, in the State of Kerala, of manufacturing sugar, running a distillery and also a tincture factory. The appellant-company was floated with a view to taking over the business assets of a company called ' Travancore Sugars Ltd. ' (which was being wound-up and in which the State Government held the largest number of shares), the Government distillery at Nagercoil and the business assets of the Government tincture factory at Trivandrum. For this purpose an agreement dated June 18, 1937, was entered into between the Government of Travancore and Sir William Wright on behalf of Parry & Co. Ltd., the promoters of the appellant-company. Under the said agreement the assets of all the three concerns were agreed to be sold by the Government of Travancore to the appellant-company. Clause 3 of the agreement provided that the cash consideration for the sale of assets of the Travancore Sugars Ltd. shall be 3.25 lakhs rupees. Clause 4(a) provided that the cash consideration for the sale of the Government distillery shall be arrived at as a result of joint valuation by the engineers to be appointed by the parties. Clause 5(a) stated that the cash consideration for the sale of assets of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Appellate Assistant Commissioner relied upon the decision in Pondicherry Railway Co. Ltd. v. Commissioner of Income-tax in disallowing this item of expenditure. The appellant preferred an appeal against the order of the Appellate Assistant Commissioner to the Income-tax Appellate Tribunal which held that the case came within the principle of the decision in British Sugar Manufacturers Ltd. v. Harris (Inspector of Taxes), and that the payment of commission was an expenditure made in order to earn profits of the business and not an expenditure paid out of earned profits. In the result the Tribunal allowed the appeal by the company. At the instance of the respondent the Tribunal referred the following question of law to the High Court of Kerala : ' Whether, on the facts and in the circumstances of the case, the payment of Rs. 42,480 by the assessee to the Travancore Government under the agreements dated June 18, 1937, and January 28, 1947, was allowable under section 10 of the Income-tax Act? ' By its judgment dated August 20, 1963, the High Court held that the payment of the aforesaid amount constituted capital expenditure and was not allowable under section 10(2)(xv) of the I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , buildings, machinery and other things attached thereto and more particularly described in the schedule ' B ' annexed to the principal agreement, and all the assets of the factory known as the Government tincture factory situated at Trivandrum and more particularly described in the Schedule ' C ' annexed to the principal agreement for the cash consideration in the said principal agreement mentioned and also in consideration, inter alia, that the Government should be entitled to 20% (twenty per cent.) of the said net profits earned by the company in every year subject however to a maximum of Rs. 40,000 per annum, such net profits for the purposes of the said agreement to be ascertained after the deductions set out in clause 7 of the said agreement.' " This court, while recognising that it is difficult--as indeed all judges have found it difficult--to determine whether a particular expenditure is in the nature of capital expenditure or in the nature of revenue expenditure and that it was not easy to distinguish whether an agreement is for the payment of price stipulated in instalments or for making annual payments in the nature of income, observed that not only the documents but t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his finding for which this court found support from the decisions in Commissioners of Inland Revenue v. 36149 Holdings Ltd. (In liquidation) , Commissioner of Income-tax v. Kolhia Hirdagarh Co. Ltd. and the decision of the Judicial Committee in Jones v. Commissioners of Inland Revenue a it nonetheless observed that it is not possible for it to finally determine this appeal and that even if the payment of commission to the Government by the assessee is not capital but revenue payment certain questions would arise for consideration in this case which the High Court has not dealt with in the reference. These questions as stated in that decision were : firstly, it has to be determined whether the appellant is right in his argument that the payment of commission is tantamount to diversion of profits by a paramount title; secondly, the contention of the respondent that the transaction should be treated as a joint venture with an agreement to share profits between the appellant and the Government, and, thirdly, it has to be considered whether the requirements of section 10(2)(xv) have been satisfied in this case. It was pointed out on behalf of the appellants in that case who are responde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... upreme Court could not give an answer to the question referred. " The learned advocate for the revenue finding himself in this difficulty attempted to create a dichotomy under which according to him both the capital and revenue nature of the expenditure as well as the payment being wholly and exclusively laid out for the purpose of the business are included in the aforesaid clause (xv) of sub-section (2) of section 10. But we are unable to understand the sequitur. Even supposing that these two kinds of expenditure are included, if the expenditure is of one or the other it becomes deductible. We find no justification for this contention because a cursory reading of that provision would show that it is merely confined to the payments wholly and exclusively laid out for the purpose of the business in which expenditure of a revenue nature would also be included along with the expenditure of various other categories. Section 10(1) and (2)(xv) are as follows : " (1) The tax shall be payable by an assessee under the head I Profits and gains of business, profession or vocation in respect of the profits and gains of any business, profession or vocation carried on by him. (2) Such pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for purposes of trade determined upon the principle of ordinary commercial trading would not make any difference to the answer which could be given on the basis of the expenditure being revenue expenditure and not capital expenditure. Even so, Mathew J., after referring to the several decisions, posed the question, namely, when a trader makes a payment which is computed in relation to the profits, the question that arises is, does the payment represent a mere division of profits with any party or is it an item of expenditure the amount of which is ascertained by reference to profits, to which his answer was the payment would be allowable in the second case but not in the first Even on the other question whether the payment is an expenditure wholly and exclusively laid out for purposes of trade and ascertained with reference to profits, an examination of the several cases to which a reference has been made by the learned judge led him to the conclusion that the payment in question was such an expenditure deductible under section 10(2)(xv). In considering the nature of the expenditure incurred in the discharge of an obligation under a contract or a statute or a decree or some sim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is contended that the assessee-company was created for the specific purpose of taking over the assets burdened with the obligations set out above, that it had no volition in the matter and had to take over the assets subject to the aforesaid enforceable obligations before it came into existence. It is, therefore, submitted that it was an enforceable obligation at source by which part of the revenues of the business activities of the company were diverted with the result that the part so diverted did not become its income at all. The case of Pondicherry Rly. Co. v. Commissioner of Income-tax was sought to be distinguished because it is said in that case the company was already in existence, that the venture was a joint venture between the English company and the French company, that the French company merely contributed to some share of the capital by the grant of a subsidy and land free of charge and that the work in fact was done by the South Indian Railway which was to pay gross receipts less working expenses to the Pondicherry company which divided the net profits after deduction of rates and taxes, etc., half and half between it and the Pondicherry company. On these facts Lord ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the problem which has to be solved in the case before them, and they further added that a sentence in the judgment in that case has been explained, if explanation was necessary, by Lord Macmillan in the subsequent case of W. H. E. Adamson v. Union Cold Storage Company 8 (see pages 278-279). The Indian Radio case was under section 10(2)(ix). In British Sugar Manufacturers Ltd. v. Harris , which the Tribunal said on the facts was nearest to the case before us, the company was carrying on business as manufacturers of beet sugar, had agreed to pay to two bodies in each of four years for division between them as they mutually agreed upon 20% of the net profits of the company in consideration of their giving to the company the full benefit of their technical and financial knowledge and experience, and giving to the company and its directors advice to the best of their ability respectively on all questions of or relating to manufacture and finance and disposal of the company's products. It was held, reversing the decision of Finlay J., that in ascertaining the profits or gains of the company for any year assessable to income-tax the sum payable to the two bodies under this agreement o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see, it is deductible. But, where the income is required to be applied to discharge an obligation after such income reaches the assessee it is merely a case of application of income to satisfy an obligation of payment and is therefore not deductible. On a construction of the terms of the contract in this case and the obligations arising therefrom we cannot say that the conclusions of the Kerala High Court are unsustainable. The assessee had no choice at the time of inception, as a condition of its coming into existence to agree to the several terms stipulated by the Government for transferring the profit earning assets. No doubt, as the learned advocate for the revenue said, the company paid the Government in full for the value of the assets and the company had, therefore, no obligation to the Government on that account. This may be true to some extent but then there are the other obligations which are inter-linked with the transfer of assets notwithstanding the fact that the company paid a price fixed for the transfer of the assets which may not in all cases, as in this case it is not, be the true value of the assets which are the subject-matter of the transaction. The Governmen ..... X X X X Extracts X X X X X X X X Extracts X X X X
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