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TMI Blog1967 (11) TMI 26X X X X Extracts X X X X X X X X Extracts X X X X ..... of the association notwithstanding, the assessee and Messrs. H. V. Low & Co, Ltd. became potential rivals in coal export to Burma. Thereupon, it is said, there was an understanding or an arrangement between the two on the following lines : (a) Messrs. H. V. Low & Co. Ltd. will not export coal to Burma during the subsistence of the agreement ; (b) Messrs. H. V. Low & Co. Ltd. would place coal from their colliery at the ready disposal of the assessee for shipment to Burma and would otherwise assist the latter in the export business ; and (c) the assessee will carry on the actual shipping business and pay to Messrs. H. V. Low & Co. Ltd. at 5 annas per ton (subsequently raised to Re. 1-5 as. per ton) of shipped to Burma. According to the assessee, the last shipment of coal, under the above arrangement, was made in June, 1954. Thereafter, the arrangement came to an end automatically because the Government of Burma began to took elsewhere for its coal requirements. Further, according to the assessee, it made the following payments to Messrs. H. V. Low & Co. Ltd. under the aforesaid arrangement, during April 1, 1950, to March 31, 1955, namely, 1951-52 91,149 1952-53 1,77,898 1953-5 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee-company and Mr. Indra Kumar Karnani, on behalf of Messrs. H. V. Low & Co. Ltd. He explained that at the relevant time the great and infamous Calcutta killings of 1946 were going on and business had to be conducted under great stress and strain and no more businesslike relations were at that time practicable. Moreover, as stated by Sir Walter, the arrangement was treated as very confidential and it was confined to only a few people at the top of the two organisations and these factors explain why there are no more documents evidencing the deal than we actually find before us. In the absence of anything to the contrary, except mere suspicion, we see no reason to disbelieve the sworn testimony of Sir Walter, who, as already stated, was examined before us as a court witness. It would be extremely unreasonable to suppose that Sir Walter would perjure himself to bolster up a false case of one of the managed companies courting the risk of prosecution." The Tribunal further found that there were other materials showing that an agreement had in fact taken place and for that purpose relied on the correspondence that passed between Sir Walter Michelmore (chairman of the managing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was forwarded to the assessee-company only and to no other traders. It is true that the fact that the intimation about the requirements of the Burma Government for coal was not given to any other concern warrants an inference that the assessee-company alone had some sort of an authority for procuring and supplying coal to the Government of Burma. But the letter supports the version of Sir Walter about the procedure then adopted by the Burma Government for procuring coal from India. The procedure was that the Government of Burma through its Embassy in India intimated its requirements for coal to the Coal Commissioner in India every month. It was the duty of the Coal Commissioner to meet such requirements. Sir Walter's attention was drawn in the course of his examination to the letter of Shri P. P. Menon, dated the 30th June, 1950, and he explained that at the material time the assessee-company 'were also providing the ships for carrying coal to Burma and, therefore, the purpose of sending Coal Shipments Ltd., a copy of the letter in question was to give them an advance intimation of the tonnage in order that shipping could be arranged'. The explanation sounds plausible. Sir Walter h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rangement, arrived at verbally between the assessee and Messrs, H. V. Low & Co. Ltd. was a temporary measure liable to be terminated at will by any of the two parties. " In the view taken, the Tribunal allowed the appeal and modified the assessment by exclusion of the sums claimed by the assessee as business expenditure. Aggrieved by the order of the Tribunal, the revenue obtained reference to this court on the following point: " Whether, on the facts and in the circumstances of the case, the payments made by the assessee to Messrs. H. V. Low & Co. Ltd. or their nominees were of a capital nature and as such not allowable under section 10(2)(xv) of the Income-tax Act, 1922 ? " It is no longer in dispute before us that there was an agreement between the assessee and Messrs. H. V. Low & Co. Ltd., on terms stated by the assessee and that the payments in question were made thereunder. We are to see whether the expenditure was of capital nature and as such not allowable as business expenditure under section 10(2)(xv) of the Indian Income-tax Act. The question of allocation to capital or income runs on fine lines of distinction and the distinction often proves puzzling. None of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... apital. If it was part of the fixed capital of the business it would be of the nature of capital expenditure and if it was part of its circulating capital it would be of the nature of revenue expenditure. These tests are thus mutually exclusive and have to be applied to the facts of each particular case in the manner above indicated. It has been rightly observed that in the great diversity of human affairs and the complicated nature of business operations it is difficult to lay down a test which would apply to all situations. One has therefore got to apply these criteria one after the other from the business point of view and come to the conclusion whether on a fair appreciation of the whole situation the expenditure incurred in a particular case is of the nature of capital expenditure or revenue expenditure in which latter event only it would be a deductible allowance under section 10(2)(xv) of the Income-tax Act. The question has all along been considered to be a question of fact to be determined by the income-tax authorities on an application of the broad principles laid down above and the courts of law would not ordinarily interfere with such findings of fact if they have been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... question was answered in the negative. It was held that where before starting on its business venture and by way of setting the stage for its business operation, a newly formed company took steps to ensure for itself certain conditions of security, which would last throughout the life of the project or during a substantial period and undertook to pay a consideration to the grantor of the security, the expenditure although to be incurred periodically was capital expenditure. The question is whether the expenditure incurred by the assessee was of the above type. It was contended, on behalf of the revenue, that the expenditure was incurred to buy off competition by an experienced rival company and secure a sort of monopoly business for coal export to Burma. In either event, it was submitted, the expenditure would be capital expenditure. Reliance was placed in support of the proposition upon Collins v. Joseph Adamson (and vice versa) and Associated Portland Cement Manufacturers Ltd. v. Kerr. We are not impressed by the argument. In the first place, at the material time, shipment of coal to Burma was under Open General Licence and it was open to all coal merchants to export. Sir Walter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... yments were to uncertain shipments to be made to Burma only the rate of payment was agreed upon and thereafter changed to a higher rate. In our opinion, the motive behind the arrangement and the terms thereof did not envisage the creation of any monopoly trading right for the assessee. There remained in the field other coal exporters to Burma. All that the arrangement secured for the assessee were certain temporary advantages, namely : (a) promise of assistance from Messrs. H. V. Low & Co. Ltd. in the matter of procurement of coal for export to Burma ; (b) promise from Messrs. H. V. Low & Co. Ltd. not to export coal to Burma by themselves. Both the promises were delimited to uncertain duration of the arrangement which was terminable at will. The exclusion of Messrs. H. V. Low & Co. Ltd. from the field of coal export to Burma was certainly of some commercial expediency to the assessee ; otherwise no attempt should have been made in that direction. But the expediency was limited, at the initial stage of resumption of coal trade with Burma, to the exclusion of a competitor in coal shipment for some time at least, by a promise to them of a share in shipping charges. This may have b ..... X X X X Extracts X X X X X X X X Extracts X X X X
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