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TMI Blog1934 (7) TMI 15X X X X Extracts X X X X X X X X Extracts X X X X ..... ing not to compete with the assessees ' business after the termination of the agency-are or are not expenditure allowable in charge under Section 10 (2) (ix) of the Act." Section 10 (2) deals with the manner in which profits or gains are to be computed for the purpose of assessment of income tax, and it contains an enumeration of the allowances which the asses-sees shall be entitled to make or, to put it more accurately perhaps, the deductions which the assessees are entitled to make before a net sum is arrived at upon which income tax becomes payable, and in sub-paragraph (ix) we find as a permissible allowance or deduction " any expenditure, not being in the nature of capital expenditure, incurred solely for the purpose of earning such profits or gains." The Court is, therefore, asked by the Commissioner of Income Tax to decide in effect whether the payment of ₹ 10,000 was one which could be taken into account by way of deduction for the purpose of arriving at the net sum upon which income tax would be payable in respect of the tax year 1931-32. This matter originally came before the Court on the 12th February, 1934. Some question was then raised by lea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Commissioner of Income Tax, solely with reference to the provisions of sub-Section (ix) of Section 10 (2) of the Act. In order to make it quite clear what the point is which has been submitted for determination by the Court, it is necessary that I should recite the relevant facts which show the circumstances in which, and the conditions under which, the payment in question came to be made by the assessees. The Commissioner points out that the payments in issue relate to two agencies of the assessees, that is, of the Imperial Chemical Industries (India), Ltd., one at Madras and the other at Colombo. It appears that the assessees succeeded a company known as Messrs. Brunner Mond and Company (India), Ltd., in the tax-year 1928-29. I presume the Commissioner of Income Tax means that the business of Messrs. Brunner Mond & Co., was taken over by or absorbed into the undertaking known as Imperial Chemical Industries (India), Ltd. Messrs. BrunneriMond & Co., on 9th February, 1923, had entered into what is described as a del credere commission agency with a firm known as Parry and Company, Madras. That agreement contained inter alia the following clause : "Either party may, by no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cilitate the opening of our own offices." On 8th February, 1927, the agents replied accepting the proposals (in the letter copied as Annexure B), including their appreciation of " the friendly and generous attitude which has guided these negotiations." By a letter of 14th June, 1927 (copied as Annexure C), the assessee gave due formal notice of termination of the agreement with effect from 31st December, 1927. By agreement with the assessee the agents debited in their running account of 28th December, 1927, the lump sum of ₹ 30,000 ; but the assessee distributed the charge in his revenue accounts, passing ₹ 4,500 through the books on 30th September, 1928, and ₹ 6,000 annually since then : so that ₹ 6,000 falls in the accounts for the year ending 30th September, 1930, under the present assessment; that is of course the assessment for the tax-year 1931-32. Then the Commissioner of Income Tax says : " It may be noted for information that the commission (gross) payable to Messrs. Parry and Company had been approximately 1925 26,300. 126 31,000. 1927 34,750." Then the Commissioner deals with the position as between Imperial Chem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or 4 months of the year after the formlal expiration of the agency. Then comes the material statement in the case with regard to the total sum of Rs, 10,000. In paragraph 5 the Commissioner says : " The amount thus charged in this period in respect of the two agencies.totalled ₹ 10,000. It appears that the Agents held and kept stocks of the assessee's goods: and in the course of the change-over of the business, transferred the stocks to the assessee as convenient. Then in paragraph 5 (b) the Commissioner says: "The assessee's case throughout the assessment and in his application to the Commissioner for revision was as follows (quoted from his letter of 5th October, 1931 ):- " We still contend that this compensation is from our point of view an allowable business expense. The payment of the compensation depended on an agreement that the ex-agent would not compete with our products and this agreement, we argue, changed the payment from an ex gratia one to a definite business one." Then he says : "No other ground was raised within the time permissible to the assessee; but it appears that eventually my predecessor decided to leave the case to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Annexure "A" the result of the negotiations between the company and their Madras agent, summarised as follows:- "(1) You will allow any members of our European staff, whom we may detail for the purpose, to work on our business in your office during the continuance of the agency. (2) As the time approaches when we consider that our staff will shortly be in a position to run the business independently, we shall give you the six months' notice required under your Agency agreement. (3) You will not oppose the opening of our office or offices in Madras or elsewhere during the period of the notice. This will, of course, not affect your position as regards commission, which will be payable until the notice expires." Paragraphs (4) and (5) are not very material, but in paragraph ((3) it is stated :- "We informed Mr. Wood that as compensation to a certain extent for the loss of our agency, we should be willing to pay you the sum of ₹ 500 per month for five years to be reckoned from the date of the expiration of the notice terminating the agency or a lump sum of ₹ 30,000 if you preferred it, provided that you would agree not to enter into co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpensation should be paid to you when our European Assistant was attached to your office." Those proposals were accepted by the Colombo Agents in their letter of the 21st March, 1929. It will be seen from that correspondence that the real position was that Messrs. Brunner Mond & Co., as predecessors of Imperial Chemical Industries (India), Ltd., were making an arrangement whereby instead of conducting their business and providing for the sale of their products through agency firms in Madras and Colombo, they would in future conduct their business through their own officers and their own staff in those two centres respectively. In brief, the position was that although Messrs. Brunner Mond & Co., were entitled to put an end to the agency agreement upon a bare six months' notice and nothing more, they, by the arrangement they had made, secured for themselves certain advantages which otherwise might not have enured to them, if they had merely exercised their strict legal right and terminated the agencies and had done nothing more. The advantages which were obtained may be summarised thus: They were to be entitled to take steps for establishing their own organization during th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... evidence at all upon which the Commissioner of Income Tax could have come to that conclusion. But what is far more important for the purpose of the determination of the case now before us, is that there was nothing in the pure facts of the case as set out by the Commissioner in the paragraph headed "Facts" which justified him in taking the view that any part whatever of the ₹ 10,000 was payment in the nature of an ex gratia gift made in recognition of past services. On the contrary, the assessees, or rather their predecessors say quite definitely and categorically in paragraph (6) of their letter of the 4th February, 1927, that the sum which they were willing to pay was as compensation to a certain extent for the loss of the agency, that is to say, they were prepared to pay the sum of ₹ 30,000 to make up to a certain degree the remuneration which Messrs. Parry & Co. would otherwise have earned as agents of Messrs. Brunner Mond & Co. But it is to be noted that they expressly said that that payment would only be made, provided there was an undertaking on the part of the ex-agents not to enter into competition with them for a period of five years. It is true tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pears to us to be the real position, having regard to all the circumstances and all the facts as revealed by the evidence which the Commissioner has put before us. I have already stated that in our opinion there was no justification for what the Commissioner says he has found as a fact, namely, the splitting up of the sum of ₹ 10,000 or the finding that it was made in part as an ex gratia gift in recognition of past services. The learned Advocate-General says that nevertheless we must answer such part, of the question as we can upon those findings, and reject the rest, or else say that it is impossible to deal with this reference at all. The learned Advocate-General has quoted a number of authorities. Notably the case of The Tata Iron and Steel Company Limited v. The Chief Revenue Authority, Bombay [1923] 1 ITC 206 , where it was apparently decided that the decision of the Court given upon a reference under Section 51 of the Indian Income Tax Act (VII of 1918) which was the forerunner of the present Section 66 of the Act of 1922, is not a judgment within the meaning of Chapter 39 of the Letters Patent of the Bombay High Court, so as to give rise to a right to appeal. The Adv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce are the matters set out in paragraphs 3 and 4 of the case and what he has stated in the opening paragraph as having been found as a fact specially as regards item (a), is really the inferences which the Commissioner has drawn from the bare facts which he has stated in paragraphs 3 and 4. In those circumstances, it seems to me that we ought to deal with this case upon the principles which are contained in a passage in the judgment of the Master of the Rolls in the case of The Gramophone and Typewriter Ltd. v. Stanley [1908] 2 K.B. 89 , where his Lordship said : "The question arises on a case stated by the Commissioners. It is undoubtedly true that, if the Commissioners find a fact, it is not open to this Court to question that finding unless there is no evidence to support it. If, however, the Commissioners state the evidence which was before them, and add that upon such evidence they hold that certain results follow I think it is open and was intended by the Commissioners that it should be open, o the Court to say whether the evidence justified what, the Commissioners held. I am satisfied that the case stated by the Commissioners falls under the latter head. They have care ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... getting rid of onerous capital assets or something of that sort as we have had in the cases, endures. I think that the Commissioners, with great respect, have been misled by the way in which they have taken 'enduring' to mean merely something that extends over a number of years. I do not quite understand how the view that they appear to have taken is consistent which the numerous cases." Then the learned Judge proceeded to deal with the case almost as if the whole matter was at large and he was in a position to form his own judgment upon the whole of the materials then before him. All these cases to which I have just referred and certain ether cases are collected and discussed in SUNDARAM'S book on the Law of Income Tax at p. 1037 (et seq.) . In the light of all those authorities, I think what we ought to do in the present instance is to give a decision which will operate by way of guidance to the Commissioner of Income Tax upon the pure facts of the case as disclosed in the evidence which the Commissioner himself has put before us and upon which the matter really arises. Upon that view, the burden is cast upon us of deciding whether or not payments amounting to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e and the actual point upon which we have to express our opinion is, whether or not the expenditure was of the kind which ' falls within the proviso contained in the words within the parenthesis in sub-section (ix). Those words are "not being in the nature of capital expenditure." Paraphrasing the whole of sub-Section (ix), a proposition can be formulated thus: It is permissible that an allowance shall be made for an expenditure which has been incurred solely for the purpose of earning profits or gains of any business, provided that such expenditure is not an expenditure in the nature of a capital expenditure. Stated in a different form, the problem which we have to solve is whether or not the payment of the sum of ₹ 10,000 was a payment which ought to be charged to capital account in the books of the assessees or could properly be chargeable to revenue account. The assessees themselves have contended, as the Commissioner has admitted in paragraph 5 (b) of the case, that the payment was a definite business one and the Commissioner has stated in the course of his narrative in paragraph 3 of the statement of the case that the assessees have., distributed the charg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that 'in a rough way' it was not a bad criterion of what is capital expenditure'-as against what is income expenditure-to say that capital expenditure is a thing that is not going to recur every year; and no doubt this is often a material consideration. But the criterion suggested is not, and was obviously not intended by Lord Dunedin to be, a decisive one in every case; for it is easy to imagine many cases in which a payment, though made 'once and for all would be properly chargeable against the receipts for the year, Instances of such payments may be found in the gratuity of £l,5O0 paid to a reporter on his retirement, which was the subject of the decision in Smith v. Incorporated Council of Law Reporting for England and Wales [1914] 3 K.B. 674 and in the expenditure of £4,994 in the purchase of an annuity for the benefit of an actuary who had retired, which in Hancock v, General Reversionary and Investment Co. [1919] 1 K.B. 25 was allowed, and I think rightly allowed, to be deducted from profits." Then the Lord Chancellor said : "When an expenditure is made, not only once and for all, but with a view to bringing into existence an asset or a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... statutory duty to realise the company's assets and divide the proceeds amongst his constituents. Certainly no part of the fund. That in its entirety is completely alienated. And I can myself think of nothing else. Moreover, my Lords, a reference to the authorities shows, it seems to me, clearly that it is by reference to no such shadowy conceptions that the words of the statute "employed as capital" have to be interpreted. Such things as a purchase of goodwill involving a capital expenditure might come within them: Smith & Son v. Moore [1921] 2 A.C. 13, an excess profits duty case." Then he quotes various other instances. Now, the passage which I have quoted from Lord Blanes-Burgh's judgment suggests two further tests in addition to those indicated by LORD DUNEDIN And Lord Cave. The first test is this : Did the expenditure involve any withdrawal of capital? It would seem that in the case with which we are concerned the payment of ₹ 10,000 involved no withdrawal of capital. Indeed, there is no evidence before us that it did anything of the kind. On the contrary, it was debited to the revenue account. The other test suggested by Lord Blanesburgh is the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. The law applicable to such cases as the present was, it seems to me, placed beyond the realms of controversy. The boundary line between deductions that were permissible and those that were not, had previously been uncertain and difficult to follow. As regards the large majority of deductions, there was, and could be, no conceivable doubt. They were clearly on one side of the line or the other. But as regards a comparatively small number, it was difficult to say on which side of the line they fell. This was particularly the case where, as in the present one, an expenditure, is not a recurring one, but is made once and for all. It was pointed out by Lord Cave in Atherton's Case ( supra), that an expenditure, though made once and for all, may nevertheless be treated as a revenue expenditure. And he then added this: "But when an expenditure is made, not only once and for all, but with a view to bringing into existence an aseet or an advantage for the enduring benefit of a trade, I think that there is very good reason (in the absence of a special circumstance leading to an opposite conclusion) for treating such an expenditure as properly attributable not to revenue but to ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t he has decided could not have been open to questions by this or any other Court. I have already expressed my opinion that in the present case there was no evidence on which the learned Commissioner of Income Tax could have come to the conclusion he did on matters which were really questions of mixed law and fact. In our judgment the principles laid down in the case of The Anglo-Persian Oil Co. Ltd's case (supra) , (the applicability of which to the present case the Commissioner of Income Tax disputes) are quite wide enough to provide the answer to the real and paramount question which is before us. In that case the facts were that in 1914 the Anglo-Persian Oil Co. entered into an agreement with a firm called Strick, Scott and Co., Ltd., under which the latter were appointed agents of the company to manage its business in Persia and the East for a term of ten years. It appears that the remuneration paid to these agents proved larger and more onerous than had been anticipated by the company; accordingly in the year 1922 the company entered into an agreement with Strick, Scott and Co., Ltd., whereby it was agreed that the agency should be terminated, that Strick, Scott and Co. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ital to get your service on its feet. What I feel here is that there is not a trace of any such thing. There is no evidence of it-none. There is not any evidence, and it was not suggested before the Commissioners as I understand it, that any part of this sum was paid for the purpose of acquiring anything analogous to goodwill on the part of these people. Of course they had to be paid for the value of their rights for ten years to receive this money." Now the Advocate-General has argued before us that that passage of Mr. Justice Rowlatt, so far from being of assistance to the assessees, really tells in favour of the income tax authorities, because, said the Advocate-General, what Messrs. Brunner Mond and Co., or Imperial Chemical Industries (India), Limited, were doing was to acquire a new business or, at any rate, to acquire the goodwill of somebody else's business, I have already expressed the opinion that upon the facts-just as Mr. Justice Rowlatt felt in the case of Anglo-Persian Oil Co. Ltd' s case (supra ), what I feel here is that there is no trace of anything of the kind. There is no evidence at all that the assessees were acquiring a new business or taking ove ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the tailings were raw material already won and gotten, the amount expended in acquiring them was in the nature of an expenditure on the raw material of the company's trade and therefore that for the purpose of assessing the company's profits or gains, the eost of the tailings treated during the period of assessment was a proper deduction from the proceeds realized by the sale of the gold extracted. Lord Justice Romer said:-" The question to be decided in this case is whether the dumps are to be regarded as fixed capital or as circulating capital. If they are the former, it is conceded by the appellants that the assessment made on them is correct. If on the other hand, they are floating or circulating capital, it is conceded that the cost of them to the appellants must be debited in the profit and loss account, the account being credited with the cost price of what was left of the dumps at the end of the year of assessment. The dumps, in other words, must be dealt with in the profit and loss account as stock in hand has to be dealt with in the profit and loss account of any other trader." Then the learned Lord Justice said : " The reason for this distinction ..... X X X X Extracts X X X X X X X X Extracts X X X X
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