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TMI Blog1989 (9) TMI 33X X X X Extracts X X X X X X X X Extracts X X X X ..... elevant previous year is the calendar year 1975. The assessee is a partnership firm. It was constituted by a deed of partnership dated June 30, 1975. It took over certain running businesses. An agreement was executed on July 1, 1975, between the assessee and the vendors for the purpose. In clause (3) of the said agreement, there was stipulation for payment of a sum of Rs. 50,000 by the assessee to the vendor for the use and utilisation of the trade name, pending import licences, contracts and other trading benefits and advantages. During the relevant year, a sum of Rs. 37,500 was paid by the assessee in pursuance of aforesaid stipulation. This amount was claimed deduction as a business expenditure. The Income-tax Officer did not allow the claim on the ground that it was capital expenditure. On appeal, the Commissioner of Income-tax (Appeals) sustained the order of the Income-tax Officer. On second appeal, the Tribunal also upheld the disallowance. The assessee sought for a reference, under section 256(1) of the Act, of the questions of law arising out of the order of the Tribunal. The Tribunal, on being satisfied that questions of law did arise out of the order, referred the two ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pital expenditure as against what is income expenditure to say that capital expenditure is a thing that is going to be spent once and for all, and income expenditure is a thing that is going to recur every year." (see Vallambrosa Rubber Co. Ltd. v. Farmer [1910] 5 TC 529, 536). Five years later, Rowlatt J. observed : "the real test is between expenditure which is made to meet a continuous demand, as opposed to an expenditure which is made once for all." (see Ounsworth v. Vickers Ltd. [1915] 3 KB 267, 273) Then came the oft quoted test evolved by Viscount Cave L. J.: "When an expenditure is made, not only once and for all, but with view to bringing into existence an asset or an advantage for the enduring benefit of a trade, I think that there is very good reason (in the absence of special circumstances leading to an opposite conclusion) for treating such an expenditure as properly attributable not to revenue but to capital." (see British Insulated and Helsby Cables Ltd. v. Atherton [1926] AC 205, 213 ; [1925] 10 TC 155, 192 (HL)). This test, on the face of it, was not intended to be of universal application as is evident from the rider added thereto which shows that it wou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... v. Strick [1969] 73 ITR 301 (HL)). These are some of the well-known tests evolved by the English courts. We may now advert to the tests evolved and accepted by the courts in India. There are a number of decisions of the Supreme Court and the various High Courts which have dealt with the question of capital expenditure and revenue expenditure, discussed the various tests, accepted some of them with or without riders and evolved new tests and given guidelines to deal with the problem. One test that got the widest application is the test of "enduring benefit" enunciated by Viscount Cave. It was, however, not accepted in all cases without reservation. It was observed that every test has its own shortcomings and that no test is of universal application. The test of enduring benefit was held to be not applicable where the benefit is so transitory as to have no endurance at all. There may be cases where expenditure, even if incurred for obtaining an advantage of enduring nature, may, nevertheless, be on revenue account and the test of enduring benefit may break down. The expressions "enduring benefit" and "right of permanent nature" also came up for interpretation before the Supreme Cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this regard we see tests were laid down in two leading cases [1971] 82 ITR 376 (SO) (Lakshmiji Sugar Mills Co. (P) Ltd. v. CIT) and [1977] 106 ITR 900 (Travancore , Cochin Chemicals Ltd. v. CIT). The tests laid down in the former case was confined to the facts of the case in the latter case. In [1980] 125 ITR 293 (L. H. Sugar Factory and Oil Mills (P.) Ltd. v. CIT), the latter case was held to be a case on facts and the former decision in [1971] 82 ITR 376 was resurrected." The present state of the law on the subject was aptly described by Raghuvir C. J. as "the state of wobbling of authorities" and it was rightly concluded by his Lordship that "no test of universal application can be laid down by the courts". (See CIT v. Makhan Sarmah Savapandit [1989] 180 ITR 35 (Gauhati)). Therefore, the question whether an expenditure is on account of revenue or capital has to be decided by looking at the facts and circumstances of the case and from the point of view of a practical and prudent businessman rather than from the view point of a tax gatherer upon strict juristic classification of the legal rights, if any, secured in the process. In order to arrive at a just and proper conclusio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re raw material, the assessee purchased the quota right of another, the amount paid for purchase of such quota right would indubitably be a revenue expenditure, since it is incurred for acquiring raw material and is a part of the operating cost. Another instance given by the Supreme Court related to payment made for securing additional power every week. It was observed that such payment would also be part of the cost of operating the profit-making structure, and hence, in the nature of revenue expenditure, even though the effect of acquiring additional power would be to augment the productivity of the profit-making structure. We may also gainfully refer to a recent decision of the Calcutta High Court in CIT v. Kusum Products Ltd. [1984] 149 ITR 250, wherein the premium paid on purchase of import entitlements was held to be deductible as revenue expenditure. There is also a decision of the Bombay High Court in CIT v. Desmet (India) Pvt. Ltd. [1982] 138 ITR 382, where payment of commission to another company as consideration for execution of unfinished contracts was held to be revenue expenditure. It was observed that no enduring benefit or advantage was obtained from such payment. W ..... X X X X Extracts X X X X X X X X Extracts X X X X
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