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TMI Blog1966 (9) TMI 44X X X X Extracts X X X X X X X X Extracts X X X X ..... - - - - - Dated:- 20-9-1966 - Judge(s) : V. RAMASWAMY., J. C. SHAH., V. BHARGAVA JUDGMENT The judgment of the court was delivered by RAMASWAMI J.--The appellant is a limited company incorporated under the Travancore Companies Regulation and is carrying 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 rup ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mount payable to the Government under the aforesaid clause 7 came to Rs. 42,480. The Appellate Assistant Commissioner disallowed the claim of the appellant for deduction of this amount on the ground that it was virtually mere sharing of profits after they came into existence. The 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 Ja ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... out-houses, machinery and other things attached thereto and more particularly described in the Schedule 'A' annexed to the said principal agreement, the factory known as the Government Distilleries situate at Nagercoil in South Travancore with lands, 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 purposes of the said agreement to be ascertained after the deductions set out in clause 7 of the said agreement. " It is often difficult, in any particular case, to decide and determine whether a particular expenditure is in the nature of capital expenditure or in the nature of revenue expenditure. It is not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pread over a certain length of time will not convert the nature of that payment from the capital expenditure into a revenue expenditure, but the payment of instalments in such a case would always have some relationship to the actual price fixed for the sale of the particular undertaking. As we have already mentioned, there is no specific sum fixed in the present case as an additional amount of price payable in addition to the cash consideration and payable by instalments or by any particular method. In view of these facts we are of opinion that the payment of the annual sum of Rs. 42,480 in the present case is not in the nature of capital expenditure but is in the nature of revenue expenditure and the judgment of the High Court of Kerala on this point must be overruled. The view that we have expressed is borne out by the decision of the Court of Appeal in Commissioners of Inland Revenue v. 36/49 Holdings Ltd. (in liquidation). In that case, an undertaking was sold and the price consisted of fixed amount and a certain commission payable for an indefinite period. The consideration in the particular agreement which the Court of Appeal had to consider, which was in addition to the fixe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onsideration for shares, 500 preference shares of Rs. 50 each and a fixed cumulative preferential dividend equivalent to four annas per ton of coal raised and railed in each year. The vendor approved the draft articles and in a letter stated that he should get four annas per ton permanently on all coals despatched from the colliery every year, without any hindrance whatsoever, irrespective of any loss or gain to the company. The assessee-company was incorporated and the formal agreement of sale was entered into between it and the vendor. Subsequently, it was found impossible to pay to the vendor a fixed dividend and, therefore, a fresh agreement was executed under which the vendor agreed to give up all the dividends to which he was entitled and to permit the company to convert the preference shares into ordinary shares. In consideration of this, the company agreed to pay a commission to the vendor at the rate of four annas per ton of steam and rubble coal and three annas per ton of slack coal raised from the colliery and sold and rented by the company from the colliery. The question arose whether the sum representing the commission paid by the assessee-company to the vendor under t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case, a person sold his interest in certain inventions and letters patent for pound 750 in cash and a percentage, called a royalty, payable for ten years on the sale of all machines constructed under the patent. Of the sum of pound 750, pound 300 was paid in cash, but the payment of the balance was secured by providing that it would have to be paid by way of 5 per cent. on the sale of the machines. It was conceded by the revenue that this 5 per cent. was not to be included in computing the total income of the transferor. A question having arisen with regard to the further 10 per cent., Rowlatt J. observed as follows : " The property was sold for a certain sum, and in addition the vendor took an annual sum which was dependent upon the volume of business done ; that is to say, he took something which arose or fell with the chances of the business. When a man does that he takes an income ; it is in the nature of income......." The principle of this case applies to the present case where the facts are closely parallel. It is not, however, possible for us to finally determine this appeal because the High Court has not dealt with the other questions arising in this reference. Ev ..... X X X X Extracts X X X X X X X X Extracts X X X X
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