Supreme Court of India
C. I. T. CENTRAL BOMBAYversusJALAN TRADING CO. (P) LTD.
- Citation
- 1985 INSC 171
- Decided
- 9 August 1985
- Disposal
- Appeal(s) allowed
- Bench
- V D TULZAPURKAR
Holding
The expenditure was made for the acquisition of a capital asset and is therefore not deductible under section 10(2)(xv) of the Indian Income‑Tax Act.
Issues considered
- Whether the royalty payment of 75% of profits under the assignment deed constitutes capital or revenue expenditure.
- Whether such payment is deductible under section 10(1)(xv) or section 10(2)(xv) of the Indian Income‑Tax Act, 1922.
- Whether the asset acquired by the assessee is an enduring capital asset.
- Whether the reasoning in Travancore Sugars & Chemicals Ltd. is applicable to the present facts.
Legislation cited
- Income Tax Act, 1922s. 10(1)(xv), s. 10(2)(xv), s. 66
Subjects
capital expenditurerevenue expendituretax deductionsection 10sole selling agencyroyaltyenduring assetIndian Income Tax Act
Judgment
517
A
C. I. T. CENTRAL J!(llllAY
v.
JALAll TRADING CO. (P) LTD.
AUGUST 9, 1985
B
(V .D. TULZAPURKAR, SABYASACHI Mll!OIARJI AND RANGANATH MISRA, JJ • l
Indian Income Tax Act 1922 - Section lO(l)(xv) - Firm
obtaining sole selling agency - Benefit of agreement assigned to
assessee, a newly incorporated company - 75% of annual profits to
be paid to firm - Sum paid - Whether deductible under section
.10(1) (xv).
c
A firm (JTC) . obtained the sole selling agency for the
products of. a manufacturer for two years with a right of renewal.
A few months later, under a deed of assignment, the firm assigned
the benefits ot the agreement to the assessee cc)mpany'under Which
D
the assessee carried on the business as sole selling agents for
the products of the· manufacturer. Under the deed of assignment
the assessee company should take over not the whole of the
business of the firm but only the benefit of the contract with
the manufacturers in consideration whereof the assessee was· to
pay to the firm as and. by way of royalty, an amount equal to 75%
of their profits and cODDission, rl!llllneration and other moneys
E
received from the manufacturers. The assessee had the option to
renew the agreement. 0
In its illCOlle tax return the assessee claimed under· section
10 (1) (xv) of the Act deduction of a sum of Rs. 7,93 lacs, which
under the deed of assignment it was required to pay to the firm,
F
but the authorities below rejected the ·claim. On appeal the
Appellate Tribunal held that although no ascertained sum was
mentioned for acquiring the right or the enduring benefit, the
amount was spent by the assessee for acquiring an asset of
enduring benefit, and therefore, the . expenditure was capital
expenditure. On reference although the High Court held that. the
G
asset acquired by the assessee was of an enduring nature; iiurpor-
ting to follow the decision of this Court in Travancore·Sugars &
"-'eel• Ltd. v. Cqw!ssioner of me.- Tu:, lerala 62 ITR 566
it held that the annual payment by the assessee of 75% of its
profits was not in the nature of capital expenditure.
H
It -was contended on behalf of the· Revenue that "if ·the
amount had been spent for obtaining a capital asset the assessee
WOnld not be entitled to claim it as a deduction.
518 SUPREME, COURT REPORTS [1985] SUPP;2 s.c.R.
A On behalf of the assessee it was contended that once the
assessee had paid 75% of its profits to the firm, the amJUllt was
no more in its hands as income and since s. 10( 1) envisage the
levy of tax on real income in the assessee' s hands this was not
income wi'thin the ..,,.ning of s.10(1) and was not taxable.
B Allowing the appeal,
JIELD: On the finding of the High Court that the expendi-
ture related to acquisition of a capital asset, it was not
admissible as a deduction under section 10(2) (xv) of the Indian
Income Tax Act 192~. [528 G]
·C It is well settled that if an expenditure is made for
acquiring or bringing into existence of an asset for the enduring
benefit of the busin~ss, it is prop~rly attributable to capital
and is of the nature of capital expenditure. The aim and object
of the expenditure would determine, whether it is capital
expenditure or revenue expenditure. The source or the manner of
the payment would be of no consequence. Where a company had
D acquired an asset in consideration of recurring payment of
certain sum per year ,which was a right to carry on its business
unfettered by any competition from outsiders within the area it
was held to be in the nature of a capital asset and the payment
was not deductible under section 10(2) (xv) of the Act. [524
A,C,G]
E
Aa&alll Bengal ~t Co. Ltd. Vo C<mdastoner of 1 - TalC
27 ITR 34 ~ (1955] s.c.R. 1972 applied.
In Travancore Sugars and a-teals Ltd. which the High .
Court purported to follow there was a substantial and definite
F ilmount of outright cash payment over and above which an
indefinite annual pa~t had been stipulated. The tests laid
down in this case were. not intended to be of general application
but were given to bring into bold relief the special aspects of
the case. The Court i1'self has pointed this out. Therefore, the
High Court erred in importing this reasoning as a test of general
G. application to be appiied to the facts of the present case.
[528 D,E]
In the instant case, the High Court has categorically found
that a capital asset 1u!4 been acquired under the agreement. The
assessee was a new company and had no other business. Under the
11 contract it· acquired the right to carry on the business on a
long term basis subject to renewal of the aireement. Therefore,
C.I.T. v. JALAN TRADING co. [RANGANATH MISRA, J.) 519
A
the first of the broad tests laid down in .Aaaall Bengal cases that
the expenditure .was made for initial outlay applied and on the
finding that a capital asset had been acquired, the ezpenditure
is not liable as a deduction. [ 528 F-G)
2. lbere 1& no merit in the assessee's submission. If the
B
amount had been spent for obtaining a capital asset, the assessee
would not be entitled to claim it as a deduction under section
10(1) (xv). [531 CJ I
CIVIL APPELLATE JURISDICTION: Civil Appeal No •. 1733 of 1973.
From the Judgment and Order dated 26. 7 .1971 of the Bombay
c
High Court in Income Tax Reference No. 112 of 1963.
G.C. Sharma, K,C. Dua and Miss A. Subhashini for the
Appellant. ·
D
S.T. Desai, D.N. Misra and Mrs. A.K. Verma for the
Respondent.
The Judgment of the Court was delivered by
llANGAllATll MISRA, J. This appeal by special leave at the
instance of .the Revenue assails the decision of the Bombay High
E
Court upon a reference under section 66 of the Income Tax Act,
1922 (hereinafter referred to as 'the Act'). In respect of the
assessment year 1954-55, the respondent-assessee claimed deduc-
tion of a sum of Rs.7,93,837 under s. 10(1) or alternatively
under s. 10(2) (xv) of the Act in determining its business
profits which the Income Tax Officer and . the two appellate
F
authorities in due course rejected. On .the application of the
assessee the dispute regarding admissibility of the .claim was
referred to the High Court. It agreed with the Tribunal that 'the
assessee had acquired an asset of an enduring nature in lieu of
the payment of the amount in dispute'; yet, the High Court held
that the payment represented business expenditure and the claim
G
of deduction was tenable under •· 10(2) (xv) of the Act. On
reaching this conclusion the Court was of the view th4t consi-
deration as to whether the payment made by the assessee did not
form part of its real income was unnecessary and answered the
reference in favour of the ,1ssessee. The d~ssioner of Income
Tax, on obtaining special leave; is in appeal before this Court. H
The short facts relevant for appreciating the question for
consideration are these:
520 SUPREME COURT REPORTS [19851 SUPP;2 s.c.1.
A
M/s. Bharat Barrel & Drwn Manufacturing Co. Ltd., ('Bharat
Barrel' for short) gave its sole selling agency to a fina - Jal.an
Trading Co. - by a11 agreement dated Mey 1, 1951, for two years
with a right of renewal. Assessee - respondent is a private
company incorporated on October 16, 1952. Under a deed of assign-
B ment dated December 30, 1952, the benefits of the agreement dated
Mey 1, - 1951, were assigned to the assessee and from January 1,
1953, under the assignment the resi>ondent carried on the buaineas
as selling agents :of Bharat Barrel. From Mey 1, 1953, on the
basis of the option for renewal exercised by the asae88ee an
agreement was ent~red into between Bharat Barrel and the
assessee in respect of the sole selling agency and with a renewal
C clause.
The deed of assignment incorporated the following relevant
terms:
"WHEREAS after the incorporation of the said Company
(assessee) it 1'as however agreed that the assignee company should
D take over not the Whol!! of the business of the Assignors but only
the benefit of the .aforesaid contract dated the 1st Mey 1951 with
the said manufacturers on the terms and conditions D11tually
agreed to and as hereinafter appearing:
l. In consideration of the premises and of the cove-
E nant on the part of the assignees hereinafter contain-
, ed the ;~signors as beneficial owners hereby assigns
to the assignees:
(i) The said agreement of the 1st day of Mey 1951 and
made between the said Bharat Barrel & Drum Manufactur-
F ing Co. Ltd. of the one part and the assignors of the
other ~art and the full benefit thereof as and from
the 1st day of January 1953 and all commission and
other ,100neys payable or to be payable by the
manufacturers;
G (ii) the full benefit of all pending contracts and
orders entered into or given by the assignors in
connection with the said agreement ....
2. In consideration aforesaid the assignees hereby
covenant with the assignors to pay to the assignors as
H and by way of ROyalty an atOOUnt equivalent to 75% of
their profits and commission reDUneration and other
C.I.T. v. JALAN TRADING CO. [RANGANATH MISRA, J.] 521
moneys received from the manufacturers under the said A
agreement or any further agreement that may be entered
into by the Manufacturers with the Assignees in
pursuance of the optiOn to ,·enew the agreement
contained in cl. 5 of the said agreement dated 1st May
1951." I
B
Assessee claimed to have paid Rs. 7,93,887 being 75% of its
net profits in the assessment year 1954-55 and claimed it as a
business deduction but the saine was rejected by the Assessing
Officer as also the appellate authorities. In· dealing with the
question raised, the Tribunal held:
c
-- -"The narrow question, therefore, that we have to
decide in this case is whether · the payment of
Rs.7,93,837 is made by the assessee for acquisition of
an asset or benefit of an enduring character and,
therefore, is of a capital nature. In this the only
relevant <!ocument to be - considered, - is the deed of D
assignment dated 30.12.1952. Examining the said deed
and particularly clause' 2 · therein which is already
stated above; we think there is no doubt that the
payment in question was ma.de by the ·assessee to
acquire the right to carry on the sole selling agency
of Bharat Ltd. or in any case to acquire a benefit of
an enduring nature. - It is true that in· this case no E
ascertained S\DD is mentioned for acquiring the right
or the enduring benefit. But in our opinion, this
faCtor aione is not a decisive factor ·1n every case.
The facts and the circumstances of every case have to
be looked into· and i f on the whole it appears that
w:hat was acquired was. an asset or an enduring benefit F
by expending a certain- slDD, the expenditure can well
be held to be.a capital expenditure and riot a revenue
expenditure. In certain cases, tit may well be that in
conjunction with other facts, the fact that there is
no ascertained swn mentioned in order to acquire the
asset or the enduring benefit, would lead to the, G
inference that the expenditure is not a capital
expenditure. But in this case, we have no doubt that
the amount in· queStloll was spent for acquiring an
asset- of· enduring benefit and, therefore~ we have to
hold that the expenditure in question was a capital
expenditure ..... .. H
522 SIJPREME COURT REPORTS (1985] SUPP.2 S.C.R.
A The High Court .also negatived the assessee' s stand that no
enduring asset was acquired and held:
"We cannot accept the assessee' s submission that the
asset aequired by it when it obtained assignment of
the sole selling agency agreement, is not of an
B enduring l\llture. Counsel for the ·assessee says that
the assessee only acquired the right to use the rights
under the sole selling agency agreement and that is
not an ass.et of a capital nature~ There is no warrant
for the sybmission, because clause l of the deed of
assignment provides in terms that the firm as a bene-
ficial owner assigned to the assessee .'the said agree-
c ment of the lst day of May 1951. • •••• ·and the full
benefit thereof as and from the lst day of January
1953 and a11 cOlllllission and other moneys payable or to
be payable ••••••• by the manufacturers. Secondly, the
right which the assessee acquired under the deed of
assignment was a right to act as the sole selling
agents till the lst day of May 1953 in the first
D instance, coupled with the right to have the sole
selling agency agreement renewed for an indefinite
period, though for two years at a stretch· lhere was
some faint argument before us as to the true meaning
and scope ,of the option of renewal, but we see no
doubt that under the agreement of the lst day of May
E 1951, the firm had the option to stipulate for a
renewal on the same terms and conditions as were
contained i,n that agreement, which must include the
term regarding the option for a further renewal for an
indefinite period._ Thus, the 'assessee obtained an
assignment ,of the agreement between the Company atid
F the firm. That agreement contained the right to have
the sole selling agency agreement renewed for an
indefinite period. It must follow that the assessee
acquired an.asset of an enduring nature."
Ordinarily, out of this finding the conclusion would have
G followed that the claim of deduction was not admissible as the
expenditure was for acquisition of a capital asset. The High
Court, however, referred to this Court's decision -in Travancore
Sugars & Qvsfrals Ltd •. v. Ccml..asiooer of lucome Tax, Kerala, 62
I.T.R. 566 = (1967] l s.c.R. 423 and adopting the reasonings relied
upon in that case to which we shall presently refer, came to
H hold:
C.I.T. v. JALAN TRADING CO. [RANGANATH MISRA, J.] 523
A
"In view of these circumstances, the Supreme Court
held that the payment of the annual sum was not in the
nature of capital expenditure but was in the nature of
revenue expenditure. Each one of the· three features
adverted to by the Supreme Court is present in the
instant case." B
and proceeded to conclude the matter by saying:
"We take the view that the case before us is in
material respects similar to the Travancore Sugar
case." c
The High Court did not examine the aspect relating to
whether the payment made by the assessee did not form part of its
·real income by saying: "It is enough for our purpose that the
payment is deductible under s. 10(2) of the Act."
D
A four Judge Bench of this Court in Assam Bengal Cement Co.
Ltd. v. c.-issioner of Income Tax, West Bengal, 27 I.T.R.
34=[1955] 1 S.C.R. 972, indicated that the line of demarcation
between capital expenditure and revenue expenditure is very thin.
Several English decisions were ref erred to and the Court approved
the opinion of the Full Bench of the Lahore High Court in
Benarsidas Jaganoath, In re. 15 I.T.R. 185, where Mahajan, J. (as E
he then was), speaking for the Court, had successfully attempted
a synthesis. This Court observed:
"The synthesis attempted by the full Bench of the
Lahore High Court truly enunciates the principles
which emerge from the authorities. In.cases where the F
expenditure is made for the initial outlay or for
extension of a business or a substantial replacement
of the equipment, there is no doubt that it is
capital expenditure. ,A capital asset of the business
is either acquired or extended or substantially
replaced and that outlay whatever be its source G
whether it is drawn from the capital or the income of
the concern is certainly in the nature of capital
expenditure. The question however arises for consi-
deration where expenditure is incurred while the busi-
. ness is going on and is not incurred either for
extension of the business or for the substantial H
replacement of its equipment. Such expenditure can be
looked at either from the point of view what is
acquired or from the point of view of what is the
524 SUPREME COURT REPORTS [l985J supp;2 s.c.R.
A source from which the expenditure is incurred. If the
expenditure is made for . acquiring or bringing into
existence an asset or advantage for the enduring
benefit of the business it is properly attributable to
capital and is of the nature of capital expenditure.
If on the other hand it is made not for the purpose of
ll bringing into existence any such asset or advantage
but for ru~ning the business or working it with a view
to produce the profits it is a revenue expenditure. If
any such asset _or advantage for the enduring benefit
of the business is thus acquired or brought into
existence it would be irnmaterial·whether the source of
the payment was the capital or the income of the
c concern or whether the payment was made once and for
all or was made periodically. The.aim and. object of
the expenditure would determine the character of the
expenditure whether it is a capital expenditure or a
revenue expenditure. 'lb.e source or t.he manner of the
payueit would then be of no consequence. It is only in
those cases where this test is of no avail that one
D may go to the test of fixed or circulating capital and
consider whether of the business or part of its circu-
lating capital. 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 i,t would be the nature of revenue expenditure.
E These tes.ts 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
F 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
G 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 dqwn above and the Courts of law would not
H ordinarily interfere with such finding of fact if they
have been arrived at on a proper application of these
principles."(emphasis ours)
C.I.T. v. JALAN TRADING CO. [RANGANATH MISRA, J.J 525
In that case before this Court, a lease was obtained with A
certain stipulations including the payment of a sum of Rs.5,000
per year. The Court found that it was an enduring benefit for the
benefit of the whole. business of the company. The fact that it
was a recurring payment was imnaterial because one had got to
look. to the nature of the payment which in its turn was determin-
ed by_ the nature of the asset which the company had acquired. The ll
asset which the Company had acquired in consideration of this
_recurring payment-. the right to carry on its business unfetter-
ed by any competition from outsiders within the area - was in the
nature of a capital asse_t and, therefore, the payment was not
deductible under s. 10(2) (xv) of the Act. The broad tests laid
down by this .Court in Assam Bengal Cement Co. Ltd.' e case have c
been accepted in several subsequent decisions Of this Court as
also by the High Courts in India.
The facts ln Travaneore Sugars & Chemi~.al s case were pecu-
1
liar. The assessee in that case purchased T.ravancore Sugar Ltd.,
a Government dlstillery at Negercoil and the b 1siuess assets of a
1
D
Government Tin.cture Factory· at Trivandruu under an agreement
dated June 18, 1937, ent2red into between the Government , of
. Travancore and the promo_ters of the assessee company. Under. the
agreemertt, cash consideration of Rs.3,25,000 was to be paid for
buying the assets of Travancore Sugars Ltd. In regard to the
distillery, the sale price . had to be arrived at on the basis of
joint valuation by the Engineers to be appointed by the parties. E
As regards the Tincture Factory, the book valuation was to be
adopted for fixing the consideration. The existing distillery
licence was agreed to stand recognised in ·the hands of the
assessee for a period . of five years after its termination.
Go\.~ernment also undertook to purchase pharmaceutical products
manufactured by the assessee at the Tincture Factory. Govern:inent F
reserved the right to nominate a director on the aoard of Direc-
tors of the assessee company without voting powers. The agreement
further stipulated payment to Goveniment of 20% of the net
profits earned by the company every year subject to a limit of
Rs.40,000 per arinum and certain other payments were also under-
, taken. The 20% stipulation was reduced to 10% by ·a subsequent
agreement. The question. that fell for consideration was whether
payment of Rs.42,480 by the assessee company to the Travancore
Government in terms of the agreeri:ent referred to above as modi-
fied, was allowable expenditure under s. 10 of the Act in the
year under consideration. This Court stated:
H
"It is often difftcult, in any particular case, to
decide and determine whether a particular expenditure
526 SUPREME COURT REPORTS [1985] SUPP;2 s.c.R.
is in the nature of capital .expenditure or in the
nature of revenue expenditure. It is 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. The Court has to
il look not only into the documents but also at the
surround,ing circumstances so as to arrive at a
decision as to what was the real nature of the
transaction from the commercial point of view. No
single test of universal application can be discovered
for a solution of the question. The name which the
parties ,may give to the transaction which is the
source of the receipt and the characterization of .the
c receipt by them are of little consequence. The Court
has to ascertain the true nature and character of the
transaction from the convenants of the agreement
tested on the light of surrounding circumstances."
So far as these observations forrru.lating the tests are
concerned, they are not different from those laid down by this
lJ
Court in Assam Bengal Cement Co.'s case. The Court then proceeded
to apply these tests to the facts of the case and observed:
"Examining the transaction from this point of view, it
is clear tn the present case that the consideration
for the sale of the three. undertakings in favour of
E
the appellant was: (1) the cash consideration mention-
ed in the principal agreement, viz., clauses 3, 4(a)
and 5(a); and (2) the consideration that GovertlJ'lent
shall be .entitled to twenty . per cent of the net
prof its earned by the appellant in every year subject
to a maximum of Rs.40,000 per annum. ·With regard to
F
the second part of the consideration there are three
important points to be noticed. In the first place,
the payment of connnission of twenty per cent on the
net prof its by the appellant in favour of the Govern-
ment is for an indefinite period and has no limitation
of time attached to it. In the second place, the pay-
G
ment of t~e cormnission is related to the annual
profits whi~h flow from the trading activities of the
appellant-company and the .payment has no relation to
the capital value of the assets. In the third place,
the annual payment of 20 per cent commission every
year is not related to or tied up, in any way, to any
H
fixed sum agreed between the undertakings. There isnot
)
I
C.I.T. V• JALAN TRADING CO. [RANGANATH MISRA, J.] 527
reference to any capital sum in this part of the A
agreement. On the contrary, the very nature of the
payments excludes the idea that any connection with
the capital sum was intended by the parties. It is
true that the purchaser may buy a running concern and
fix a certain price and the price may be payable in a
lump sum or may be payable by instalments. The mere B
fact that the capital sum is payable by instalments·
spread over a certain length of time will not convert
the nature of that payment from the capital expendi-
ture 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 c
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 artd payable by
instalments or by any particular method. In view of
these facts we are of opinion that the payment of the D
annual sum of Rs.42,480 in the present 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."
As we have already observed, the facts in thi's case were
peculiar. There was a substantial amount of outright Cash payment E
over and above which the indefinite annual payment _had been
stipulated.
It is interesting to .note that this Court by its judgment in
Travancore Sugars & Oiemicals Ltd. had sent down the matter to
the High Court for a re-disposal and the•very matter again came F
before this Court, this time at the instance of the Revenue and
the judgment is reported in Colllmissioner of Income Tax, Kerala v.
Travancore Sugars & °""'"'cats Ltd. 88 I.T.R. l = [1977] 2 S.C.R.
738. At page 10 of the Reports, this Court observed:
"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 similar binding
coVenant, one must avoid being caught in the maze of
judicial decisions rendered on different facts and
which always present distinguishing features for a
H
comparison with . the facts and circumstances of the
case in hand. Nor would it be conducive for clarity or
528 SUPREME COURT REPORTS [1985] SUPP.2 s.c.R.
'
A
for reaching a logical result if we were to concen-
trate on the facts of the decided cases with a view to
match , the· colour of the case with that of the case
which re,quires determination. The surer way of
arriving ~t a just conclusion would be to first ascer-
ll
tain· by -,reference to the expenditure is createQ.. and
thereafter to apply the principle emblamed in the
decisions of those facts. Judlcial statements on the
facts of a particular case can never assist courts in
the construction of an agreement or a statute which
was not ·considered in those judgm~nts or to ascertain
,, what the intention of the legislature was. What we
f·· rust 109k at is the contract or the statute or the
decree, in relation to its terms, the obligation
imposed and the purpGse for which the transaction was
entered .into."
We agree wit!l these observations. The tests indicated by
this court in Travancore Sugars &<lle:;n:lcals were not intended to
u be of general appl:cation but were given to bring into bold
relief the speci<l;l aspects of the case as the learned Judges
themselves stated. The High Court, committed a mistake in import-
ing these reason_ings as· tests of general application to be
applied to the facts of the presE"nt case though the facts were
indeed quite different. As already pointed out, there was a
definite sum of cash consideration in Travancore Sugars &
Chemicals' case a~d the special features were taken into account.
In the dispute before us the High Court was categorically found
that, a capital asset had been acquired under the arrangement.
Admittedly, the assessee was a new company and it had no other
business. It acquired under the contract'stipulating to pay 75%
F
of its annual net pro_fits, the r.lght to carry on the business on
a long ·term basis subject to the renewal of the agreement. The
first' of the. broad tests lafd down in Assam Bengal Cement Co. 's
case that the expenditure was made for the' initial ·outlay
squarely applies and on ·the finding that a capital ass.et had· been
acquired (a finding which has not been disput'd before us) we
G must hold that· the expendittire related to ~:cquisition of a
capital asset and was not admissible as a deduction under s.
10(2) (xv) of the Act.
With thi.s conclusion of ours and no more, the appeal
des.erved to b~ allowed. Mro S.T. Desai for the assessee -
H
respondent thereupon sought to raise the contention that once
the assessee had paid 75% of its profits of the year, the
c.r.T. v. JALAN TRADING.CO .• !RANGANATH MISRA, J.J 529
A
amount claimed as a deduction was no mor.e in its hands as income
and on the principle of real ii:icome in-the hands or- the _assessee,
we should hold· the Same was -~at income within the· meaning· of
s.10(1) of the Act. 1nitlal1y, objection was raised tu this move
of Mr.· Desai by learned .counsel foi- · the .Revenue .on . the gr.ou°:d
. that such a plea had not been canvassed in the earlier stages of
·the matter. The questio_n referred to· the High Court did raise the
issue and the High Court in the penultimate .. paragraph of lls
judgment had declined to go into this question by say'ing t:1at it
Was-sufficient for the disposal 6f the reference:once it took the
view that the 'payment was .deductible under s. 10(2) (xv) of the
·Act. Mr •. Desat wanted: this aspect of the matter to be sent back c
to the High Court, but we were not inclined to do so in
consideration of the.fact that the·assessment is for the year
1954-55 - a .period· three decades away •. Thereupon·, coUii.sel for
both sides agreed to advance.their .arguments in. regard to- this
aspect to ?nable this Court to firlally deal with' this' question
avoiding rec.ind. Section 10(1) of the Act provides: ll
".The· tax shall be payable by an. assessee under the
head '.Ptofits & ·gains of business, profession or
vocation' in res'pect of the p·rofits 'and gains of a_ny
business, p'rofession or vocatiOn c·arried on by him."
Tax, therefore, unde_r the provision. is payable on income and E
if incoine is not earned by the assessee no tax is payable. It
follows that· tax is leviable on the' real· income in the hands of
the assessee. Mr. Desai for ·the assessee· has maintained that when
75% of the net profits have been paid to the partnership firm,
the real inCome in the hands of the assessee was reduced to 25%
·of ·the·.net profit's:and that· amqunt ·alone was assessable ·to tax. F
M/s. Jalan Trading Co., the partnership had initially been
·appointed as the sole· selling agent. On October,.'16, 1952, the
assessee Company came. to be incorporated ·and Soon after incorpo-
ration by ·agreement "the rlghts of the fim we·re assigned to the
assessee company. Neither the· Income Tax Officer nor,. the two G
appellate· authorities and nor ··even the High Court 'went into the
question ·as to: whether the assessee was in fact Separate from,
and independent, of the, partnet:'shi·p firm. It is true that the
tenability of the claim of deductibility as a business
expenditure of the-amount was examined by taking it for granted
· that ·the payment had been made by the assessee to the firm. But H
the exact position having not been investigated no finding has
·been recorded· at any stage• The fact that the partnership and the
530 SUPREME COURT REPORTS [1985] SUPP.2 s.c.R.
A
assessee company bear the same namE! and soon after incorporation
the agreement assigning the firm's rights in favour of the
company had been entered, had obviously led the Income Tax
Officer to doubt the bona fides. That is why in his order. of
assessment the Income Tax Officer had observed:
B
"The payment is also not allowable as it is only an
apportionment of profits as pointed out above, ·as it
is nothing but 75% of the net profits of the assessee
company and although it has been written to the profit
and loss account actually it is nothing but an
apport!'onment of profits and as such the amount is not
allowable."
c
The Appellate Assistant Commissioner took note of the
position that the assessment of Jalan Trading Co., the firm, was
not before him and observed:
"The amm,mt claimed cannot also be regarded as deduc-
tfon in the trading account Itself because the royalty
D
is ascertained ultima.tely on the profits and does not
go to add to the cost of ·the drurns that are p•irchased
from the ma!lufacturers. Therefore, there can be no
question of giving any deduction under s. 10(1) of the
Act. The concept of 'real income' apparently based on
the dedeion of the Bombay· High Court in the case of
E
31. l.T.R. 735 has also no relevance because there is
no question of any deviation of profits of the
appella'1t company by any overriding title."
The Appellate Tribunal in answer to the reiteration of the
F point raised, said:
•
"Shri Mistry next submitted that the amount in
questio? is also deductible under s. 10(1) as a
trading item and in any event what is to be determined
is the assessee's real income and that can only be
G determined after deducting from the assessee's total
income the amount paid to M/s. Jalan Trading Co. It
was also stated that in the hands of the tecipient the
said amount of Rs.7,93,000 and odd was assessed as
revenue receipts and assessing the same in the hands
of the assessee would amount to double taxation. In
ll our opinion, this later submission of Shri Mistry can
easily be disposed of because even though the real
c.r.r. v. JALAN TRADING co. [RANGANATH MISRA, J. J 53)
income of the assessee is to be taxed, it is not that A
each and every outgoing is to be taken into considera-
tion in arrtving at the real income of the assessee
and if the outgolng is in fact of a capltal nature,
the same can never be considered as an allowable .
deduction under the Act." B
We are impressed by the argument advanced on behalf of the
Revenue that if the amount had been spent for obtaining a capital ·-
asset, the assessee would not be entitled to claim it as a
decution under s;lO(l) of the Act and on the, principle of
taxation that income tax is to be levied on the real income, the
amount paid for obtaining capital asset would not be deductible.
In such circumstances, we are inclined to agree with the
appellant's submission that there is no merit in this aspect of
the matter and no relief is admissible to the assessee on that l)
acore.
We allow the appeal and vacate the judgment of the High
Court and direct that the Tribunal's decision shall be given
effect to• Parties are directed to bear their own costs both ~
before the High Court as also this Court.
P~B.R. Appeal allowed.
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