Case: M.K. Brothers Ltd Vs. Commissioner of Income Tax, Kanpur

Khanna, J.1. This appeal on certificate granted by the Allahabad High Court is directed against the judgment of that Court whereby it answered the following two questions referred to it under Section 66 (1) of the Indian Income Tax Act, 1922 (hereinafter referred to as the Act) against the appellant and in favour of revenue :"1) Whether on the facts and on a true and proper interpretation of the agreement dated 31-7-1956, between the British India Corporation and the appellant company, the letters of Sri Kailash Nath Agarwal, the letters of Managing directors, the sum of Rupees 43,333/- retained by the British India Corporation and adjusted by it to the credit of Sharma and Co. was the assessable income of the appellant company?2) Whether on the facts and circumstances of the case, the sum of Rs. 43,333/- represented an expenditure under Section 10 ?"2. The matter relates to the assessment year 1956-57. The appellant is a private limited company and Kailash Nath Agarwal is one of its directors. As per agreement dated July 31, 1956 the appellant was appointed with effect from April 1, 1955 the sole selling agent of the Kanpur Cotton Mills for the sale of yarn and cloth manufactured by the said mills. The Kanpur Cotton Mills is owned by the British India Corporation (hereinafter referred to as BIC). Prior to the appellants appointment Sharma and Co., a partnership firm, was functioning as the sole, selling agent of the Kanpur Cotton Mills. The amount due by Sharma and Co. to the Kanpur Cotton Mills as on March 21, 1955 was Rs. 8,39,350/15/6 inclusive of interest. On March 23, 1955 a letter was addressed on behalf of Sharma and Co. to the Managing Director of BIC stating that an agreement had been entered into with Kailash Nath Agarwal whereby Sharma and Co. had agreed to give up the sole selling agency of the Kanpur Cotton Mills. The Managing Director of BIC was requested to appoint Kailash Nath Agarwal or any firm or company formed by him for this purpose as the sole selling agent in place of Sharma and Co. Reference was also made in that letter to an agreement between Sharma and Co. and Kailash Nath Agarwal in the following words :"As you will notice from the agreement with Sri Kailash Nath Agarwal we are entitled to receive one seventh of the commission due to the new selling agency or to a sum of Rs. 50,000/- per annum whichever is greater till your dues with interest are fully liquidated. We do hereby authorise you to retain this amount thus becoming due to us out of the commission payable to the agency and adjust the same to our firms account with the Corporation."On the same day, i.e. March 23, 1955 Kailash Nath Agarwal addressed a letter to the Managing Director of BIC informing him of the agreement with Sharma and Co. and requesting for the grant of sole selling agency to the appellant. The letter concluded as follows :"I hereby authorise you in case you are pleased to grant your sole selling agency to my said firm to retain one-seventh of our commission for adjustment in the account of M/s. Sharma and Co. with minimum of Rupees 50,000/- per annum till your dues against them are cleared with interest." The Managing Director of BIC later on that day, i.e. March 23, 1955 addressed a letter to Sharma and Co. accepting its resignation from the sole selling agency of the Kanpur Cotton Mills and about the appointment of Kailash Nath Agarwal or his nominee as the sole selling agent in succession to Sharma and Co. In regard to the liquidation of dues from Sharma and Co. the Managing Director of BIC wrote :"As agreed between Shri Kailash Nath Agarwal and yourselves we shall deduct one seventh of the commission or Rs. 50,000/- whichever is greater out of the commission earned by the new sole selling agents and credit the same to your account with us till our dues against you standing today at Rs. 8,39,350/15/6 are completely liquidated with interest thereon at 6%." On June 31, 1956 an indenture was executed by BIC and the appellant relating to the appointment of the appellant as the selling agent of the Kanpur Cotton Mills for the sale of yarn, cloth and cotton manufactures with effect from April 1, 1955. In this indenture the appellant ratified the agreement entered into by Kailash Nath Agarwal with Sharma and Co. on March 23, 1955 and authorised BIC "to give effect to the said agreement generally and in particular to ratain an amount equal to one-seventh of the trade discount of 1 3/4% due to the sole selling agents with a minimum of Rs. 50,000/- per annum so that the amount payable to the sole selling agents shall be the amount payable at the rate of 1 3/4% minus the aforesaid amount retained by the corporation as payable to M/s. Sharma and Co." Clauses 12 and 13 of the indenture were as under :"Clause 12That in the event of the dissolution of M/s. Sharma and Co. before the complete repayment of their liability the sole selling agents agree that the corporation may continue to retain an amount equal to one-seventh of the trade discount of 1 3/4 % or Rs. 50,000/- whichever is greater and adjust it towards such dues of M/s. Sharma and Co. as may then be standing.Clause 13That the authority given above to the corporation to retain and adjust a part of the trade discount towards the outstanding against M/s. Sharma and Co. will not be revocable and will be binding on the sole selling agents, their successor, or assigns only so long as they act as the corporations sole selling agents and will be deemed to be a condition on which the sole selling agency has been granted to the agents. The agents will have no claim whatsoever to any such amounts retained out of their normal trade discount and adjusted in the account of M/s. Sharma and Co. as if the amount so retained was not payable to them."3. During the year under reference, the commission as per terms of the indenture dated July 31, 1956 payable to the appellant amounted to Rs. 2,06,283. Out of this amount. Rs. 43,333 were retained by BIC under the contract for adjustment against the outstanding dues of Sharma and Co. in accordance with the terms of the indenture. In its statement of account the appellant credited the full amount of commission of Rs. 2,06,283 to its profit and loss account. The sum of Rupees 43,333 was, however, shown as a deduction therefrom. During the assessment proceedings, the Income Tax Officer disallowed the above deduction. The order of the Income Tax Officer in this respect was upheld by the Appellant Assistant Commissioner in appeal as well as by the Income Tax Appellate Tribunal in second appeal. On application filed by the appellant, the Tribunal referred the questions reproduced earlier to the High Court. The High Court, as stated above, answered the two questions against the appellant.4. In appeal Mr. Maheshwari on behalf of the appellant has argued that the amount of Rs. 43,333 was a permissible deduction and the High Court was in error in deciding this matter against the appellant. There is, in our opinion, no force in this contention and we agree with Mr. Ram Chandran, learned counsel for the respondent, that the judgment of the High Court should be upheld. It would appear from the resume of facts given above that in March 1955 an amount of Rs. 8,39,350/15/6 was due to BIC from the firm Sharma and Co. who was the previous sole selling agent of the Kanpur Cotton Mills. As a result of agreement between the appellant, BIC and Sharma and Co. the appellant undertook to discharge the liability of Sharma and Co. in lieu of being appointed the sole selling agent of the Kanpur Cotton Mills in place of Sharma and Co. It can, therefore, be said that the appellant got the sole selling agency of the Kanpur Cotton Mills in consideration of its agreeing to pay Rs. 8,39,350/15/6 which was the amount due from Sharma and Co. to BIC. It is not disputed by Mr. Maheshwari that if the amount of Rs. 8,39,350/15/6 had been paid by the appellant in lump sum in consideration of its being appointed the sole selling agent of the Kanpur Cotton Mills, the payment would have constituted capital expenditure as it was an amount paid for acquiring or bringing into existence an asset or advantage for the enduring benefit of the business. The fact that the amount was paid not in lump sum but was paid in instalments through deductions out of the commission due to the appellant would not, in our opinion, make any difference. The answer to the question as to whether the money paid is a revenue expenditure or capital expenditure depends not so much upon the fact as to whether the amount paid is large or small or whether it has been paid in lump sum or by installments, as it does upon the purpose for which the payment has been made and expenditure incurred. It is the real nature and quality of the payment and not the quantum or manner of the payment which would prove decisive. If the object of making the payment is to acquire a capital asset, the payment would partake of the character of a capital payment even though it is made not in lump sum but by installments over a period of time.On the contrary, payment made in the course of and for the purpose of carrying on business or trading activity would be revenue expenditure even though the payment is of a large amount and has not to be made periodically. As observed by this Court in the case of Assam Bengal Cement Co. Ltd. v. Commr. of Income Tax, West Bengal, (1955) 27 ITR 34 at p. 45 (SC), 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 other hand it is made not for the purpose of bringing into existence any such asset or advantage but for running 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 immaterial whether the source of the payment was the capital or the income of the 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. The source or the manner of the payment would then be of no consequence. We may also in this connection refer to the following observations of this Court in the case of P. H. Divecha (Deceased) and After Him His Legal Representatives v. Commr. of Income Tax, Bombay City I (1963) 489 ITR 222 = (AIR 1964 SC 758 ) :"It may also be stated as a general rule that the fact that the amount involved was large or that it was periodic in character have no decisive bearing upon the matter. A payment may even be described as "pay", "remuneration", etc., but that does not determine its quality, though the name by which it has been called may be relevant in determining its true nature because this gives an indication of how the person who paid the money and the person who received it viewed it in the first instance. The periodicity of the payment does not make the payment a recurring income because periodicity may be the result of convenience and not necessarily the result of the establishment of a source expected to be productive over a certain period. These general principles have been settled firmly by this Court in a large number of cases."5. Although the above observations were made in the contest of periodic receipts, they have a direct bearing even on cases relating to periodic payments.6. Mr. Maheshwari has referred to clause 13 of the indenture reproduced above and has contended that the appellant could make no claim to the amount of Rs. 43,333 which had been retained by BIC. This fact, in our opinion, would make no material difference so far as the true nature of that amount was concerned. The amount was deducted by BIC in pursuance of the agreement entered into by the appellant with BIC and Sharma and Co., according to which the appellant had to pay that amount in the form of deduction out of its commission in consideration of being appointed the sole selling agents of the Kanpur Cotton Mills. The present is a case relating to the application of income to discharge a liability incurred not in the course of running the business but a liability undertaken for the purpose of acquiring the sole selling agency right which was indisputably an asset of capital nature.

Decision reasoning: 0[ds]4. In appeal Mr. Maheshwari on behalf of the appellant has argued that the amount of Rs. 43,333 was a permissible deduction and the High Court was in error in deciding this matter against the appellant.There is, in our opinion, no force in this contention and we agree with Mr. Ram Chandran, learned counsel for the respondent, that the judgment of the High Court should be upheld. It would appear from the resume of facts given above that in March 1955 an amount of Rs. 8,39,350/15/6 was due to BIC from the firm Sharma and Co. who was the previous sole selling agent of the Kanpur Cotton Mills. As a result of agreement between the appellant, BIC and Sharma and Co. the appellant undertook to discharge the liability of Sharma and Co. in lieu of being appointed the sole selling agent of the Kanpur Cotton Mills in place of Sharma and Co. It can, therefore, be said that the appellant got the sole selling agency of the Kanpur Cotton Mills in consideration of its agreeing to pay Rs. 8,39,350/15/6 which was the amount due from Sharma and Co. to BIC. It is not disputed by Mr. Maheshwari that if the amount of Rs. 8,39,350/15/6 had been paid by the appellant in lump sum in consideration of its being appointed the sole selling agent of the Kanpur Cotton Mills, the payment would have constituted capital expenditure as it was an amount paid for acquiring or bringing into existence an asset or advantage for the enduring benefit of the business. The fact that the amount was paid not in lump sum but was paid in instalments through deductions out of the commission due to the appellant would not, in our opinion, make any difference. The answer to the question as to whether the money paid is a revenue expenditure or capital expenditure depends not so much upon the fact as to whether the amount paid is large or small or whether it has been paid in lump sum or by installments, as it does upon the purpose for which the payment has been made and expenditure incurred. It is the real nature and quality of the payment and not the quantum or manner of the payment which would prove decisive. If the object of making the payment is to acquire a capital asset, the payment would partake of the character of a capital payment even though it is made not in lump sum but by installments over a period of time.On the contrary, payment made in the course of and for the purpose of carrying on business or trading activity would be revenue expenditure even though the payment is of a large amount and has not to be mademay also in this connection refer to the following observations of this Court in the case of P. H. Divecha (Deceased) and After Him His Legal Representatives v. Commr. of Income Tax, Bombay City I (1963) 489 ITR 222 = (AIR 1964 SC 758  ) :"It may also be stated as a general rule that the fact that the amount involved was large or that it was periodic in character have no decisive bearing upon the matter. A payment may even be described as "pay", "remuneration", etc., but that does not determine its quality, though the name by which it has been called may be relevant in determining its true nature because this gives an indication of how the person who paid the money and the person who received it viewed it in the first instance. The periodicity of the payment does not make the payment a recurring income because periodicity may be the result of convenience and not necessarily the result of the establishment of a source expected to be productive over a certain period. These general principles have been settled firmly by this Court in a large number of cases."5. Although the above observations were made in the contest of periodic receipts, they have a direct bearing even on cases relating to periodic payments.6.Mr. Maheshwari has referred to clause 13 of the indenture reproduced above and has contended that the appellant could make no claim to the amount of Rs. 43,333 which had been retained by BIC.This fact, in our opinion, would make no material difference so far as the true nature of that amount was concerned. The amount was deducted by BIC in pursuance of the agreement entered into by the appellant with BIC and Sharma and Co., according to which the appellant had to pay that amount in the form of deduction out of its commission in consideration of being appointed the sole selling agents of the Kanpur Cotton Mills. The present is a case relating to the application of income to discharge a liability incurred not in the course of running the business but a liability undertaken for the purpose of acquiring the sole selling agency right which was indisputably an asset of capital nature.