Case: C.I.T. West Bengal Ii, Calcutta Vs. Coal Shipment (P) Ltd

agreed between the parties. The dictum laid down by this Court in Travancore Sugars and Chemicals Ltd. v. Commr. of Income-tax, Kerala, 62 ITR 566 = (AIR 1967 SC 477 ) in the circumstances is attracted. The appellant company in that case was to take over the assets of sugar manufacturing concern a distillery and a tincture factory of the Government of Travancore. The promoters of the appellant company in that connection entered into an agreement with the Government. The cash consideration for the sale of the assets of the sugar manufacturing concern was Rupees 3.25 lakhs, that for the sale of the distillery was agreed to be arrived at as a result of joint valuation and that for the sale of the assets of the tincture factory was the book value. The Government agreed to recognise the transfer of the licence for the distillery to the appellant company and to secure the continuance of the licence for a period of 5 years after the termination of the existing licence. The Government also agreed to purchase the pharmaceutical products manufactured by the appellant company. Apart from the cash consideration, Clause 7 of the agreement provided that the Government would be entitled to 20 per cent of the annual net profits subject to a maximum of Rupees 40,000/- after providing for depreciation and remuneration of the secretaries and treasurers. Clause 7 was amended in January, 1947 to the effect that the Government would be entitled to 10 per cent. of the annual net profits. Question arose whether an amount of Rupees 42,480/- which was payable under Clause 7 of the agreement was a permissible expenditure under Section 10 of the Income-tax Act. It was held that the above payment was in the nature of revenue expenditure and not capital expenditure. Ramaswami J. speaking for the Court dealt with the matter in the following words :- Examining the transaction from this point of view, it is clear in the present case that the consideration for the sale of the three undertakings in favour of the appellant was: (1) the cash consideration mentioned in the principal agreement, viz. Clauses 3, 4 (a) and 5 (a) and (2) the consideration, that the Government shall be entitled to twenty per cent. of the net profits earned by the appellant in every year subject to a maximum of Rupees 40,000/- per annum. With regard to the second part of the consideration there are three important points to be noticed. In the first place, the payment of commission of twenty per cent. on the net profits by the appellant in favour of the Government is for an indefinite period and has no limitation of time attached to it. In the second place, the payment of the commission is related to the annual profits which 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 fixed sum agreed between the parties as part of the purchase price of the three undertakings. There is no reference to any capital sum in this part of the 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. The above observations in our opinion have a direct bearing on the present case. 17. Mr. Desai has referred to the following observations of Lord Greens in Henriksen (Inspector of Taxes) v. Grafton Hotel Ltd., (1943) 11 ITR (Supp) 10 :- It appears to me that there can be no difference in principle between a payment out-and-out for monopoly value and a payment in respect of a term. Each licence granted for a term must stand by itself since an application for its renewal falls to be treated as an application for a new licence. This is what I mean when I say that there is a false appearance of periodicity about these payments. Whenever a licence is granted for a term, the payment is made as on a purchase of monopoly for that term. When a licence is granted for a subsequent term, the monopoly value must be paid in respect of that term, and so on. The payments are recurrent if the licence is renewed; they are not periodical, so as to give them the quality of payments which ought to be debited to revenue account. The thing that is paid for is of a permanent quality although its permanence being conditioned by the length of the term is short-lived. A payment of this character appears to me to fall into the same class as the payment of a premium on the grant of a lease which is admittedly not deductible. 18. Particular reliance has been placed by Mr. Desai upon the concluding part of the above observations. The portion relied upon, in our opinion, has to be read in the context of the preceding lines and the facts of that case. The lessees of the licenced premises in that case, under a covenant in their lease, paid annually certain sums imposed by the licensing justices as instalments of the monopoly on the grant and renewal of the licence for three years period. It was contended that those sums were not capital payments but should be regarded as revenue payments. It was held that monopoly value payments were imposed for the term of the licence on grant or renewal though the fact that permission was given to pay by yearly instalments gave a false appearance of periodicity. Such payments, in the opinion of the Court, fell into the same class as a premium paid on the grant of a lease and as such should be regarded as capital nature. It is obvious that the question involved in that case was different and the appellant can derive no assistance from it.

Decision (1 = appeal accepted, 0 = rejected): 0

Explanation:
0[ds]8. We have heard Mr. Desai on behalf of the appellant and Mr. Palkhiwala on behalf of the respondent and are of the opinion that there is no merit in these appeals. The Tribunal has found that the amounts in question were paid by the respondent to M/s. H. V. Low and Co. Ltd. in pursuance of the agreement according to which M/s. H. V. Low and Co. Ltd. were to assist the respondent in procuring coal for shipment to Burma and were themselves not to export coal to Burma during the subsistence of the agreement. The above findings of fact are for the purpose of these proceedings, binding upon the appellant and consequently no attempt was made either in the High Court or in this Court to assail them. The payments which were made by the respondent to M/s. H. V. Low and Co. Ltd., it would thus appear were because of the assistance rendered by them for shipment of coal to Burma and for abstaining from exporting coal to Burma during the subsistence of the agreement. So far as the payment is concerned which was made to M/s. H. V. Low and Co. Ltd. for assistance to the respondent in procuring coal for shipment to Burma, it was admittedly an item of revenue expenditure. The controversy between the parties has centered on the point as to whether that part of the payment which was made because of M/s. H. V. Low and Co. Ltd. having agreed not to export coal to Burma during the subsistence of the agreement constituted capital expenditure or revenue expenditure9. Mr. Desai on behalf of the appellant contends that as the payment was made for warding off competition by rival coal exporters, the payment should be held to be a capital expenditure. The fact that there was no certainty of the duration of the arrangement between the respondent and M/s. H. V. Low and Co. and the same could be terminated at any time, according to the learned counsel, is wholly immaterial. As against that, Mr. Palkhiwala argues that in order to constitute capital expenditure, the object of the expenditure should be to secure an advantage of enduring nature. When there is no certainty of the duration of the arrangement and the same can be revoked at any time, the advantage cannot be said to be of an enduring character and the expenditure cannot be held to be of a capital nature. Further as the payment was related to the quantum of coal shipped to Burma in the course of trading activity and was not connected with the capital value of the assets, the payment, Mr. Palkhiwala submits, should be considered to be revenue expenditure. In our opinion, there is considerable force in Mr. Palkhiwalas submissionAny other view would have the effect of rendering the word enduring to be meaningless. No cogent ground or valid reason has been given to us in support of the contention that even though the benefit from the arrangement to the respondent may not be of a permanent or enduring nature, the payments made in pursuance of that arrangement would still be capital expenditure. Such a contention indeed was repelled by the Judicial Committee in the case of Commr. of Taxes v. Nechanga Consolidated Copper Mines Ltd., (1965) 58 ITR 241. The respondent company in that case together with two other companiesRhokana Corporation Ltd. and Bancroft Mines Ltd. formed a group for carrying on the business of copper mining. Following a steep fall in the price of copper in the world market the group, in common with other producers, decided voluntarily to cut their production by 10 per cent. In effecting the cut, it was agreed that Bancroft Mines Ltd. should cease production for one year and that the respondent company and Rhokana Corporation Ltd. should undertake between them the whole group programme for the year reduced by the overall cut of 10 per cent. It was further agreed to pay a sum to Bancroft Mines Ltd. to compensate it for the abandonment of the production for the year. Question arose whether the compensation which the respondent Company had paid to Bancroft Mines Ltd. was expenditure of capital nature? The Judicial Committee held that the compensation paid was an allowable deduction in determining the respondent Companys taxable income. The expenditure, in the view of the Judicial Committee, had no analogy with expenditure for the purpose of acquiring a business or a benefit of long term or enduring contractAlthough we agree that payment made to ward off competition in business to a rival dealer would constitute capital expenditure if the object of making that payment is to derive an advantage by eliminating the competition over some length of time, the same result would not allow if there is no certainty of the duration of the advantage and the same can be put to an end at any time. How long the period of contemplated advantage should be in order to constitute enduring benefit would depend upon the circumstances and the facts of each individual case18. Particular reliance has been placed by Mr. Desai upon the concluding part of the above observations. The portion relied upon, in our opinion, has to be read in the context of the preceding lines and the facts of that case. The lessees of the licenced premises in that case, under a covenant in their lease, paid annually certain sums imposed by the licensing justices as instalments of the monopoly on the grant and renewal of the licence for three years period. It was contended that those sums were not capital payments but should be regarded as revenue payments. It was held that monopoly value payments were imposed for the term of the licence on grant or renewal though the fact that permission was given to pay by yearly instalments gave a false appearance of periodicity. Such payments, in the opinion of the Court, fell into the same class as a premium paid on the grant of a lease and as such should be regarded as capital nature. It is obvious that the question involved in that case was different and the appellant can derive no assistance from it.