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

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.

Court's decision (1 = petition accepted / positive for appellant, 0 = rejected / negative): 0

Reasoning from the judgment:
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.