Case: Commissioner Of Income-Tax, Kerala, Ernakulam Vs. Travancore Sugar &amp; Chemicals Ltd

Inasmuch as this Court had earlier considered the case we may take the facts as stated in the following passage in that judgmentappellant 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. They 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 and Co. Ltd., the promoters of the. Under the said agreement the assets of all the three concerns were agreed to be sold by the Government of Travancore to the. 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 rupees. Clause 4 (a) provided that the cash consideration for the sale of the Government Distillery shall be arrived at as a result of joint valuation by the engineers to be appointed by the parties. Clause 5 (a) stated that the cash consideration for the sale of assets of the Government Tincture Factory shall be the value according to the books. Under clause 4 (b) and (c) of the agreement the Government undertook to recoggnise the transfer of the licence from the licensees of the distillery to the appellant and to secure to it the continuance of the licence for a continuous period of five years after the termination of the then existing licence. Under clause 5 (b) of the agreement the Government agreed to purchase the pharmaceutical products manufactured by the appellant in the tincture factory, for its medical requirements. Under clause 6 of the agreement all books of account and connected documents are to be open to inspection by the authorised officers of the Government. Under clause 10 the Government was entitled to nominate a director on the board of directors of they who would not be entitled to any voting power or to interfere with the normal management of the company. Apart from the cash consideration referred to in the agreement. Cl. 7 of the said agreement provided for further payments as follows :"(7) The Government shall be entitled to twenty per cent of the net profits earned by the company in every year subject however to a maximum of rupees forty thousand per annum such net profits for the purposes of this clause to be ascertained by deduction of expenditure from gross income and also after(i) provision has been made for depreciation at not less than the rates of allowances provided for in thex law for the time being in force, and

Reasoning: The learned advocate for the Revenue however at the outset tried to assail the statement of Mathew, J. that the Supreme Court had held that the amount paid to the Government was not a capital expenditure but a revenue expenditure because he realised that if that finding be assailed then it would be immaterial whether the amount paid to the Government amounted to diversion of the profits before they reached the assessee by an overriding title or whether it was otherwise an allowable deduction under Section 10 (2) (xv) of thex Act, 1922. In support of the stand taken by him, he submits that a decision of this Court cannot be otiose and if that is so then it must be assumed that the question wheter the amount is of a capital expenditure or revenue expenditure is still open not only for the Kerala High Court to determine but also for this Court to gointo.We cannot accept this contention in the light of the finding given by this Court where not only did it hold that the amount of Rs. 42,480/was not capital expenditure but that it was also a revenue expenditure but that it was also a revenue expenditure. Having so held this Court went further and said that the judgment of the Kerala High Court on that point must be overruled. Can there be anything more categorical than this finding ? We think not, Raghvan, J. did hint at this incongruity when after pointing out that this Court had held that the payment was not in the nature of a capital payment but was in the nature of revenue payment he said :"Still the Supreme Court observed since the other questions ............. were not decided by this Court the Supreme Court could not give an answer to the question referred"The learned advocate for the Revenue finding himself in this difficulty attempted to create a dichotomy under which according to him both the capital and revenue nature of the expenditure as well as the payment being wholly and exclusively laid out for the purpose of the business are included in the aforesaid Cl. (xv) ofn (2) of S.10.