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

2. The matter relates to the assessment years, the corresponding accounting years for which ended5 respectively.      3. The respondent was one of the companies which exported coal from India to Burma before the Second World War. Amongst the other exporters were Messrs. Karamchand Thapar and Bros. Ltd., Messrs. Macheill Barry Ltd., Messrs. Andrew Yule and Co. Ltd. and Messrs. H. V. Low and Co. Ltd. The shipment of coal to Burma Railways before the war was the subject of open tender. After the cessation of hostilities in 1946, it became possible to resume the export of coal to Burma. In order to overcome the difficulties in the conduct of the trade following the war, the members of the coal trade in Bengal formed an association styled Coal Exporters and Charters Association. The respondent company as well as M/s. H. V. Low and Co. Ltd. were two of the major members of the said association. When M/s. H. V. Low and Co. Ltd. learnt of the resumption of coal export to Burma by the respondent in 1946, they also expressed intention to export coal to Burma. Thereupon the two companies came to an understanding and arrived at a mutual arrangement of agreement on the following lines:(i) M/s. H. V. Low and Co. Ltd. would not export coal to Burma during the subsistence of the agreement.      (ii) M/s. H. V. Low and Co. Ltd. would assist the respondent in procuring coal for shipment to Burma.      (iii) The respondent would carry on the coal shipping business and pay M/s. H. V. Low and Co. Ltd. @ Rupees /5/per ton (subsequently raised to Rs. 1/5/per ton) of coal shipped to Burmax Officer held that the expenditures claimed could not be allowed, as there was no written agreement in proof of the alleged arrangement and it was not possible to say that the payments were made for the purpose of the assessees business. Thex Officer further held that even assuming that the payments were made to keep off M/s. H. V. Low and Co. Ltd. from the Burma trade, they were payments to secure a monopoly and were not, therefore, allowable as revenue expenditure. The Appellate Assistant Commissioner on appeal upheld the order of thex Officer.      6. When the matter came up in second appeal before thex Appellate Tribunal, the Tribunal found that there was some discrepancy in the facts stated on behalf of the assessee and the Revenue. The Tribunal thereupon required the respondent company to swear an affidavit in support of the facts relied upon by it. In pursuance thereof, Sir Walter Michelmore, Director of Managing Agents of the respondent company filed an affidavit. Sir Walter was also examined orally before the Tribunal. The case was thereupon remanded to thex Officer to verify the facts as stated in the affidavit of Sir Walter and report back to the Tribunal. Thex Officer after making further investigation submitted his report. In deciding the appeal, the Tribunal formulated two points for its decision:      (1) Were the payments for the purpose of the assessees trade in terms of the alleged agreement?      (2) If the answer to the above question is in the affirmative, did the assessee acquire a monopoly by such payment?      Both the questions were answered in favour of the respondent by the Tribunal. It was held that the payments were made in pursuance of the alleged agreement in the interest of the respondents trade. The version of the respondent about its agreement with M/s. H. V. Low and Co. Ltd. was accepted. According to the agreement, M/s. H. V. Low and Co. Ltd. agreed to assist the respondent in procuring coal for export to Burma whenever asked to do and further agreed not to export coal to Burma during the subsistence of the arrangement. The agreement was found to have been acted upon and it was held that M/s. H. V. Low and Co. Ltd. supplied varying quantities of coal to the respondent for shipment to Burma. It was further held that the respondent company did not acquire any monopoly rights to carry on Burma trade and the impugned payments were made to carry on the trade in a more facile and profitable manner. The Tribunal found that the arrangement arrived at verbally between the respondent and M/s. H. V. Low and Co. Ltd. was a temporary measure liable to be terminated at will and the respondent company did not derive any advantage of an enduring character by such payments. The expenditures in question were, in the opinion of the Tribunal, attributable to revenue and not to capital. As such, they were held to be permissible expenditures under Sec. 10 (2) (xv) of the Act.      7. On application filed by the Revenue, the following question was referred to the High Court:Whether on the facts and in the circumstances of the case, the payments made by the assessee to M/s. H. V. Low and Co. Ltd. or their nominees were of a capital nature and as such not allowable under section 10 (2) (xv) of theIt was not disputed before the High Court that there was an agreement between the respondent and M/s. H. V. Low and Co. Ltd. on terms stated by the respondent and that the payments in question were made under that agreement. The High Court held that the arrangement entered into by the respondent with M/s. H. V. Low and Co. Ltd. was not such as was likely to have an enduring beneficial effect. In the opinion of the High Court, there was no certainty of duration and the arrangement could be terminated or revoked at any time. The consideration of the arrangement it was observed, was not paid once for all but was related to uncertain shipments to be made. The arrangement, it was further held, did not create any monopoly or bring about any capital advantage to the assessee. The respondent was held entitled to claim the deduction of the expenditures under section 10 (2) (xv) of the Act. In the result, the question referred to the Court was answered in the negative and in favour of the assessee.

Court's reasoning:
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.