Judicial Analysis Court Copy Headnote Facts Arguments Court observation

1966 Supreme(SC) 210

SUPREME COURT OF INDIA
J.C. SHAH, V. RAMASWAMI AND V. BHARGAVA, JJ.
The Travancore Sugars and Chemicals Ltd., Appellant
Versus
The Commissioner of Income-tax, Kerala, Respondent.
Civil Appeal No. 324 of 1965, dated 20-9-1966
Advocates appeared
Mr. A. K. Sen, Senior Advocate, (Mr. G. L. Sanghi, Advocate and Mr. B. R. Agarwala, Advocate of M/s. Gagrat and Co., with him), for Appellant; Mr. S. T. Desai, Senior Advocate, (M/s. S. K. Iyer and R. N. Sachthey, Advocates, with him), for Respondent.

Advocates:
A.K.SEN GUPTA, B.R.AGRAWAL, G.L.SANGHI, GAGRAT JANEDRA LAL, R.N.SACH, S.K.IYER, S.T.DESAI

Payments made in relation to the turnover of a business, rather than its profits, and not related to a specific sum fixed as part of the purchase price, are generally considered revenue payments.

Headnote:
INCOME TAX - Payment of commission to Government under agreement - Whether capital expenditure or revenue expenditure - Held, revenue expenditure.
Fact of the Case:

The appellant company was incorporated to take over the business assets of three concerns, including a distillery and a tincture factory, from the Government of Travancore. Under the agreement, the appellant was to pay the Government a commission of 20% of its net profits, subject to a maximum of Rs. 40,000 per annum. The appellant claimed that this payment was revenue expenditure and deductible under Section 10(2)(xv) of the Income-tax Act, while the respondent Revenue contended that it was capital expenditure and not allowable as a deduction.
Finding of the Court:

The Court held that the payment of commission to the Government was not capital expenditure but revenue expenditure and was therefore allowable as a deduction under Section 10(2)(xv) of the Income-tax Act. The Court found that the payment was not related to the capital value of the assets, but rather to the annual profits of the appellant, and that it was not tied to any fixed sum agreed upon as part of the purchase price.
Issues: Whether the payment of commission to the Government under the agreement was capital expenditure or revenue expenditure.
Ratio Decidendi: The Court applied the following principles in reaching its decision: * The nature of an expenditure, whether capital or revenue, is determined by its commercial and accounting nature, rather than its legal characterization. * Payments made in relation to the turnover of a business, rather than its profits, and not related to a specific sum fixed as part of the purchase price, are generally considered revenue payments. * Payments made for an indefinite period and not related to any fixed sum agreed upon as part of the purchase price are generally considered revenue payments.
Final Decision: The Court allowed the appeal, set aside the judgment of the High Court of Kerala, and remanded the case for rehearing and disposal in accordance with the directions given in the judgment.

Judgment

RAMASWAMI, J. : The appellant 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. The appellant-company 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 Perry and Co. Ltd., the Promoters of the appellant-company. Under the said agreement the assets of all the three concerns were agreed to be sold by the Government of Travancore to the appellant-company. Clause 3 of the agreement provided that the cash consideration for the sale of assets of the Travancore Sugars Ltd. shall be 3.25 lakes rupees. Clause 4 (a) provided that the cash consideration for the sale of the Government Distillery shall he 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 CI. 4 (b) and (c) of the agreement the Government undertook to recognise 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 Cl. 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 Cl. 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 Cl. 10 the Government was entitled to nominate a director on the Board of Directors of the appellant-company 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 the income-tax law for the time being in force, and

(ii) payment of the Secretaries and Treasures s remuneration."

By another agreement, dated January 28, 1947 the following clause was substituted for the above Cl. 7 of the original agreement :

"The Government shall be entitled to ten per centum of the net profits of the Company in every year. For the purpose of this clause net profits means the amount for which the Company s audited profits in any year are assessed to Income-tax in the State of Travancore."

2. For the assessment year 1958-59 (the corresponding previous year being May 1, 1956 to April 30, 1957) the amount payable to Government under the aforesaid Cl. 7 came to Rs. 42,480. The appellate Assistant Commissioner disallowed the claim of the appellant for deduction of this amount on the ground that it was virtually mere sharing of profits after they came into existence. The appellate Assistant Commissioner relied upon the decision in Pondicherry Rly. Co. Ltd. v. Commr. of Income-tax, Madras, 5 ITC 363:58 Ind App 239: in disallowing this item of expenditure.The appellant preferred an appeal against the order of the appellate Assistant Commissioner to the Income -Tax Appella

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1966 Supreme(SC) 210

Payments made in relation to the turnover of a business, rather than its profits, and not related to a specific sum fixed as part of the purchase price, are generally considered revenue payments.

Cases Referred (1)