Judgment

RANGANATH MISRA, J. :- This appeal by special leave at the instance of the Revenue assails the decision of the Bombay High Court upon a reference under Section 66 of the Income-tax Act, 1922 (hereinafter referred to as the Act). In respect of the assessment year 1954-55, the respondent-assessee claimed deduction of a sum of Rs. 7,93,837/- under S. 10(1) or alternatively under S. 10(2)(xv) of the Act in determining its business profits which the Income-tax Officer and the two appellate authorities in due course rejected. On the application of the assessee the dispute regarding admissibility of the claim was referred to the High Court. It agreed with the Tribunal that, the assessee had acquired an asset of an enduring nature in lieu of the payment of the amount in dispute; yet, the High Court held that the payment represented business expenditure and the claim of deduction was tenable under S. 10(2)(xv) of the Act. On reaching this conclusion the Court was of the view that consideration as to whether the payment made by the assessee did not form part of its real income was unnecessary and answered the reference in favour of the assessee. The Commissioner of Income-tax, on obtaining special leave, is in appeal before this Court.

2. The short facts relevant for appreciating the question for consideration are these :

M/s. Bharat Barrel & Drum Manufacturing Co. Ltd., (Bharat Barrel for short) gave its a sole selling agency to a firm - Jalan Trading Co. - by an agreement dated May 1, 1951. for two years with a right of renewal. Assessee - respondent is, a private company incorporated on, October 16, 1952. Under a deed of assignment dated December 30, 1952, the benefits of the agreement dated May 1, 1951, were assigned to the assessee and from January 1, 1953, under the assignment the respondent carried on the business as selling agents of Bharat Barrel. From May 1, 1953, on the basis of the option for renewal exercised by the assessee an agreement was entered into between Bharat Barrel and the assessee in respect of the sole selling agency and with a renewal clause.

3. The deed of assignment incorporated the following relevant terms :

"Whereas after the incorporation of the said Company (assessee) it was however agreed that the assignee company should take over not the whole of the business of the Assignors but only the benefit of the aforesaid contract dated the 1st May 1951 with the said manufacturers on the terms and conditions mutually agreed to and as hereinafter appearing :

(1) In consideration of the premises and of the covenant on the part of the assignees hereinafter contained the Assignors as beneficial owners hereby assigns to the assignees :

(i) The said agreement of the 1st day of May 1951 and made between the said Bharat Barrel & Drum Manufacturing Co. Ltd. of the one part and the assignors of the other part and the full benefit thereof as and from the 1st day of January 1953 and all commission and other moneys payable or to be payable by the manufacturers;

(ii) the full benefit of all pending contracts and orders entered into or given by the assignors in connection with the said agreement .......

(2) In consideration aforesaid the assignees hereby covenant with the assignors to pay to the assignors. as and by way of Royalty an amount equivalent to 75% of their profits and commission, remuneration and other moneys received from the manufacturers under the said agreement or any furher agreement that may be entered into by the Manufacturers with the Assignees in pursuance of the option to renew the agreement contained in Cl. 5 of the said agreement dated 1st May 1951."

4. Assessee claimed to have paid Rs. 7,93,837/- being 75% of its net profits in the assessment year 1954-55 and claimed it as a business deduction but the same was rejected by the Assessing Officer as also the appellate authorities. In dealing with the question raised, the Tribunal held :

"The narrow question, therefore, that we have to decide in this case i