The payment made for the purchase of the patent medicine was held to be taxable as capital expenditure, not a lawful deduction under Section 10(2)(ix) of the Indian Income Tax Act.

Horace Owen Compton Beasley, Kt., C.J.

1. The petitioners here, a limited company registered under the Indian Companies Act, carrying on business in the manufacture and sale of the "Minsararasam," a patent medicine, claimed a deduction from their income in the year of account of a sum of Rs. 13,000 odd as a lawfully deductible item. They claimed to deduct that sum under Section 10(2)(ix) of the Indian Income Tax Act as being expenditure incurred solely for the purpose of earning profits or gains. It appears that one Dr. Varadarajulu Naidu had invented this patent medicine or at any rate was the owner of its secret; and on the 29th March, 1923, the petitioners entered into an agreement with Dr. Varadarajulu Naidu for the purchase by them and for the sale by him of all rights and privileges of manufacturing, selling and generally dealing in Minsararasam and covenanted that, if they successfully promoted the company, Dr. Varadarajulu Naidu should sell to them all such rights and privileges for manufacturing, selling and generally dealing in the medicine subject to the following conditions - it is necessary to set out only two of them:

(1) That the parties of the first part pay to the party on the second part the sum of Rs. 81,030 in five yearly instalments at not less than Rs. 16,000 a year with effect from 1st April, 1923, and (2) that after the expiry of five years a royalty of annas eight on every bottle of Minsararasam sold be paid to the party on the second part as long as the said Minsararasam Company, Ltd., is in existence.

2. With regard to the former clause, it is stated that the Rs. 81,000 have been paid by the company to Dr. Varadarajulu Naidu and with regard to the second clause, that he was paid in the year of account Rs. 13,000 odd representing eight annas on ever) bottle of the medicine sold by the company. In the Memorandum of Association of the company-one of the objects of the company is to buy the Minsararasam Company, Salem, its goodwill, rights and privileges from Dr. Varadarajulu Naidu, Salem, for Rs. 81,000 and thus become the sole proprietors to manufacture, sell and generally deal in Minsararasam.

3. It is contended onbeha,lf of the petitioners that this payment of Rs. 13,000 odd to Dr. Varadarajulu Naidu in pursuance of Clause (2) of the agreement of the 29th March was a payment made by them solely for the purpose of earning the profits or gains of the business which in the year of account amounted to Rs. 28,000. The question referred to us depends entirely upon how the agreement before mentioned is construed. It is the petitioners contention that Clause (2) does not relate to the consideration for the purchase of the rights and privileges of manufacturing, selling and generally dealing in the medicine but that the purchase price is that set out in Clause (1), namely, Rs. 81,000. It seems quite clear to me that Clauses (1) and (2) must be taken together as between them providing the consideration for the purchase of this medicine. If that is so, then this clearly is, as the Commissioner of Income Tax points out in his reference to us, taxable as capital expenditure. It was the amount of money expended for the purchase by the company of this medicine and as such would be assessable and not a lawful deduction under Section 10(2)(ix) of the Indian Income Tax Act. It is further contended that Clause (2) of the agreement cannot be said to be consideration for the purchase of the medicine because it provides for something indefinite. It is quite true that it does provide for something indefinite to some extent. At the time of the agreement it could not be known what quantity of medicine would be sold and what amount would be realised by that sale. But as soon as the company started selling the medicine what was indefinite at the time of the agreement became definite and ascertainable at any time and the accounts of the company would show the amount due to the Doctor under Clause (2) of the agreement. There