Payments made under agreements to government are considered revenue expenditure, not capital, and are deductible under Income Tax laws.

1 These references arise out of assessment proceedings against the Travancore Sugars and Chemicals Ltd., hereinafter referred to as the assessee for the assessment years 1959-60 to 1962-63 and have been made by the Income Tax Appellate Tribunal, Cochin Bench under S.66(i) of the Indian Income Tax Act, 1922 and S.256(i) of the Income Tax Act, 1961, at the instance of the Commissioner of Income Tax, Kerala, Ernakulam. The questions referred to this Court are:
"(1) Whether on the facts and in the circumstances of the case, the payment of Rs. 1,45,969/- by the assessee to the Kerala Government under the agreements dated 18-6-1937 and 28-1-1947, was allowable under S.10 of the Indian Income Tax Act, 1922.
(2) Whether on the facts and in the circumstances of the case, the payment of Rs. 1,14,520/- by the assessee to the Kerala Government under the agreements dated 18-6-1937 and 28-1-1947, was allowable under S.10 of the Indian Income Tax Act, 1922.
(3) Whether on the facts and in the circumstances of the case, the payment of Rs. 1,21,578/- by the assessee to the Kerala Government under the agreements dated 18-6-1937 and 28-1-1947, was allowable under S.10 of the Indian Income Tax Act, 1922.
(4) Whether on the facts and in the circumstances of the case, the payment of Rs. 65,682/- by the assessee to the Kerala Government under the agreements dated 18-6-1937 and 28-1-1947, was allowable under S.37 of the Income Tax Act, 1961."
The assessee is a public limited company incorporated under the Travancore Companies Act carrying on the business of manufacturing sugar, running a distillery and a tincture factory, in the State of Kerala. In the Travancore Sugars Ltd., Thuckalai incorporated under the Travancore Companies Act the Travancore Government owned the largest number of shares. Steps were taken to wind up this company and to transfer all the shares to the Government. One of the objects of the assessee was to purchase the assets of the Travancore Sugars Ltd., as well as the Government Distillery at Nagercoil and the Government Tincture Factory at Trivandrum. An agreement dated 18th of June, 1937, Annexure 'A', was entered into between the Government of Travancore and Sir William Wright on behalf of the Parry and Co., Ltd., Madras, who were the promoters of the assessee, by which, the Government of Travancore agreed to sell the assets of the Travancore Sugars Ltd., the Government Distillery at Nagercoil and the business assets of the Government Tincture Factory at Trivandrum to the assessee for Rs. 3.25 lakhs, Clause (7) of Annexure 'A' reads 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 & Treasuries' remuneration."
Clause (7) of the agreement of 1937 was deleted and in its place the following clause was substituted; by the agreement dated 28th January 1947 produced as Annexure 'B':
"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."
The assessee claimed deduction of Rs. 1,45,969/-, Rs. 1,14,520/-, Rs. 1,21,578/- and Rs. 65,682/- respectively paid to the State Government in pursuance to clause (7) of Annexure A, read with Annexure B under S.10(2)(xv) of the Indian Income Tax Act, 1922 for the assessment years 1959-60 to 1961-62 and under S.37 of the Income Tax Act, 1961 for the assessment year 1962-63.

2 The Income Tax Officer as well as the Appellate Assistant Commissioner disallowe