1. At the instance of the assessee the question referred for our determination is as under :
'Whether, on the facts and in the circumstances of the case, the commission amounting to Rs. 88,514 in the first year and Rs. 65,502 in the second year paid by the assessee-company to M/s. Western Manufacturing Co. could be disallowed in determining the business profits for the years in question on the ground that they were items of expenditure of a capital nature ?'
2. The question relates to the assessment years 1960-61 and 1961-62, the corresponding previous years being the financial years ending on March 31, 1960, and March 31, 1961. The firm of M/s. Western Manufacturing Co. was doing business in machinery equipment and other articles, especially cranes. The firm consisted of five partners and the business thereof was carried on in two section, namely, manufacturing section and selling section. The assessee-company acquired the manufacturing section of the firm on April 1, 1959, for a sum of Rs. 5 lakhs. By an agreement dated January 5, 1960, the selling section of the firm was sold to the assessee-company making the sale effective from October 1, 1959. The selling section was purchased by the assessee-company as a going concern with effect from October 1, 1959, together with all its then stock-in-trade, outstanding and other assets, as per the balance-sheet attached therewith including the benefit of its pending contracts and orders as on 1st October, 1959, and of the quota rights and licences held by them in respect of the business of the said unit in the premises at 5-D Vulcan Insurance Building, Churchgate, Bombay, in consideration of the purchasers paying to the vendors a sum of Rs. 3,39,294.38 and a commission of ten per cent. on the value of the pending contracts and orders entered into by the vendors and also in consideration of the purchasers taking over the liabilities of the vendors in respect of the said unit. The commission was paid at the rate of 10% on the value of the pending contracts which had been transferred to and taken over by the purchasers as and when the execution of the contracts and orders was completed. No commission was payable or paid on contracts not executed subsequently. In addition, the directors of the assessee-company passed a resolution on September 28, 1959, sanctioning the commission at the rate of 7 1/2% on the invoice value of the orders received from October 1, 1959, to October 31, 1959, and 5% commission on the invoice value of orders received from November 1, 1959, to December 31, 1959. Accordingly, a commission of Rs. 97,344 paid by the assessee-company to the firm in the first year and an amount of Rs. 79,886 was paid in the second year. The amount of Rs. 97,344 paid for the first year included an amount of Rs. 88,514 paid under the original agreement of transfer while the balance of Rs. 8,830 was paid according to the subsequent resolutions of the company. For the second year out of the amount of Rs. 79,886 paid to the firm an amount of Rs. 65,502 was paid under the original agreement while the amount of Rs. 14,384 was paid according to the subsequent resolution. The present reference is confined to the amounts of Rs. 88,514 and Rs. 65,502 which were paid in pursuance of the original agreement.
3. Before the Income-tax Officer the assessee-company claimed the amounts of Rs. 88,514 and Rs. 65,502 as deductions from its profits. The claim was disallowed by the Income-tax Officer on the ground that the expenditure in question was capital expenditure, because it was paid in consideration of acquisition of a capital asset, i.e., the right to carry on the vendor's business. The order passed by the Income-tax Officer was confirmed in appeal by the Appellate Assistant Commissioner. The Appellate Assistant Commissioner took the view that with regard to the commission paid by the assessee to the firm in terms of the agreement, the correct position was that the assessee had taken over certain unexecuted contracts and for the work done by the firm the assessee paid commission at certain rates to the firm. According to the Appellate Assistant Commissioner where part of the business taken over by the company consisted of unexecuted contracts, the price paid for such contracts was not a deduction from the profits arising from their performance. He confirmed the finding of the Income-tax Officer that the commission paid in respect of the unexecuted contracts taken over by the assessee-company from the firm was not an admissible deduction. On second appeal by the assessee-company before the Tribunal, it was contended on its behalf that the payment of commission was essentially on revenue account, being payment in respect of trading contracts taken over by the assessee-company from the vendors and executed by the assessee-company. It was also contended that even if pending contracts were taken over as part of the transfer of business, there was nothing in principle against the payment relating to contracts being of revenue nature as a result of the arrangement between the parties. If was pointed out by the assessee-company that it had paid such commission at much higher rates to outside parties whose contracts it had executed and the mere fact that the payment of commission to the firm was made a part of the agreement for the taking over of the selling section as a going concern would not convert the payment into a capital payment. On the other hand, it was contended on behalf of the revenue that the payment of commission was a part of the purchase consideration and, as such, it was properly disallowed as capital cost.
4. On behalf of the revenue reference was made to the letter dated January 24,1962, written by the assessee and on the basis of the said letter it was contended that the commission was actually paid for services already rendered by the firm to the customers and it had nothing to do with the operations to be performed by the company itself. It was pointed out that the very measure of the payment had no relation to the nature or quality of services rendered because the payments had to be made at a flat rate. The Tribunal upheld the order of the taxing authorities disallowing the commission for both the years. The Tribunal concurred in the view taken by the taxing authorities that payment of commission was on capital account. The Tribunal emphasised that the whole of the business as a going concern with all its stock-in-trade and other assets was taken over and, therefore, proceeded on the basis that the business was transferred as a whole and that the consideration was paid for the business as a whole. The Tribunal pointed out that it was impossible to separate the unexecuted contracts from the rest of the assets sold. According to the Tribunal the benefit of the pending contracts was one of the important attractions of the business and it, therefore, formed an important part of the complex that was transferred as a going concern from the firm to the assessee-company. The transfer of the benefit of the pending contracts was an integral part of the transfer of the business as a whole. The Tribunal also pointed out that in the balance-sheet of the business taken over which was attached to the agreement there were several assets mentioned, but there was no mention of other intangible assets such as quotas, licences, occupancy rights, goodwill, etc. It is from this order of the Tribunal that the above question has been referred for our determination.
5. Mr. Mehta, on behalf of the assessee-company, contended that the amounts paid to the firm for the two years under the agreement in respect of benefit of pending contracts were in the nature of revenue expenditure. He pointed out that under the agreement the commission at the rate of 10% was to be paid only when the contracts were executed and completed. He emphasised that no prudent businessman will agree to such a term whereby not only the payment of commission is postponed to a future date but also it is made dependent upon execution and completion of the contracts that were taken over by the assessee-company. He pointed out that such commission has to be paid for a trading asset similar to the stock-in-trade and was, therefore, rightly claimed to be a revenue expenditure. He also emphasised the fact that other merchants have been paid commission at a larger percentage by the assessee-company and there was no reason for the taxing authorities and the Tribunal to take the view that the commission paid to the firm for the two years should not be treated as one made on revenue account. In any event he submitted that when a business is taken over as a going concern, just as a stock-in-trade will have to be valued as a trading asset, so also the benefit of pending contracts shall have to be treated on the same footing and, if not the whole of the amount claimed by the assessee-company, at least a reasonable amount should be earmarked as a revenue expenditure pertaining to taking over of such trading asset like pending contracts.
6. An item of disbursement is regarded as a capital expenditure when it is referable to fixed capital or capital assets. It is revenue expenditure when it is referable to circulating capital or stock-in-trade. In the leading case of John Smith & Son v. Moore (H.M. Inspector of Taxes)  12 TC 266 Viscount Haldane drew the distinction between fixed capital and circulating capital. Fixed capital is what the owner turns to profit by keeping it in his own possession. Circulating capital is what he makes profit of by parting with it and letting it change masters. In that case, unexecuted contracts under which a coal merchant was entitled to obtain supplies of coal were held to be part of fixed capital of the business and the sum paid by the purchaser of the business to acquire the rights under the contract was held to be on capital account. Mr. Mehta, however, urged that the decision of the House of Lords in John Smith's case  12 TC 226 has been explained by Viscount Radcliffe in Commissioner of Taxes v. Nchanga Consolidated Copper Mines Ltd.  58 ITR 241 as under :
'The John Smith decision  12 TC 266, therefore, turned upon the combination of two elements as the facts of the case : an aggregate price paid as the net value of a business taken over, and the inclusion in the assets of that business of the benefit of short-term supply contracts which were not in a form allowing them to be treated as analogous to stock-in-trade. But for the combination of those elements it is not to be assumed that the decision would have been the same, for it is difficult to accept as a sound general proposition that if a man acquires and pays for stock-in-trade for his own business on the taking over of another he is not entitled to set off against the gross proceeds of realising the stock the identifiable cost of acquiring it.'
7. The question whether the amounts paid by the assessee-company to the firm for the two years should be regarded as on capital account or revenue account would depend upon the terms of the agreement under which the payment is made by the assessee-company to the firm. The selling section of the firm was taken over by the assessee-company under an agreement dated January 5, 1960. One of the recitals in this agreement is as under :
'AND WHEREAS the vendors agreed to sell to the purchasers and the purchasers agreed to buy from the vendors the said unit as a going concern as on the 1st day of October, 1959, together with all its then stock-in-trade, outstanding and other assets as per the balance-sheet attached here-with including the benefit of its pending contracts and orders as on 1st October, 1959, and of the quota rights and licences held by them in respect of the business of the said unit in the premises at 5-D, Vulcan Insurance Building, Churchgate, Bombay, in consideration of the purchasers paying to the vendors a sum of Rs. 3,39,294.38 and a commission of ten per cent. on the value of the pending contracts and orders entered into by the vendors as hereinafter mentioned and also in consideration of the purchasers taking over the liabilities of the vendors in respect of the said unit.'
8. Clauses 1 and 2 which form the operative part of this agreement are relevant and they are as under :
'NOW IT IS HEREBY RECORDED CONFIRMED AND DECLARED by and between the parties hereto as follows : - 1. That the vendors have sold to the purchasers and the purchasers have purchased from the vendors the said unit as a going concern as on the 1st day of October, 1959, together with all its then assets of the vendors comprised in the said unit, namely, stock-in-trade, outstandings, benefits of pending contracts and orders, and of the quota rights and licences held by the vendors in respect of the business of the said unit at 5-D, Vulcan Insurance Bldg., Churchgate, Bombay. In consideration of the sale and transfer by the vendors to the purchasers of their assets, the purchasers had agreed to pay to the vendors :
(a) A sum of Rs. 3,39,294.38, and (b) a commission of 10 per cent. on the value of all the pending contracts which have been transferred to and taken over by the purchasers as aforesaid, as and when execution of the said contracts and orders is completed.
2. In further consideration of the sale of the business of the said unit of the vendors to the purchasers, the purchasers have agreed to take over and discharge all the liabilities of the vendors in respect of the business of the said unit as on the 1st day of October, 1959.'
9. If this recital and the operative part of the agreement are borne in mind then it is a composite sale of all the assets of the business as a going concern and the consideration paid is entirely for transfer of the said business as a going concern together with the assets. Mr. Mehta urged that as the commission of 10% is payable when execution of the contracts is completed it will be reasonable to assume that this 10% commission is for transfer of the rights of the firm in pending contracts which should be treated as a trading asset. There is no warrant for restricting this 10% commission as referring to transfer of the benefit of pending contracts and orders. The consideration is as a whole which consists of three items : (a) a sum of Rs. 3,39,294.38, (b) payment of commission of 10% on the value of all the pending contracts on execution being completed, and (c) taking over of the liabilities of the firm which were then pending. The entire consideration is, therefore, paid for transfer of the whole of the business of the firm as a going concern with all its assets. Our attention was invited by Mr. Mehta to the annexure to this agreement which shows how the figure of Rs. 3,39,294.38 was calculated. A mere look at this statement, annexure 'A', will indicate that this figure is arrived at without separate consideration being payable in respect of the items, quota rights, and licences, benefit of the tenancy rights in premises situate at 5-D Vulcan Insurance Building, Churchgate, Bombay, goodwill, benefit of pending contracts, etc. Thus, it will not be possible for us to earmark the payment of commission of 10% upon completion of the contracts on the footing that it is a payment for transfer of the benefit of the rights under the pending contracts. Actually such payment of commission is in respect of every item of assets of the firm as a going concern other than what is possibly referred to in the statement, annexure 'A', to the agreement. When such is the position, the Tribunal was right in holding that the consideration paid under this agreement covers the business as a whole although this amount is to a certain extent dependent upon the value of the contracts executed. It is clearly one consideration for the transfer of the business as a whole and could not be allocated to various assets of the business transferred. The Tribunal was, therefore, justified in proceeding on the basis that the business was transferred as a whole and the consideration was paid for the business as a whole. It was not possible to separate the unexecuted contracts from the rest of the assets sold.
10. The mere fact that such commission is payable to the firm upon execution and completion of the contracts or orders will not convert it into a payment for a trading asset like stock-in-trade. There is nothing in the agreement to indicate that the payment of commission of 10% is earmarked for the transfer of the rights or benefit of pending contracts. The fact that to other persons even commission at a larger rate has been paid is of no consequence. It should not be overlooked that the entire selling section of the firm was taken over by the assessee-company. When such is the position, one cannot expect the firm to retain its rights under the pending contracts nor can one expect that the assessee-company as purchaser would enter into this transaction without taking over the pending contracts. The benefit of the pending contracts was one of the important attractions of the business and it accordingly formed an integral part of the complex that was transferred as a going concern from the firm to the assessee-company. When the business was transferred as a going concern it is difficult to visualise the transfer of the complex without the benefit of such pending contracts. It was urged by Mr. Mehta that assets like goodwill, quota rights and licences may have been transferred by the firm to the assessee-company without charging any consideration. If regard be had to the provisions of the relevant recital above quoted and the operative part of the agreement contained in clauses 1 and 2, it is quite evident that the sum of Rs. 3,39,294.38 was paid for specified assets shown in annexure 'A' to the agreement while the rest of the payment was for all the other assets of the business as a going concern. The mere fact of the payment being made dependent upon execution of the contracts is of no consequence. When business is sold as a whole it will be difficult to separate unexecuted contracts from the rest of the assets sold. Further, the Tribunal has pointed out that the payment made by reference to the invoice value of the contracts executed has no reference to the expenditure incurred in connection therewith by the vendor-firm. Ordinarily it is not possible to allocate any value to the intangible assets in the form of benefits under the pending contracts, nor was there any attempt made by the assessee-company to measure the expenditure incurred in relation to the pending contracts by the vendor-firm. That payment of the commission of 10% will depend upon the contract being completed is of no consequence. Thus, the Tribunal was right in taking the view that the commission payments formed a part of the purchase price of the business as a whole and its capital nature was not changed by the mere mode of ascertainment which had reference to the invoice value of the contracts executed.
11. Thus, the taxing authorities and the Tribunal were right in disallowing the deductions claimed by the assessee-company for the two assessment years. Our answer to the question referred to us is in the affirmative. The assessee shall pay the costs of the revenue.