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Western India Oil Distributing Co. Ltd. Vs. Commissioner of Income-tax - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtMumbai High Court
Decided On
Case NumberIncome-tax Reference No. 46 of 1963
Judge
Reported in[1970]77ITR140(Bom)
ActsIncome Tax Act, 1922 - Sections 66(1); Bombay Money-Lendrs' Act; Usrious Loans Act
AppellantWestern India Oil Distributing Co. Ltd.
RespondentCommissioner of Income-tax
Appellant AdvocateS.P. Mehta and ;N.A. Palhivala, Advs.
Respondent AdvocateG.N. Joshi and ;R.J. Joshi, Advs.
Excerpt:
direct taxation - deduction - section 66 (1) of income tax act, 1922 - whether claim of appellant to deduct certain sum or any instalment thereof as paid and litigation expenses in relation to its suit has been rightly rejected in assessments of applicant - sum expended were disbursements to revenue account - held, deduction should be allowed. - - it also provided for default clause on failure of payment of any instalment for acceleration of payment of the whole of the remaining balance of the above sum of rs. ). the passage runs :but when an expenditure is made, not only once and for all, but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade, there is very good reason (in the absence of special circumstances leading to an opposite.....k.k. desai, j. 1. in this reference under section 66(1) of the indian income-tax act, 1922, the question referred to us is as follows : 'whether the claim of the applicant to deduct the sum of rs. 3,00,000 or any instalment thereof as paid and the litigation expenses amounting to rs. 69,645 in relation to its suit has been rightly rejected in the assessments of the applicant for the assessment years 1957-58 and 1958-59 ?' 2. the facts appear in the statement of the case. 3. the applicant-company has been carrying on business of importing and distributing petrol, kerosene oil and other allied products since 1932. during the second world war, its business activities were discontinued after 1941, on account of export restrictions in other countries and the requisition by the government of.....
Judgment:

K.K. Desai, J.

1. In this reference under Section 66(1) of the Indian Income-tax Act, 1922, the question referred to us is as follows :

'Whether the claim of the applicant to deduct the sum of Rs. 3,00,000 or any instalment thereof as paid and the litigation expenses amounting to Rs. 69,645 in relation to its suit has been rightly rejected in the assessments of the applicant for the assessment years 1957-58 and 1958-59 ?'

2. The facts appear in the statement of the case.

3. The applicant-company has been carrying on business of importing and distributing petrol, kerosene oil and other allied products since 1932. During the Second World War, its business activities were discontinued after 1941, on account of export restrictions in other countries and the requisition by the Government of India for purposes of the war of the company's installations at Bombay, Madras and Calcutta. In the end of 1949, these three installations were returned to the company.

4. For the purpose of carrying on its business and obtaining finance to the extent of Rs. 10,00,000, the company made the first agreement of finance dated August 29, 1953, with Khushalbhai Patel & Sons, a partnership firm carrying on business in Bombay. In connection with the arguments advanced on both sides, details of various clauses in the agreement will require to be noticed hereafter. It may, however, at once be stated that under the agreement the lenders agreed to advance the aggregate sum of Rs. 10,00,000 at interest at the rate of 6 per cent. per annum. The company agreed to pledge all goods imported by the company as security with the lenders. The company agreed to pay commission on all goods imported as provided in Clause 13. The agreement was for a period of 10 years and the company agreed to pay even after the expiry of 10 years to the lenders commission as mentioned in Clause 25. Thus, the first agreement related to imports to be made at Bombay and to be stored at the company's installation at Bombay. Similar second agreement of finance dated January 11, 1955, was made in connection with the above firm of lenders in respect of imports made at Madras to be stored at the company's installation at Madras. A further agreement dated January 12, 1955, in connection with the loans already advanced to the company and for modification of certain terms of the previous agreements was made between the company and the above firm of lenders.

5. From October, 1955, the company contended that the agreements were extortionate, unconscionable and illegal and offended the provisions of the Bombay Money Lenders' Act and the Usurious Loans Act. On March 25, 1956, the company instituted Suit No. 87 of 1956, inter alia, for a declarationthat the above three agreements and the power-of-attorney, dated March 5, 1954, given by the company to the lenders had come to an end. The further declaration claimed was that the clauses in the above three agreements in relation to payment of interest and commission in excess of interest at the rate of 9 per cent. per annum on amount actually lent and advanced were invalid, void and of no effect. The company prayed for accounts on the footing that the Usurious Loans Act and the Bombay Money Lenders' Act applied to the loans advanced under the above agreements. The company also claimed an order setting aside the pledge of the company's goods to the lenders. It is not necessary to refer to the several other reliefs claimed in the plaint. After the lenders had filed written statement and counter-claim on June 15, 1956, the suit and the counter-claim were settled on June 21, 1956, in terms of consent which are annexure 'B' to the statement of the case. Clause 1 of the consent terms provided that the three agreements mentioned above stood revoked and cancelled and were at an end as from the date of the consent terms. Under Clause 2, the power-of-attorney, dated March 5, 1954, was also revoked and cancelled. Under Clause 3, the parties agreed and declared that the several sums mentioned in sub-items in that clause were payable by the company to the lenders. Some of these items were agreed to be given up by the lenders under Clause 4. Clause 9 of the consent terms provided for payment of compensation and damages in the sum of Rs. 3,00,000 by five equal annual instalments of Rs. 60,000 each payable on 31st December, 1956, and on 31st December of each succeeding year. It also provided for default clause on failure of payment of any instalment for acceleration of payment of the whole of the remaining balance of the above sum of Rs. 3,00,000 immediately. For the assessment year 1957-58, the company claimed as deduction the above sum of Rs. 3,00,000 due and payable by the company under the consent decree or in the alternative a deduction of the first instalment of Rs. 60,000 which was paid during the year. The company claimed a further deduction of Rs. 69,645 as legal expenses. These legal expenses, consisted of three different items and Rs. 24,719*08 related to costs paid to Messrs. Kanga & Co., Solicitors, in connection with the preparation of the above three agreements of finance and other various deeds. In connection with this item of expense, Mr. Joshi for the respondent has stated that it was revenue disbursement and was liable to be deducted in the assessment year 1957-58. In respect of the assessment year 1958-59 the company claimed a deduction of Rs. 60,000 being the second instalment paid under the consent decree. The revenue authorities including the Appellate Tribunal rejected the claims for deduction.

6. The Submission of Mr. Mehta for the company in support of the claim for deduction in respect of the above sum of Rs. 3,00,000 and/or the twoitems of Rs. 60,000 paid towards damages in the above two assessment years is as follows:

The company agreed to pay the above sum of Rs. 3,00,000 as damages for the termination of the above three agreements. These three agreements created disadvantageous relationship and expenditure for termination of the disadvantageous relationship was allowable as revenue expenditure, because the expenditure is not agreed to be made to secure an asset but to enable the company to continue its business in its same course as prior to the dates of the above agreements and only to remove a difficulty in carrying on the business on the same lines as before. The submission was that expenditure made for merely getting rid of a disadvantageous relationship which obstructed smooth working of the company's business could not be held to be expenditure for acquiring any capital asset or any enduring benefit of any kind.

7. On behalf of the respondent, the contrary submission of Mr. Joshi was that the three agreements taken together constituted the very framework of the structure for the carrying on of the business of the company. These agreements were not mere finance agreements but were agreements for carrying on business in the manner provided in the agreements for a period of 10 years. The agreements did not create any trading relationship between the parties. By the cancellation and the termination of the agreements the company has secured benefit of an advantage of an enduring nature. The advantage and the benefit secured was that under the three agreements the whole business was entirely under the control of the lenders and this control was got rid of completely so that the company acquired freedom to do its own business in such manner as the company desired. In Mr. Joshi's submission, the provision for payment of damages of Rs. 3,00,000 as on termination of these agreements was a payment to secure a permanent enduring advantage of carrying on business with entire freedom. In his submission, the liability to pay damages and disbursements made towards payment of damages thus secured an asset of an enduring nature and must be held to be disbursements on capital account.

8. In connection with these rival contentions, reliance has been placed on behalf of the company mainly on the decisions in B.W. Noble Ltd. v. Mitchell, [1927] 11 T.C 372 (C.A.) and Anglo-Persian Oil Co. Ltd. v. Dale [1931] 16 T.C. 253 (C.A.). Reference was also made to the case of Atherton v. British Insulated and Helsby Cables Ltd. [1925] 10 T.C. 155, 192 (H.L) and G. Scammell and Nephew Ltd. v. Rowles : [1940]8ITR41(Cal) 1. On behalf of the respondent, reliance has been placed on the case of Mallett v. Staveley Coal [1928] 13 T.C. 772 (C.A.) and Iron Co. Ltd., Van Den Berghs Ltd. v. Clark [1935] 19 T.C. 390: 3 I.T.R. (Eng. cAS.) 17 and Associated Hotels of India Ltd. v. Commissioner of Income-tax . Before referring to these authorities, it is necessary to notice the clauses of the above agreements on which reliance has been placed particularly on behalf of the respondent.

9. The first finance agreement which forms part of annexure 'A' contains a recital that the company 'intends to import petrol and kerosene oil and other petroleum products and store and stock the same at its Wadala installation'. The second recital on which reliance is placed provides that 'the financiers agree to finance the company in the manner and on the terms and conditions mentioned in the agreement'. Under Clause 2, the interest agreed was 6 per cent. per annum and it was agreed to be paid on Rs. 10,00,000, whether the company took finance or not. Under Clause 3, the imports were agreed to be made on such terms as were agreed between the company and the financiers. There was prohibition on the company for making contracts without the consent in writing of the financiers. The imported goods were agreed to be stored in Wadala installation and the financiers were to be put in possession of the installations as pledgees. The pledged goods were to remain security for the liability of the company. Clause 9 provided that the company 'shall not charter any tanker or tankers for importing the said goods in Bombay without obtaining the approval in writing of the financiers'. Under Clause 12, the company had to redeem from the pledge the goods of the first shipment within a period of the first six months and thereafter goods of every subsequent shipment within a period of four months from the respective dates of pledge. Clause 13 provided for payment of commission as follows:

'..... whether the company shall or shall not take any finance from the financiers for such imports as and by way of commission either:

(a) in the case of liquid oil six pies per gallon;

(b) in the case of asphalt five per cent. of the c. i. f. value thereof ; or thirty per cent. of the net profits of the company .....'

10. Clause 16 provided for the pledgee's right of selling of the goods pledged. Clause 17 provided for acceleration of due date under certain circumstances. Clause 19 provided :

'This agreement shall operate as a continuing security for all moneys, indebtedness and liabilities of the company to the financiers ......'

11. Clause 21 provided: 'Nothing herein contained shall create a partnership between the company and the financiers .....' Under Clause 22, the agreement was to be for 10 years from the date of the agreement. Under Clause 23, the company agreed to deposit Rs. 3,00,0,00 as security for the due performance of its obligations under the agreement. Clause 24 provided that 'the company shall as and when required by the financiers give anirrevocable power-of-attorney ..... to do and execute for and on behalf of the company all such acts, deeds and things as the financiers may require the company to do from opening letters of credit, clearing and selling the goods, endorsing insurance policies and other documents, requiring the company's endorsements and for signing all documents required by any bank or banks, customs, port trust and any other authorities to be signed by the company'. Clause 25 provided :

'..... during the said period of ten years the company doth hereby covenant with the financiers that if the company shall after the expiration of the said period of ten years continue to carry on the business in petrol and/or kerosene or petroleum products in any area now served by the established oil companies in Bombay ..... the company shall so long as the company continues the said business pay to the financiers as and by way of commission a sum equal to one and a half pies per gallon on liquid oils and one and a quarter per cent. of the c. i. f. value on asphalt dealt in by the company after the expiration of the said period of ten years.'

12. The second agreement is almost on the same terms but in relation to the imports made by the company at the Port of Madras. The third agreement dated January 12, 1955, which also forms part of annexure 'A' to the statement of facts modifies certain clauses of the previous agreements and reliance has been placed on behalf of the respondent on the modified Clauses 24 and 25 as contained in the third agreement. The Clause 24 relates to deposit of Rs. 3,00,000. The Clause 25 relates to the execution of an irrevocable power-of-attorney by the company in favour of the lenders and provides for authorising under the power-of-attorney the financiers to obtain licences to open letters of credit and to do several such things for and on behalf of the company.

13. Now, there is no dispute between the parties that under Clause 9 of the consent terms the sum of Rs. 3,00,000 was agreed to be paid by the company to the lenders as and by way of compensation and/or damages for the termination of the above three agreements. As already stated, in the submission of Mr. Mehta, these three agreements created disadvantageous relationship and created obstructions in the smooth working of the company's business. The payment of damages of Rs. 3,00,000 was agreed to be made to enable the company to carry on its business after getting rid of the disadvantageous relationship and the obstruction created by the three agreements. The payment of Rs. 3,00,000 was meant for removing difficulties in the smooth course of business of the company and to enable the company to carry on its business in the manner it used to do prior to the execution of the agreements. In connection with this submission, it is first necessary to refer to an oft-quoted passage from the speech of LordCave in the House of Lords case of British Insulated and Helsby Cables Ltd. v. Atherton [1925] 10 T.C. 155 (H.L.). The passage runs :

'But when an expenditure is made, not only once and for all, but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade, ..... there is very good reason (in the absence of special circumstances leading to an opposite conclusion) for treating such an expenditure as properly attributable not to revenue but to capital.'

14. Now, this passage has been noticed in almost all the subsequent decisions and has led to different results. In the very case, Lord Atkinson indicated that the word 'asset' ought not to be confined to something material. In the case of B.W. Noble Ltd. v. Mitchell the question related to an inconvenient director who was to be dismissed; but to avoid publicity injurious to the company's reputation, an agreement was made under which the director agreed to retire on the company agreeing to pay him 19,200 and the other directors agreeing to pay to him 300 which were all payable in five annual instalments. The question was whether the payments made by the company to the director were admissible deductions in arriving at its profits for income-tax purposes. Rowlatt J. in the first court referred to the case of Atherton v. British Insulated and Helsby Cables Ltd. and observed:

'.... it is a capital expense if you buy an asset or purchase an enduring advantage. This was not that case, or anything like it. What it is more like, perhaps, is the case of a payment made to remove the possibility of a recurring disadvantage. . . . This gentleman being there as an unsatisfactory servant was not a permanency. He was no doubt there for his life, but I do not think you can say: 'By an expenditure of capital I will get rid of this nuisance affecting my business, and have his room rather than his company by making this capital expenditure'. I cannot look at it in that way.'

15. In the Court of Appeal Lord Hanworth, Master of the Rolls, observed at page 419 :

'It is Said, and not unfairly, that you have a sum definitely agreed, a payment no doubt by instalments, but for all practical purposes the sum is immediately ascertained and is in that sense in the nature of a capital payment, liquidated though it may be over a subsequent period of time; and it is said that for this payment they obtained an immediate result, namely, the resignation of the director. It was not a recurring incident; it was not something which would have to be dealt with in subsequent years, but it was an immediate result final in its conclusion inasmuch as it severedthe connection between the director and the company. Now all that is very true and I agree that perhaps it is more difficult to see whether it should be treated as a capital payment or not, but I think Mr. Justice Rowlatt puts it well at the end of his judgment where he says : 'This gentleman being there as an unsatisfactory servant was not a permanency'.'

16. At page 420, his observation, on which strong reliance has been placed by Mr. Mehta, is :

'It is a payment made in the course of business, dealing with a particular difficulty which arose hi the course of the year, and was made not in order to secure an actual asset to the company but to enable them to continue, as they had in the past, to carry on the same type and high quality of business unfettered and unimperiled by the presence of one who, if the public had known about it, might have caused difficulty to their business and whom it was necessary to deal with and settle with at once.'

17. In the case of Anglo-Persian Oil Co. Ltd. v. Dale, the assessee-company had by two agreements appointed another company as its agents in Persia for a period of years, upon the terms that the agents should be remunerated by commission at specified rates. The amounts payable to the agents by way of commission increased far beyond the amounts contemplated by the company and the agreements of agency were cancelled upon the company agreeing to pay to the agents 3,00,000 in cash. Upon payment, the assessee-company claimed that the payment was an admissible deduction in computing the company's profits for the purposes of income-tax. Though that claim was rejected by the Special Commissioners, Rowlatt J. and the Court of Appeal held that the payment to the agents was an admissible deduction and in that connection, the observations made by Rowlatt J. in the court of first instance at page 261 were as follows :

'Now I want to see how the Commissioners have dealt with it, and what they say is that this was expenditure of a capital nature to secure an enduring benefit for the company's trade by getting rid of an onerous contract.... The question is not merely getting rid of an onerous contract, but an onerous contract for what If it is an onerous contract for the payment of wages or commission which are chargeable to revenue account in the plainest possible way, and if that is the onerous contract that you are getting rid of, it is impossible to suggest that that is a reason for saying that this is a capital expenditure unless you get rid of that onerous contract.... by erecting in its place a capital asset. .. But to say that it is a capital expenditure because it secured an enduring benefit by getting rid of an onerous contract is not to state the material thing, and it is completely inconclusive.'

18. In connection with the observation of Lord Cave and the phrase 'enduring', the learned judge observed:

'What Lord Cave is quite clearly speaking of is a benefit which endures, in the way that fixed capital endures; not a benefit that endures in the sense that for a good number of years it relieves you of a revenue payment.'

19. The argument of the Attorney-General in that case was same and similar as the argument of Mr. Joshi in this case and has been put in inverted commas in the judgment of Rowlatt J. as follows:

'This is clearing the ground of the agency and embarking upon a new organization, in this district, of the business, by having your own organization and your own servants.'

20. That argument was negatived by observing that:

'There is no evidence. . . that any part of this sum was paid forthe purpose of acquiring anything analogous to goodwill on the part ofthese people. Of course they had to be paid for the value of their rightsfor ten years to receive this money. That is compressing .... the liabilityand the corresponding claim for wages into a lump . .. There is no trace ofa payment at all; nor is there any trace of there being any payment byway of starting a business . . ..'

21. The last observation was: 'This sum of 3,00,000 with which this case deals, upon the face of this case, appears to me to represent nothing at all but the lump sum representing the future emoluments of the agent which are being redeemed .... by that arrangement.' In the Court of Appeal Lord Hanworth, Master of the Rolls, referred to the case of Noble v. Mitchell as laying down the test that 'if the expenditure is not to secure an asset, but to enable the business to continue its same course as before, and only to remove a difficulty in carrying on the business on the same lines as before, then the expenditure is from revenue, and not from capital.' He also observed that the phrase 'enduring benefit' in Lord Cave's test seemed to leave open doubts as to what is meant by 'enduring'. He rejected the submission of the Attorney-General that the taking of the agency back into the hands of the company was the creation or taking over of a valuable asset. In that connection, he observed:

'It seems difficult to accept the view that the appointment of an agent, or the withdrawal of an agency, in the very business belonging to the principals, creates or destroys a business of a separate nature or an asset which is to be added to the capital account.'

22. Lastly, he observed that the payment in that case was 'to put anend to an expensive method of carrying on the business which remains thesame whether the distributive side is in the hands of the respondentsthemselves, or of their agents'. Lord Justice Romer added that the advantage paid for need not be of a positive character and may consist in the getting rid of an item of fixed capital, i.e., of an onerous character. Now, in our view, Mr. Mehta is right in relying upon the above observations and in submitting that the facts in the present case are in most respects similar to the facts in the above authority. The assessee-company had in that case appointed another company as its agents in Persia and in the East for a period of years. The assessee-company had found that with the passage of time the amounts payable to the agents by way of commission increased far beyond the amounts originally contemplated. Those difficulties and the difficulty of the business having been entrusted to the agents was obviated and removed by the agreement for payment of 3,00,000 in cash. In the present case also, as we will presently notice, whilst dealing with the arguments advanced on behalf of the respondent, similar difficulties arose and the applicant, assesee-company, obviated all these difficulties by agreeing to pay the sum of Rs. 3,00,000 as and by way of damages for termination of the three agreements referred to, above.

23. In the case of Mallett v. Staveley Coal and Iron Co. Ltd. the assessee was a colliery company and had obtained onerous leases. Upon surrender of a part of the seams demised under some of the leases, the colliery company was absolved from certain obligations. The colliery company claimed that the payments made towards the discharge of its obligations under the previous leases was revenue disbursement and it was entitled to deduct the same in computing the profits for income-tax purposes. That claim was rejected by the courts and in that connection, Rowlatt J. in the first court observed that the whole transaction on the clearest possible principles was a capital transaction. In the discussion he observed :

'... redeeming an annual business expenditure by a payment in one particular year instead of over a number of years, and where that is done the payments can be deducted.'

24. Mr. Mehta relied upon this part of the observation strongly. Thefurther observation was that :

'But that only applies, of course, where the annual business expense, which is obviated by the single payment, is an annual business expense chargeable against revenue, Here that entirely breaks down.' In the Court of Appeal, Lord Hanworth at page 783 observed that the colliery company 'have been able to get rid .... of a liability which would have hung round their necks. By this payment out-and-out they have freed themselves from what was a capital liability'. Particular reliance has been placed on behalf of the respondent on the phrase 'a liability which would have hung round their necks' as contained in these observations.

In the case of Associated Portland Cement . v. Kerr [1945] 27 T.C. 103 (C.A.) deduction was claimed in connection with payments made to retiring directors for procuring from them covenants not to engage in competitive activities to the detriment of the company. The assessee-company claimed deductions in respect of these payments by contending that the payments were made solely in order to protect and preserve the goodwill of the company unimpaired and were admissible deductions in computing its profits for taxation purposes. That contention was rejected and in that connection, in the Court of Appeal, Lord Greene, Master of the Rolls, at page 118, referred to the test in the observation of Lord Cave which we have cited above. He observed that there was nothing temporary about the advantage which the assessee-company got by procuring the negative covenants. 'It was to last during the lives of the two directors in question.' That advantage was a solid one. The learned Master of the Rolls distinguished the facts in the case of Mitchell v. B. W. Noble Ltd. [1927] 11 T.C. 372 (C.A.) in arriving at the conclusion that the disbursement was capital disbursement. In that connection, his main observation was : 'But when you are buying off an outside competitor the position is entirely different.'

25. In the case of G. Scammell and Nephew Ltd. v. Rowles, the deduction was claimed by the assessee-company in respect of payments made by compromising a suit and counter-claim wherein the respective claims were for a declaration that the debentures were void and for damages for defamation. The main observations on which reliance has been placed by Mr. Joshi appear at pages 52 to 54 of the report. Now, at page 53, the argument advanced was stated in the following words :

'But the real weight of the argument that was put before us was on the point as to termination of trading relation, and it was said that where you have a complex relationship, two companies with interlocked boards, the chairman of one holding a controlling interest in the other, a management agreement made, a hiring agreement made, loans, debentures issued, and so forth and so on a payment for the purpose of getting rid of that complex relationship is not one which can be said to be wholly and exclusivity laid out for the purposes of the appellant-company's trade.'

26. The above argument was rejected and it was observed :

'It seems to me that, if we assume that the object was to terminate the trading relation, we must treat the matter giving proper force to the word trading'. The relation to which the Commissioners are referring is a trading relation, and, therefore, in so far as there were any other relations which were not of a trading nature, the finding of the Commissionersnegatives the idea that one of the objects was to get rid of them ; it was trading relations, and trading relations only.'

27. He, therefore, confirmed the finding of Lawrence J. in the first court and held that the payments in question were made for the purposes of the trading of the assessee-company and were accordingly admissible deductions in computing profits for the purpose of income-tax. There is, in our view, similarities of facts in the above authority and the facts in the present case, inasmuch as certain control of business of the assessee-company was obtained by the lenders as and by way of security for repayment of the loans agreed to be advanced and for recovery of commission and interest payable by the assessee-company to the lenders.

28. In the case of Van Den Berghs Ltd. v. Clark [1935] 19 T.C. 390: 3 I.T.R. (Eng. Cas.) 17 relied upon by Mr. Joshi, the question related to the payments agreed to be made in settlement reached between the assessee-company and another company in respect of claims and counter-claims which arose under the agreements made between the two companies. Under the settlement, the assessee-company received 450,000 as damages and the agreements between the two companies, were agreed to be determined and each party released the other party from all claims thereunder. The observations on which reliance is placed appear at page 431, where, in connection with the three agreements which were cancelled by consent of parties, the observation was that they 'were not ordinary commercial contracts made in the course of carrying on their trade ; they were not contracts for the disposal of their products or for the engagement of agents or other employees necessary for the conduct of their business; nor were they merely agreements as to how their trading profits when earned should be distributed as between the contracting parties. On the contrary, the cancelled agreements related to the whole structure of the appellants' profit-making apparatus. They regulated the appellants' activities, defined what they might and what they might not do, and affected the whole conduct of their business.'

39. Mr. Joshi has submitted that these are observations which are applicable to the facts of the present case. In his submission, the various clauses in the agreements between the assessee-company and the lenders relate to the whole structure of the assessee-company's profit-making apparatus. These agreements regulated the activities of the assessee-company and defined what they might and what they might not do and affected the whole conduct of their business. He has, therefore, submitted that following the observations in the case, the damages of Rs. 3,00,000 agreed to be paid by the assessee-company must be held to be payment made for acquiring an enduring advantage. The advantage was to get the right of carrying onthe business free from shackles of the three agreements and that was a capital asset.

30. It is not necessary to refer to the facts in the case of Associated Hotels of India Ltd. v. Commissioner of Income-tax, because the subsequent decisions of the Supreme Court appear to have the effect of overruling the observations made in that case.

31. Now, we find it difficult to accept Mr. Joshi's submission that the true effect of the three agreements of finance and various clauses contained therein is to deliver the control of the business of the assessee-company to the lenders or has the effect of altering the structure of the company's business. The intent and the main purpose of these three agreements, apparently, was to enable the assessee-company to carry on its business for its own profits. All the goods of import were to be imported by contracts made by the assessee-company with a liability to pay price in respect thereof to the exporters-sellers. In that connection, under these three agreements the lenders agreed to make finances available for opening irrevocable letters of credit through banks for paying or arranging with banks for payment on behalf of the assessee-company of the c.i.f. prices and also for payment of clearing charges and other incidental charges. Though the goods were to remain in pledge with the lenders, the ownership of the goods always continued in the assessee-company. In fact, the agreements provided that within four months from the receipt of the shipments the assessee-company was bound to get the goods released from pledge by, we imagine, making arrangements for sale of the goods in the market. The lenders were not concerned with the resale prices of the imported goods as fixed by the assessee-company. Now, it is true that since the moneys belonging to the lenders were to be the finance and/or the circulating capital for procreation of the imports and would continue to remain sunk in the imported goods till these goods were resold, the lenders obtained and were given as and by way of security several important rights such as are to be found in Clauses 3, 9 and 24. Thus, the lenders' consent was necessary in connection with the terms to be agreed in the import of goods and the assessee-company was not permitted to make contracts for import without the consent in writing of the lenders. As the goods were stored in the installations at Wadala and Madras, and the lenders were to be pledgees, possession of these installations was agreed to be delivered to them. Somewhat extraordinary right was given to the lenders by providing that the assessee-company should not charter any tanker or tankers for importing the goods into Bombay without obtaining the approval in writing of the financiers. Under Clause 24, the lenders were, entitled to have an irrevocable power of attorney entitling them to execute for and on behalf of the assessee-companyvarious documents including those required for opening letters of credit, clearing and selling the goods, endorsing insurance policies and such other documents. These rights, as already stated, are normal and ordinary rights usually created in writings and/or deeds of finance agreements in favour of lenders. Such rights are exercised when repayment of advanced under finance agreements is not received in accordance with tenor of such agreements. These rights are in normal circumstances not for taking control of and/or carrying on the business of the borrowers. There is nothing in these agreements which can justify a finding that the agreements were made for entrusting the management of the business of the assessee-company to the lenders. The rights reserved are, to repeat only towards securing to the lenders payments of moneys agreed to be paid by the company under the agreements to the lenders. The main intent and purpose of the agreements, therefore, in our view was to make available to the assessee-company finances to enable it to carry on its business. It is, therefore, difficult to accept the submission made, by Mr. Joshi that these agreements contained provisions which related to the whole structure of the assessee's profit-making apparatus or that they regulated the assessee's activities and defined what they might and what they might not do and/or affected the whole conduct of their business. It is not necessary to decide in that connection as to whether the agreements of finance of the nature as appearing in this case can be described as creating trading relationship between the lenders and/or borrowers, The question is whether the agreement made by the assessee-company to pay damages to the lenders for termination of these agreements can, under the above circumstances, be held to be an agreement for procreation of any capital asset or any asset of an enduring nature. The converse that is claimed on behalf of the assessee-company is that the agreement has the effect of removal of obstructions to enable the assessee-company totally on its business on the same lines as it used to do before the agreement were made. In this connection, it requires to be noticed that under the three agreements heavy liability was undertaken by the assessee-company to pay interest at 6 per cent, whether any finance was borrowed by it under the agreement or not. Similarly, commission was agreed to be paid under clause 13 in respect of all goods of import irrespective of the assessee-company having borrowed any finances under the agreement. Under clause 25, even after the expiration of the agreed period of 10 years, the assessee-company agreed to pay, so long as it continued business, commission to the lenders. These liabilities were found to be so heavy that the assessee-company was compelled to file the suit mentioned above for consultation of the agreement and the pledge of the goods. These were disadvantages of trading nature arising against the assessee-company. Thesewere disadvantages which made it impossible for the assessee-company to make any profits. It is quite apparent that the agreement to pay damages in the sum of Rs. 3,00,000 was expenditure to be made for terminating disadvantageous relationship between the parties and was to remove difficulties in the smooth carrying on of the business of the assessee-company. The agreements of finance were to last for 10 years and the termination of these agreements was not the benefit which would have endured to the company beyond that period of 10 years except in connection with the incidental liability to pay certain small commission even after the period of 10 years. Removal of the obstructions and disadvantages which were the consequences of these three agreements were removal of liabilities rather than procreation of any benefits or enduring benefits as contended by Mr. Joshi The commission and interest payable under the agreements would have been recurrent liability to be discharged from circulating capital. Similarly, the loans advanced under the agreements were also liabilities to be discharged from circulating capital. These liabilities were made shortlived by the compromise made between the parties. It is difficult to accept the contention of Mr. Joshi that the benefit which accrued to the assessee-company by termination of these agreements was a capital asset and the payment of Rs. 3,00,000 agreed to be made in that connection would be capital expenditure.

32. In connection with the legal expenses, the claim relates to the following three items:

(1) Rs. 24,719-8-0 paid to Messrs. Kanga & Co.

(2) Rs. 3,895-0-0 paid to Mr. R. S. Daruwala, Advocate.

(3) Rs. 41,031-3-0 paid to Messrs. Little & Co.

33. As regards the first item, Mr. Joshi has conceded that the expense related to the making of the above agreements and various deeds and procreation of loan and revenue expenditure and must be allowed. As regards the next two items, his submission was that these items related to the settlement of the suit and counter-claim and the expense was of the nature of the expenditure of Rs. 3,00,000 agreed to be paid as damages for termination of the three agreements. He submitted that for the reasons advanced in connection with the item of damages of Rs. 3,00,000 these two items were for disbursements of capital nature and could not be allowed as deductions. He, however, agrees that as we are not accepting his submissions in connection with the item of Rs. 3,00,000 these two items will have to be also accepted as disbursements to revenue account and because of our judgment in connection with Rs. 3,00,000, these may be held as allowable deductions.

34. In connection with the item of Rs. 3,00,000, it requires to be stated that payments are agreed to be made and received by instalments ofRs. 60,000. In fact, in each of the relevant assessment years Rs. 60,000 only have been paid towards the liability in respect of this amount. The deduction could, therefore, be justifiably allowed for Rs. 60,000 in each year and not for the sum of Rs. 3,00,000.

35. In the result, our answer to the above question will be in the negative, but the deduction in each year will be only of the sum of Rs. 60,000 paid in each year. The respondent will pay costs.


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