JAGDISH SAHAI J. - At the instance of the assessee, Radha Kishan Kapoor (hereinafter referred to as the assessee), the following question of law has been submitted to us for our opinion :
'Whether on the facts and in the circumstances of this case the Tribunal was right in holding that the payment of Rs. 45,000 was a capital expense and hence not admissible under section 10(2)(xv) ?'
The case originally came up before a Bench consisting of R. N. Gurtu and B. Upadhya JJ., who called for a supplementary statement of the case, which having been received the reference has been put up before us for hearing. The facts as emanating from the statement of the case and relevant for our purpose are as follows : The assessee and his brother, Gauri Shanker Kapoor, constitute a registered partnership firm styled as Messrs. Hari Chand Kapoor and sons. This firms carried on canteen and contract business in the India Army. A partition took place between the brothers and out of seventeen contracts that they had, each got eight. With regard to the remaining one, which was a canteen shop run under the style of Irwin Stadium, New Delhi, the military authorities gave the brothers option for either of them to rum the business subject to his buying all the rights of the other. The brothers entered into an agreement, the main clause of which was as follows :
'It was agreed between both the partners that in consideration of the sum of Rs. 45,000 Rai Sahib Radha Kishan Kapoor should assume control of the Irwin Stadium Canteen business.'
It was also provided in the agreement that Lala Gauri Shanker Kapoor would hand over the business to Rai Saheb Radha Kishan Kapoor, immediately on receipt of the sum of Rs. 45,000 which was to be paid by the moon of 9th of September 1940. The military authorities approved of this arrangement. During the accounting period relevant to the assessment years 1946-47, this sum of Rs. 45,000 paid by the assessee to his brother, Gauri Shanker Kapoor. The assessee claimed Rs. 45,000 as a business expenditure under section 10(2)(xv) of the Act. The Income-tax officer held this amount as an expense in the nature of capital, a finding with which the Appellate Assistant Commissioner and the Income-tax Appellate Tribunal concurred in the appeals field by the assessee under section 30 and 33 of the Act.
We have heard Mr. D. D. Seth for the assessee and Mr. Gopal Behari for the department. Mr. Seth has contented that the payment of Rs. 45,000 was not made either to buy the goodwill for Gauri Shanker Kapoor or to buy a partner. On behalf of the department it was contented that this payment was made top Gauri Shanker Kapoor in satisfaction of his forgoing the claim to profits of the firm. The question therefore, is whether the amount of Rs. 45,000 was expended wholly and exclusively for the purpose of this business. In this connection is relevant to reproduce the provisions of section 10(2)(xv) of the Act.
'10. (2) Such profits or gains shall be computed after making the following allowances, namely :........
(xv) any expenditure (not being in the nature of capital expenditure or personal expenses of the assessee) laid not or expended wholly and exclusively for the purpose of such business, profession on vocation.'
We have perused the Institute Rules, India (Army and Royal Air Force Head quarters, India 1938) which deal with military contracts and which have been made annexure to the statement of the case submitted to us by the Tribunal. These rules clearly provide that no person can run a canteen other than the one appointed by the military authorities and that the business was terminable at six months notice by the military authorities. There is thus no question of a free market and the business, is in the nature of a monopoly of the military department Consequently any ideas of competition are foreign to the real nature of the business. We cannot, therefore, treat this payment of Rs. 45,000 to Gauri Shanker Kapoor as the amount paid to avoids competition We are also unable to hold that his amount was paid by they assessee to buy the goodwill of Gauri Shanker Kapoor. The question of goodwill can arise only in connection with a business to carry on which a person has a right and in which continuity is excepted. Inasmuch as neither the assessee not Gauri Shanker Kapoor nor anyone else had a legal right to run the business except for the year for which they had the contract, there was no guarantee respect of the continuity of the business. There were therefore no certain prospects to earn profits. The life of the business was only one year, i.e. the period for which the contract was given, and that too subject to cancellation by notice. No one could look forward to the prospects of earning profits as of right and as we have said above there was no free market. In the circumstances, we do not see how it can be said that the sum of Rs. 45,000 was paid buy over the good will of Gauri Shanker Kapoor.
Ordinarily, 'capital' means an assure which has an element of permanency about it and which is capable of being a source of income. Capital expenditure must, therefore, normally mean an acquisition of an asset of lasting value; while income or revenue expenses are generally running expenses incurred in earning profits or expenses incurred with the primary objects of an immediately return or acquisition of assets which are not of lasting value and are likely to get exhausted or consumed in the process of the return or a very limited number of return (see Jagat Bus Service v. Commissioner of Income-tax). It appears to us that the amount of Rs. 45,000 paid by the assessee to Gauri Shanker Kapoor to the profits in the business. It appears to us therefore was invited to B. W. Nobel v. Mitchell, where the following was observed :
'It is a payment made in the course of business, dealing with a particular difficulty which arise in the course of the year, and was made not in order to secure an actual assets 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 unimperilled 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.'
That was a case where deduction was sought in respect of an amount paid by the company to one its employees as compensation for loss of Office inasmuch as he was being removed unsatisfactory conduct. It is obvious such an expenditure would in the nature of an income expenditure.
In In re Ramji Das Jaini & Co., the Lahore High Court had to consider whether the payment made under the agreement arrived at by the partners in a business to the effect that partners Nos. 2 and 3 would get a certain sum of money every year irrespective of the firms trading result and the partner No. 1 would be the sole in-charge of the firms profits and losses. It was held in that case that the payments were made in order to acquire the right to conduct the business and not for the purpose of producing profits in the conduct of the business and as such were in the nature of capital expenditure and could not be treated to be revenue expenditure. That case is closely parallel to ours.
In Guruswamy Naidu v. Commissioner of Income-tax the remuneration of managing agents consisted of a monthly payment of Rs. 1,000 and a percentage of commission on various items. During the relevant accounting year the assessee who was one of the partners in the firm - a limited company - had purchased for his exclusive benefit the interest of another partner in the firm on payment of Rs. 1,14,000 and claimed that amount for deduction as revenue expenditure. The Madras High Court held that the payment being in the nature of capital expenditure for acquiring a profit yielding asset was not an allowable deduction.
In City of London Contract Corporation v. Styles the assessee had agreed to buy the business of Phillips & Co. For pounds 180,000 and he sought deduction on the ground that it was a revenue expenditure. Esher M. R., while disposing of the submission of the assessee, observed as follows :
'Now nothing can be more plain if that be so, that that pounds 180,000 was the capital which they embarked in that business, the money they paid for it. But then we are carried beyond that, because there is a description given of what the business is. There is an endeavour to carry us so far as to go into the description of business, and to say that the pounds 180,000 is not capital because of the description of the business, but if they bought the business, whatever it may be and whatever it consisted of, the fact that it is the capital which they embarked in that business cannot be doubted. Now, if that was the capital which they embarked in that business, they then proceeded to carry on the business. How can you carry on a business after you have embarked your capital in the purchase of it You must find new money in order to pay the expenses year by year, and you get the receipts year by year, and the difference between the expenses necessary to earn the receipts of the year, and the receipts of the year are the profits of the business for the purpose of the income-tax.
Here is a clear statement that the difference between money expended in the year in order to earn income which was to be received in the year, and the income so received, was pounds 128,000. That is the net profit within the year, that is the sum upon which income-tax is to be paid; and it is as plain as plain can be that you cannot deduct from those net profits so arrived at any part of the capital which you so invested, whether you paid it or not for the purchase of the business which you were obliged to purchase before you could begin in the difference between expenditure and income year by year. If you do not darken it with words, it is as plain can be.'
In John Smith and Son v. Moore, the facts were that the sole proprietor of a coal merchants business died on the 7th of March, 1915, and under the terms disposition and settlement his son took over the business at a valuation in which nothing was charged for good will. The price paid included a sum of pounds 30,000 representing the value of certain unexpired contracts with colliery owners for the supply of coal at fixed prices, all of which contracts expired on or before the 31st December, 1915. The son paid one-third of the profits of the business as remuneration to a relative who, it was admitted, was a person concerned in the management of the business. This relative was not employed in the business prior to the war, nor were any expenses incurred in respect of managers remunerations in the last pre-war trade year. The Commissioners of Inland Revenue refused to allow the deduction of the whole of the remuneration in question and the General Commissioners, on appeal, held that they (the General Commissioners) had no jurisdiction in the matter. The House of Lords in majority judgment held that the sum of pounds 30,000 paid in respect of the unexpired coal contracts was not an admissible deduction in computing the profits of the business for the purposes of excess profits duty for the accounting period from the 7th of March, 1915, to the 31st of December, 1915, on the ground that it was a capital expenditure.
The cases mentioned above, though not directly on the point which is before us, lend considerable support to the view that we are taking.
For the reasons mentioned above we would answer the question referred to us in the affirmative and against the assessee. We direct the assessee to pay the costs of the department which we fix at Rs. 200. The fee of learned counsel for the parties is also fixed at the same figure.
Questions answered in the affirmative.