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Commissioner of Income-tax Vs. Belpahar Refractories Ltd. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtOrissa High Court
Decided On
Case NumberSpecial Jurisdiction Case Nos. 175 to 179 of 1973
Judge
Reported in[1977]109ITR667(Orissa)
ActsIncome Tax Act, 1961 - Sections 43(3)
AppellantCommissioner of Income-tax
RespondentBelpahar Refractories Ltd.
Appellant AdvocateStanding Counsel
Respondent AdvocateB. Pal and ;B.K. Mohanty, Advs.
Cases ReferredTravancore Sugars and Chemicals Ltd. v. Commissioner of Income
Excerpt:
- motor vehicles act, 1988 [c.a. no. 59/1988]section 173(1) proviso; [d. biswas, amitava roy & i.a.ansari, jj] appeal without statutory deposit but within limitation/or extended period of limitation maintainability - held, if the provision of a statute speaks of entertainment of appeal, it denotes that the appeal cannot be admitted to consideration unless other requirements are complied with. the provision of sub-section (1) of section 173 permits filing of an appeal against an award within 90 days with a rider in the first proviso that such appeal filed cannot be entertained unless the statutory deposit is made. the period of limitation is applicable only to the filing of the appeal and not to the deposit to be made. it, therefore, appears that an appeal filed under section 173 cannot.....r.n. misra, j. 1. on applications of the revenue made under section 256(1) of the income-tax act, 1961 (hereinafter referred to as ' the act') the tncome-tax appellate tribunal, bombay bench, has stated these cases and referred the following questions for the opinion of the court:'(1) whether, on the facts and in the circumstances of the case, thetribunal was justified in deleting- rs. 3,08,012.(in assessment year 1962-63) rs. 5,57,658 (in assessment year 1963-64) rs. 5,79,336 (in assessment year 1964-65) rs. 3,57,681 (in assessment year 1965-66) and rs. 5,87,729 (in assessment year 1966-67) on the ground that the said capital expenditures were converted into revenue expenditures and if the said deletions were legal ? (2) whether, on the facts and in the circumstances of the case, the.....
Judgment:

R.N. Misra, J.

1. On applications of the revenue made under section 256(1) of the Income-tax Act, 1961 (hereinafter referred to as ' the Act') the Tncome-tax Appellate Tribunal, Bombay Bench, has stated these cases and referred the following questions for the opinion of the court:

'(1) Whether, on the facts and in the circumstances of the case, theTribunal was justified in deleting-

Rs. 3,08,012.(in assessment year 1962-63)

Rs. 5,57,658 (in assessment year 1963-64)

Rs. 5,79,336 (in assessment year 1964-65)

Rs. 3,57,681 (in assessment year 1965-66) and

Rs. 5,87,729 (in assessment year 1966-67)

on the ground that the said capital expenditures were converted into revenue expenditures and if the said deletions were legal ?

(2) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that it was not a case of sharing the net profit, but, on the other hand, it was a case of remuneration for specific services rendered '

2. In regard to the assessment year 1963-64, the following question has also been referred :

' Whether depreciation and development rebates were allowable to the assessee-company in respect of the technical know-how report '

3. Similarly, for the assessment year 1964-65, one more question has also been referred being:

' Whether, on the facts and in the circumstances of the case, the Tribunal was justified in treating the contribution made to the two hospitals as expenditure of a revenue nature '

4. Assessee is a public limited company by name Belpahar Refractories Ltd. with its registered office at Belpahar within this State. The company was born out of a collaboration agreement (hereafter referred to as ' the agreement') dated November 6, 1957, between the Tata Iron and Steel Company Ltd. (hereafter referred to as ' the TISCO '), the Tata Industries (Pvt.) Ltd. (hereafter referred to as ' the TATAS ') and Didier Works A.G., a company incorporated in West Germany (hereinafter referred to as ' the German Company'). During the material time the shareholdings in the assessee-company were in the following proportions :

(i) TISCO, TATAS and their associates ... 61%

(ii) Maharaja of Jeypore ... 28%

(iii) The German company ... 11%

5. The authorised capital of the assessee-company was rupee five crores divided into five lakh shares of Rs. 100 each. The first issue of capital was to be not less than rupees two crores and not more than rupees three crores twenty lakhs of ordinary shares and out of it the TATA group had agreed to take shares of not less than fifty-one per cent. and the German company had agreed to take shares of not less than rupees seventy lakhs. Clause 5 of the agreement ran thus :

' Didier-Works shall contribute the said rupees seventy lakhs in the first issue of capital as follows ;

(a) Rs. 30 lakhs by providing an equivalent proportion of the purchase prices of machinery and equipment required for the said plants in Deutsche Mark, pounds sterling or other European currencies for the account of the Refractories Company (including the price or prices of any machinery orequipment supplied by Didier- Works themselves) until the full equivalent of the said Rs. 30 lakhs shall have been provided;

(b) as to the remaining Rs. 40 lakhs by instalments equivalent to the amounts payable to Didier-Works under any of the following heads, that is to say-

(i) the engineering fee accruing under Clause 3 of the agreement set out in the fourth schedule hereto,

(ii) the percentage of net profits of the Refractories Company accruing under Clause 8 of the agreement set out in the third schedule hereto,

(iii) any dividends payable on the shareholding of Didier-Works in the Refractories Company until the full equivalent of the said Rs. 40 lakhs shall have been so appropriated. Provided that Didier-Works shall contribute the said Rs. 40 lakhs in full within a period of eight years from the date the plant comes into full production. Provided further that if payments under heads (i), (ii) and (iii) above are not sufficient to enable Didier-Works to contribute the said Rs. 40 lakhs in full within the said eight years the parties hereto shall mutually consult, and decide the manner in which the balance of the said Rs. 40 lakhs shall be provided.' A separate agreement between the assessee-company and the German company was put into the third schedule of the agreement, Clause 1 whereof provided that the German company was to render all technical services in connection with the erection, installation and starting up of the plants. The German company also undertook that the two plants shall have incorporated in them the latest improvements and designs and shall fulfil the performance guarantee as regards the quantity and quality of the products set out in a schedule of that separate agreement. The expression ' technical services ' which were to be rendered by the German company included :

'(a) Collection and analysis of the engineering data and other information, preparation of preliminary cost, estimated and making investigations and other preliminary studies as required for the formulation of definite plans and designs for the said plants.

(b) Preparation of detail drawings and statistical calculations for buildings to house the said two plants.

(c) Advice on tenders and on placing of orders for materials and equipment to be purchased in India and expediting the same.

(d) Supervision of erection and completion of erection of the said two plants and putting them into commercial operation.

(e) Communication of know-how and technical information and processes in respect of the said two plants and in respect of the manufacture, use and marketing of the products or otherwise relating thereto.

(f) Provision and supply to the Refractories Company in India of the requisite number of adequately qualified technical personnel for the purpose aforesaid.'

6. In several clauses of the separate agreement, the German company remained obliged to render various other services. Under Clause 8 of the separate agreement, the company's remuneration for the services to be rendered were provided in the following terms :

'By way of remuneration for the said rights and technical information and services given and provided or agreed or covenanted to be given and provided under this agreement Didier-Works shall be paid in rupees by the Refractories Company the following remuneration, namely, 6 1/4% (six and one-fourth per cent.) of the amount representing the net profits of the Refractories Company for each financial year for a period of 8 years commencing with the financial year in which the said Refractory plant comes into full production provided that if the date on which the said plant comes into full production falls in the second half of a financial year, the said period of eight years shall commence with the next following financial year. For the purpose of payment under this clause the net profit shall mean profits arrived at after allowing for depreciation at income-tax rates, taxes, overheads including selling and head office expenses and the usual charges and expenses. The above remuneration shall cover the salaries, living expenses, passages and other expenses of the technical personnel (including the works manager) who may be provided by Didier-Works in accordance with Clause l(f) hereof up to the date when the refractory plant commences operation on a commercial basis. As from that date the salaries of any of the said technical personnel who may be retained by the Refractories Company shall be borne by that company.'

7. Clause 9 provided:

'Didier-Works shall bear and pay such Indian income-tax, super-tax, or any other Indian tax (if any), as may be payable by them on the remuneration payable to them under this agreement.......'

8. In terms of the remuneration clause, the assessee-company paid to the German company the following amounts in the relevant assessment years :

Rs.

1962-63

3,08,012

1963-64

5,57,658

1964-65

5,79,336

1965-66

3,57,681

1966-67

5,87,729.

9. The assessee-company claimed these as deductible expenses but the Income-tax Officer disallowed the claims in the respective years by holding that they represented capital expenditure as according to the Income-tax Officer,the assessee derived a benefit of an enduring nature in lieu of these payments.

10. On appeal to the Appellate Assistant Commissioner, in respect of the first two years, he adopted the reasoning of the Income-tax Officer for disallowing the assessee's claim and in the second group of three years, he sustained the disallowance by holding that the remuneration paid in these years to the German company was in reality a sharing of profits. For his conclusion, he drew support from the decision of the Judicial Committee of the Privy Council in the case of Pondicherry Railway Co. Ltd. v. Commissioner of Income-tax [1931] 5 ITC 363 (PC).

11. In assessee's further appeals to the Appellate Tribunal which were heard by the Bombay Bench, the assessee claimed that the payments were essentially made on revenue account by way of remuneration payable to the German company for its services rendered in terms of the separate agreement. It was alternatively claimed that even if a capital asset had been acquired as a consequence of these payments, the payments nevertheless constituted revenue expenditure. Reliance was placed in support of such submission on the decision of the Supreme Court in the case of Travancore Sugars and Chemicals Ltd. v. Commissioner of Income-tax : [1966]62ITR566(SC) . It was further maintained that there was no case of a division or sharing of profits simpliciter. Reliance was placed on the ratio laid down in the case of British Sugar . v. Harris : [1939]7ITR101(Cal) . The Tribunal accepted the contention of the assessee that the rule in the Pondicherry Railway Company's case [1931] 5 ITC 363 (PC) had no application and it was not a case of division or sharing of profits simpliciter. The Tribunal also accepted the contention advanced by the revenue that the payments had ultimately brought into existence a capital asset, yet it came to the conclusion that the expenditure was revenue in character in view of the rule indicated in the case of Travancore Sugars and Chemicals Ltd. : [1966]62ITR566(SC) . Accordingly, the Tribunal allowed deductions of the claims in the several years.

12. In the assessment year 1963-64, the Income-tax Officer had disallowed expenditure of a sum of Rs. 1,25,190 incurred by the assessee for obtaining a complete technical know-how report. The Tribunal took note of the inclusive definition of 'plant' in the Act and relying on certain authorities came to hold that the depreciation and development rebate in respect of technical know-how report was admissible.

13. During the assessment year 1964-65, the assessee had claimed a sum of Rs. 1,44,755 under the head Workmen's Staff Welfare Expenses. The Income-tax Officer disallowed a sum of Rs. 45,000 out of the said amount on a finding that Rs. 25,000 out of it had been contributed by the assessee to the Ardeshir Dalal Memorial Hospital for erecting one air-conditioned cabin andRs. 20,000 had been donated to the Tata Memorial Hospital for providing hospitalisation facilities to the employees of the assessee and these according to the Income-tax Officer were investments of capital nature. The disallowance was upheld in first appeal. The Tribunal, however, took into consideration broad features available on the record and came to hold that these were admissible expenses.

14. We shall first examine the tenability of the claim for depreciation and development rebate in respect of the technical know-how report and the contributions made to the hospitals. The Tribunal has found in the assessment year 1963-64 that the assessee claimed under the head of operational and other expenses a sum of Rs. 1,25,190. Out of this amount, the Income-tax Officer found that Rs. 481 had been spent in connection with execution of the agreement relating to the use by the assessee in their factory at Belpahar of the patent devised by one Mr. Russel P. Hauer. The balance amount had been paid for preparation of the technical know-how report as per Clause 5(a) of the agreement dated December 12, 1961. The Income-tax Officer treated this as a capital expenditure and the Appellate Assistant Commissioner upheld that conclusion. The Tribunal in paragraph 28 of its appellate decision came to hold:

'The assessee's representative took us through the agreement of December 12, 1961, between the assessee-company and R, P. Hauer and admitted that the agreement was for the acquisition of the complete know-how report relating to the basic refractory bricks. Hauer agreed to train not more than three men at the company's expenses in the U.S.A. According to Clause V of the agreement the company paid to R. P. Hauer a sum of Rs. 25,000 for making lay-outs, drawings, designs, blueprints, to give effect to the collaboration visualised in the agreement.....,' and after dealing with the contentions advanced on behalf of the revenue came to find that the report for the acquisition of which the payment had been made contained wealth of information about the design, lay out, et cetera. Relying on the definition of ' plant' given in Section 43(3) of the Act which includes 'books', the Tribunal held that the report containing the know-how could be equated with a book as included in the definition and, therefore, it came to hold that the report was a part of 'plant' as defined in the. statute. It accordingly directed that depreciation and development rebate as admissible under the Act may be given.

15. There is no dispute before us that plant has an inclusive definition which obviously reflects the legislative intention that the term has to be given a wide meaning. The Tribunal has rightly used this as the basis to hold that the report containing the know-how be treated as a part of plant. We do not think that the Tribunal committed any mistake-in coming to its conclusion on this point. We are not called upon to examine whether theclaims on the head of depreciation and development rebate are admissible because they are matters yet to be examined by the Income-tax Officer. Our answer to the question referred, therefore, is in the affirmative, that is-

The depreciation and development rebate were allowable to the assessee in respect of the technical know-how, provided the statutory requirements are satisfied.

16. The next question for examination is as to whether the contributions made by the assessee in favour of the two hospitals were deductible as revenue expenditure. During the assessment year 1964-65, the assessee had paid a sum of Rs. 25,000. to A. D. Memorial Hospital for erecting one air-conditioned cabin and Rs. 20,000 to the Tata Memorial Hospital for providing hospitalisation facilities for the assessee's employees. These deductions were disallowed by the Income-tax Officer and the disallowance was upheld in appeal by the Appellate Assistant Commissioner. The Tribunal found :

'It is pointed out to us that the assessee did not become the owner of those cabins and no capital asset belonging to the assessee was brought into existence as a result of this expenditure. This was incurred only as a part of the staff welfare expenses. These contributions made by the assessee enabled its employees to take advantage of the hospitalisation facilities provided in those air-conditioned cabins in the two hospitals. Beyond that the assessee did not derive any further advantage. The cabins continued to belong to the hospital authorities. The departmental representative on the other hand emphasised the contents of the letter addressed by the assessee-company to TISCO wherein the two amounts were admitted to have been contributed towards the capital cost of the cabins.

We are of the opinion that in this case no capital asset of the assesseehas come into existence as a result of the contributions made by theassessee. The amounts were spent only as a part of labour welfare expenses.As a result of this expenditure, the employees of the assessee can availthemselves of the hospitalisation facilities extended by the hospital authorities on a concessional basis. Even if we assume that there was some enduringadvantage, we cannot hold that the expenditure was on capital account. Ithas been pointed out by the Supreme Court in the case of Goian Lime Syndicate v. Commissioner of Income-tax : [1966]59ITR718(SC) that in everycase where an enduring advantage is obtained, the expenditure for securingit need not necessarily be treated as capital expenditure. In the first place,we do not hold that any enduring advantage was obtained by the assesseein the sense in which it was understood by the department. Secondly,even if there was a substantial advantage gained by the assessee, we maydo no better than to rely upon the observations of the Supreme Court inthe aforesaid decision as reproduced below :

. 'It is not the law that, in every case, if an enduring advantage is obtained, the expenditure for securing it must be treated as capital expenditure, for, as pointed out by Channell J., in Allianza Company v. Bell [1904] 2 KB 666 :

'In the ordinary case, the cost of the material worked up in a manufactory is not a capital expenditure; it is a current expenditure, and does not become a capital expenditure merely because the material is provided by something like a forward contract, under which a person for the payment of a lump sum down secures a supply of the raw material for a period extending over several years '. This illustration shows that it is not in every case that an expenditure in respect of an advantage of an enduring nature is capital expenditure.... '

17. We have been referred to a decision of our own court in Commissioner of Income-tax v. Rupsa Rice Mill : [1976]104ITR249(Orissa) , wherein the question for consideration was whether a sum of money donated by the assessee for the construction of a primary health centre building was admissible as business expenditure. On an examination of several authorities the court upheld the claim of the assessee on a finding that the erection of a health centre near the factory premises would provide treatment to ailing workmen. The Tribunal appears, in our view, to have recorded a clear finding of fact and in the face of such a finding, no question of law at all arose for determination. This question should not have been referred for the opinion of the court, as, in our view, the finding recorded by the Tribunal was one of pure fact. Accordingly, we discharge the reference on this question and decline to record any answer.

18. This leaves for consideration the main question common to all the years which we shall now proceed to examine. It may be stated here that the two questions referred by the Tribunal regarding this aspect are indeed one and if we find that the assessee is not entitled to succeed in its claim of the expenditure being revenue in character, the other would not arise.

19. First, we propose to indicate the legal position; then examine the findings reached by the Tribunal and, lastly, formulate the answer to thequestion.

20. Lord Chancellor Viscount Cave, in the case of Atherton v. British Insulted and Helsby Cables Ltd. [1925] 10 TC 155, laid down what has almostiinrversally'been accepted as the test for determining what is capital expenditure as distinguished from revenue expenditure. At page 192 of the report the Lord Chancellor observed :

'But there remains the question, which I have found more difficult, whether apart from the express prohibitions, the sum in question is (in the words used by Lord Sumner in Usher's case [1914] 6 TC 399 (HL) a proper debit item to be charged against incomings of the trade when computingthe profits of it; or, in other words, whether it is in substance a revenue or a capital expenditure. This appears to me to be a question of fact which is proper to be decided by the Commissioners upon the evidence brought before them in each case ; but where, as in the present case, there is no express finding by the Commissioners upon the point, it must be determined by the courts upon the materials which are available and with due regard to the principles which have been laid down in the authorities. Now in Vallambrosa Rubber Company v. Farmer [1910] 5 TC 529 Lord Dunedin, as Lord President of the Court of Session, expressed the opinion that ' in a rough way' it was' not a bad criterion of what is capital expenditure as against what is income expenditure to say that capital expenditure is a thing that is going to be spent once and for all and income expenditure is a thing which is going to recur every year ';......and no doubt this is oftena material consideration. But the criterion suggested is not, and was obviously not intended by Lord Dunedin to be, a decisive one in every case; for it is easy to imagine many cases in which a payment, though made ' once and for all', would be properly chargeable against the receipts for the year......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, I think that 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.'

21. Several different tests were, however, indicated in many leading English cases. Viscount Haldane in the case of John Smith and Son v. Moore (H. M. Inspector of Taxes) [1921] 12 TC 266 (HL), Romer L.J. in the case of Golden Horse Shoe (New) Ltd. v. Thurgood (H. M, Inspector of Taxes) [1933] 18 TC 280 (CA) and Lord Macmillan in the case of Van den Berghs Ltd. v. Clark (H. M. Inspector of Taxes) [1935] 19 TC 390 : 3 ITR 17 indicated different tests.

22. A Full Bench of the Lahore High Court in the case of Benarsidas Jagannath, In re attempted to reconcile all these tests and Mahajan J. (as the learned judge then was), spoke for the Full Bench thus :

'It is not easy to define the term 'capital expenditure' in the abstract or to lay down any general and satisfactory test to discriminate between a capital and a revenue expenditure. Nor is it easy to reconcile all the decisions that were cited before us, for each case has been decided on its peculiar facts. Some broad principles can, however, be deduced from what the learned judges have laid down from time to time.

They are as follows:

1. Outlay is deemed to be capital when it is made for the initiation of a business, for extension of a business, or for a substantial replacement of equipment: vide Lord Sands in Commissioners of Inland Revenue v. Granite City Steamship Company [1927] 13 TC 1. In City of London Contract Corporation v. Styles [1887] 2 TC 239 (CA), Bowen L.J. observed as to the capital expenditure as follows :

'You do not use it 'for the purpose of' your concern which means, for the purpose of carrying on your concern, but you use it to acquire the concern.' 2. Expenditure may be treated as properly attributable to capital when it 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 : vide Viscount Cave L.C. in Atherton v. British Insulated and Helsby Cables Ltd. [1925] 10 TC 155. If what is got rid of by a lump sum payment is an annual business expense chargeable against revenue, the lump sum payment should equally be regarded as a business expense, but if the lump sum payment brings in a capital asset, then that puts the business on another footing altogether. Thus, if labour saving machinery was acquired, the cost of such acquisition cannot be deducted out of the profits by claiming that it relieves the annual labour bill, the business has acquired a new asset, that is, machinery.

The expressions ' enduring benefit' or 'of a permanent character' were introduced to make it clear that the asset or the right acquired must have enough durability to justify its being treated as a capital asset.'

3. Whether for the purpose of the expenditure, any capital was withdrawn, or, in other words, whether the object of incurring the expenditure was to employ what was taken in as capital of the business. Again, it is to be seen whether the expenditure incurred was part of the fixed capital of the business or part of its circulating capital. Fixed capital is what the owner turns to profit by keeping it in his own possession. Circulating or floating capital is what he makes profit of by parting with it or letting it change masters. Circulating capital is capital which is turned over and in the process of being turned over yields profit or loss. Fixed capital, on the other hand, is not involved directly in that process and remains unaffected by it.'.

23. In the oft-quoted decision in the case of Assam Bengal Cement Co. Ltd. v. Commissioner of Income-tax : [1955]27ITR34(SC) , the Supreme Court, with reference to the tests laid down by Mahajan J., observed (page 45):

'This synthesis attempted by the Full Bench of the Lahore High Court truly enunciates, the principles which emerge from the authorities. In cases where the expenditure is made for the initial outlay or for extension of a business or a substantial replacement of the equipment, there isno doubt that it is capital expenditure. A capital asset of the business is either acquired or extended or substantially replaced and that outlay whatever be its source whether it is drawn from the capital or the income of the concern is certainly in the nature of capital expenditure. The question however arises for consideration where expenditure is incurred while the business is going on and is not incurred either for extension of the business or for the substantial replacement of its equipment. Such expenditure can be looked at either from the point of view of what is acquired or from the point of view of what is the source from which the expenditure is incurred. If the expenditure is made for acquiring or bringing into existence an asset or advantage for the enduring benefit of the business it is properly attributable to capital and is of the nature of capital expenditure. If on the other hand it is made not for the purpose of bringing into existence any such asset or advantage but for running the business or working it with a view to produce the profits it is a revenue expenditure. If any such asset or advantage for the enduring benefit of the business is thus acquired or brought into existence it would be immaterial whether the source of the payment was the capital or the income of the concern or whether the payment was made once and for all or was made periodically. The aim and object of the expenditure would determine the character of the expenditure whether it is a capital expenditure or a revenue expenditure. The source or the manner of the payment would then be of no consequence. It is only in those cases where this test is of no avail that one may go to the test of fixed or circulating capital and consider whether the expenditure incurred was part of the fixed capital of the business or part of its circulating capital. If it was part of the fixed capital of the business it would be of the nature of capital expenditure and if it was part of its circulating capital it would be of the nature of revenue expenditure. These tests are thus mutually exclusive and have to be applied to the facts of each particular case in the manner above indicated. It has been rightly observed that in the great diversity of human affairs and the complicated nature of business operations it is difficult to lay down a test which would apply to all situations. One has therefore got to apply these criteria one after the other from the business point of view and come to the conclusion whether on a fair appreciation of the whole situation the expenditure incurred in a particular case is of the nature of capital expenditure or revenue expenditure in which latter event only it would be a deductible allowance under Section 10(2)(xv) of the Income-tax Act. The question has all along been considered to be a question of fact to be determined by the income-tax authorities on an application of the broad principles laid down above and the courts of law would not ordinarily interfere with such findings of fact if theyvliave been arrived at on a proper application of those principles.'

24. In a series of decisions of the Supreme Court, the rule in Assam Bengal Cement Company's case : [1955]27ITR34(SC) has been applied for a factual determination as to whether the disputed expenditure was capital expenditure or revenue expenditure.

25. Lord Reid, delivering the decision of the House of Lords in the case of Regent Oil Co. Ltd. v. Strick (Inspector of Taxes] [1966] AC 295 ; [1969] 73 ITR 301 observed :

'Whether a particular outlay by a trader can be set against income or must be regarded as a capital outlay has proved to be a difficult question. It may be possible to reconcile all the decisions but it is certainly not possible to reconcile all the reasons given for them. I think that much of the difficulty has arisen from taking too literally general statements made in earlier cases and seeking to apply them to a different kind of case which their authors almost certainly did not have in mind--in seeking to treat expressions of judicial opinion as if they were words in an Act of Parliament. And a further source of difficulty has been a tendency in some cases to treat some one criterion as paramount and to press it to its logical conclusion without proper regard to other factors in the case. The true view appears to me to be that stated by Lord Macmillan in Van den Berghs Ltd. v. Clark [1935] AC 431 : [1935] 3 ITR 17 : ' While each case is found to turn upon its own facts, and no infallible criterion emerges, nevertheless the decisions are useful as illustrations and and as affording indications of the kind of considerations which may relevantly be borne in mind in approaching the problem'. '

26. Lord Reid again observed (page 318):

'So it is not surprising that no one test or principle or rule of thumb is paramount. The question is ultimately a question of law for the court, but it is a question which must be answered in light of all the circumstances which it is reasonable to take into account, and the weight which must be given to a particular circumstance in a particular case must depend rather on common sense than on strict application of any single legal principle.'

27. This being the legal position, the character of the annual-payments for the five years in question made by the assessee has now to be determined. In paragraph 13 of the second appellate decision, the Tribunal has held :

Coming now to the main question as to whether the payments in question are capital expenditure or not, we notice that the payments in question were connected with the erection of the plants and brought to the assessee know-how as also patent rights for exclusive exploitation. Therefore, the payments were in connection with the acquisition of capital assets. The services, technical information, engineering data, etc., were-linked up with the erection, installation and starting up of the two factories Clause 4(4)of the agreement of 1959 enabled the assessee to get the reports and technicians from the German company at its own expense after the production commenced. This indicates that the remuneration in question was intimately related to the services, information data, know-how et cetera for constructing the factories. No doubt, Clause 1(3) of the said agreement deals with the communication of know-how and technical information for the manufacture, use and marketing of the products. But then, this clause is an ancillary provision incidental to the main purpose of the erection of the factories. Apart from this, no evidence has been let in before us to show that the amount is attributable to the performance of the German company under this clause. There is no evidence as regards the quantum and value of work done under this clause and, at any rate, this work is not separately identifiable. The training of personnel under Clause l(f) for the purpose mentioned in Clause l(g) is similarly in the penumbra of uncertainty. It is not, therefore, possible to allocate any part of the remuneration to such services. No detail's have been supplied with regard to these services for each of the years. Therefore, the revenue element, if any, embedded in the remuneration payable to the German company is not ascertainable. In these circumstances, we hold that the department was right in treating the entire remuneration as having brought into existence the capital assets. Authorities are numerous for the proposition that expenditure for the purpose mentioned in Clause 1 of the agreement of 1959 is normally capital in nature......'

28. Dr. Pal for the assessee relying on the decision in the case of Commissioner of Income-tax v. Ciba of India Ltd. : [1968]69ITR692(SC) made an attempt to point out that the conclusion of the Tribunal that a capital asset was acquired was not appropriate. But learned counsel conceded that the assessee was not entitled to dispute the aforesaid finding of the Tribunal in the absence of a reference made at its instance of a question allowing within its ambit scope to dispute the finding. We shall, therefore, proceed on the footing that the Tribunal's finding that the expenditure in regard to which deduction has been claimed was utilised for obtaining a capital asset for the assessee is final.

29. Even after holding that a capital asset had sprung up for the company as a result of the impugned expenditure, the Tribunal came to hold that the same were revenue in character and, therefore, the claims of deduction were admissible. For doing so, the Tribunal mainly relied upon the decision of the Supreme Court in the case of Travancore Sugars and Chemicals Ltd. v. Commissioner of Income-tax : [1966]62ITR566(SC) . It is appropriate to ascertain the true ratio indicated by this decision and then find out whetherthe assessee is entitled to draw support from it for its claim. These briefly are the facts of the case taken from the head-note of the case reported :

The promoters of the Travancore Sugars and Chemicals Ltd. (assessee) which was floated to take over the assets of certain undertakings run by the Government of Travancore entered into an agreement with the Government, whereunder the assets of a sugar manufacturing concern, a distillery and a tincture factory were agreed to be sold by the Government to the assessee-company. The consideration for the sale of the assets of the sugar manufacturing concern was Rs. 3.25 lakhs, the consideration for the sale of the distillery was agreed to be arrived at as a result of joint valuation by engineers to be appointed by the parties and that for the sale of the assets of the tincture factory was the book value. The Government agreed to recognise the transfer of the licence for the distillery to the assessee and to secure the continuance of the licence for a period of five years after the termination of the existing licence and also to purchase the pharmaceutical products manufactured by the assessee in the tincture factory to meet its medical requirements. The Government was entitled to nominate a director on the board of directors of the assessee but he did not have voting power or the right to interfere with the normal management and the books of the assessee-company were open to inspection by the authorised Government officers. Apart from the cash consideration referred to above, under Clause 7 of the agreement, the Government were entitled to 20 per cent. of the annual net profits subject to a maximum of Rs. 40,000 after providing for depreciation and remuneration of the secretaries and treasurers. In January, 1947, instead of 20 per cent., Government's entitlement was reduced to 10 per cent. of the annual net profits which meant the net amount for which the company's audited profits were assessed to income-tax in the State of Travancore. In the assessment year 1958-59, the Government became entitled to Rs. 42,480 on the basis of 10 per cent. of the annual net profits. The question arose whether the said payment was deductible as a revenue expenditure.

30. The Income-tax Officer as also the Appellate Assistant Commissioner rejected the claim. The Tribunal, however, took the view that the payment was by way of commission and, therefore, was an expenditure; made in order to earn profits of the business and it was not an expenditure paid out of earned profits and accordingly accepted the assessee's stand. At the instance of the revenue, the following question had been referred to' the High Court of Kerala:

'Whether, on the facts and in the circumstances of the case, thepayment of Rs. 42,480 by the assessee to the Travancore Government underthe agreements dated June 18, 1937, and January 28, 1947, was allowableunder section 10 of the Income-tax Act '

31. The High Court held that the amount constituted capital expenditure and, therefore, the claim was not admissible. The assessee, therefore, came in appeal before the Supreme Court.

32. In support of the assessee's stand, it was pointed out that the annual payments were not part of the purchase price of the assets. Reference was made to Clauses 3, 4(a) and 5(a) of the agreement and it was said that separate and full considerations had been provided for the purchase of the assets of the Travancore Sugars Ltd., the Government distillery and the Government tincture factory. In addition to selling these assets, the Government undertook obligations enumerated in Clauses 4(b) and (c) and 5(b) of the agreement and the annual payments were in consideration of these obligations. Before entering into a close examination of the matter, the Supreme Court pointed out : [1966]62ITR566(SC) :

'It is often difficult, in any particular case, to decide and determinewhether a particular expenditure is in the nature of capital expenditure orin the nature of revenue expenditure. It is not easy to distinguish whetheran agreement is for the payment of price stipulated in instalments or formaking annual payments in the nature of income. The court has to looknot only into the documents but also at the surrounding circumstances soas to arrive at a decision as to what was the real nature of the transactionfrom the commercial point of view. No single test of universal applicationcan be discovered for solution of the question. The name which the partiesmay give to the transaction which is the source of the receipt and thecharacterization of the receipt by them are of little consequence. The courthas to ascertain the true nature and character of the transaction from thecovenants of the agreement tested in the light of surrounding circumstances.'

33. Proceeding to analyse the true nature of the consideration for the sale ofthe three undertakings in favour of the assessee, the court found that theconsideration had been split into, firstly, the cash consideration, and, secondly,the consideration that Government would be entitled to 20 per cent. of thenet profits subject to the upper limits of Rs. 40,000 per annum. Withregard to the second part of the consideration three important points werenoticed, namely::

(i) the payment of commission of 20 per cent. of the net profits by the assessee in favour of the Government was for an indefinite period and had no limitationtof time attached to it;

(iij the payment of the commission was related to the annual profits which flow from the trading activities of the assessee and the payment had no relation to the capital value of the assets; and

(iii) the annual payment of 20 per cent. was not related to or tiedup, in any way, to any fixed sum agreed between the parties as part of thepurchase price of the three undertakings.

34. There was no reference to any capital sum in the second part of the agreement. On the contrary, the very nature of the payments excluded the idea that any connection with the capital sum was intended by the parties. The court indicated (page 571):

'The mere fact that the capital sum is payable by instalments spread over a certain length of time will not convert the nature of that payment from the capital expenditure into a revenue expenditure, but the payment of instalments in such a case would always have some relationship to the actual price fixed for the sale of the particular undertaking. As we have already mentioned, there is no specific sum fixed in the present case as an additional amount of price payable in addition to the cash consideration and payable by instalments or by any particular method. In view of these facts we are of opinion that the payment of the annual sum of Rs. 42,480 in the present case is not in the nature of capital expenditure but is in the nature of revenue expenditure

The facts of the Trvancore Sugars' case : [1966]62ITR566(SC) are very different from the set of facts of the case before us. In that case, admittedly, certain assets were acquired by an agreement of sale. Three units were being purchased. For the sugar company, there was a cash valuation; for the other two units, a definite mode for fixing the valuation had been agreed upon. Besides these, there was a stipulation of payment of 20 per cent. out of the profits subject to an upper limit. In the agreement, the two parties had stipulated a price for the three units. The court was impressed by the fact that this was not a case of payment of a part of the consideration money by spreading over a number of years. There were certain obligations undertaken by the Government unconnected with the sales and the court, therefore, rightly relied upon the position that, in view of the three special features noted above, the annual payment had nothing to do with the consideration money for the sale. Once it was unconnected at that point and thereby lost its connection with the capital asset, the court linked up these payments with the discharge of obligations by Government and, therefore, upheld the assessee's contention. As already found, in this case, a capital asset has been acquired and the amounts in dispute are payments for it. The link between the payment and the acquisition of the asset is direct. Otherwise put, the capital asset is the outcome of these payments. It is true that some of the features which were present in the Travancore Sugars' case : [1966]62ITR566(SC) are also present here, namely, the payment is related to the annual profits which flow from the trading activities of the company. It is also true that the payment is not related to or tied up in any way to any fixed sum agreed between the parties as part consideration for the capital asset. These, however, cannot be taken as the true guiding features for ascertaining the real nature of thepayment, when as found by the Tribunal and no more disputed before us, a capital asset has sprung up obviously in return for the payments.

It was possible for the assessee to show that a part of these payments was for service and, therefore, it could be separated. Wheatcroft, in his treatise, The law of Income-tax, Sur-tax and Profits-tax, has set out three types of cases where the purchase price may be paid periodically or in instalments and the points of distinction between them are : 'First, there are cases where all the payments must be treated as income of the recipient and the payer is entitled to deduct tax on payment and to a deduction in computing his total income. Secondly, there are cases where the payments are all treated as capital and are neither taxable to the recipient nor deductible in computing the payer's total income. Thirdly, there are cases where the payments must be dissected into an income content and a capital content so that the former part is taxable and deductible whilst the latter is not. '

35. The Tribunal, however, negatived such a position and that has no more been disputed before us. In this view of the matter, we do not think that the assessee is entitled to fall back upon the ratio indicated in Travancore Sugars' case : [1966]62ITR566(SC) , and persuade us to accept its stand that the disputed amounts represent deductible revenue expenses.

36. Dr. Pal placed before us a recent decision of the Madras High Court being the case of Commissioner of Income-tax v. Sarada Binding Works : [1976]102ITR187(Mad) , wherein, even though the agreement amounted to an outright purchase of a business by the assessee, the payment which was not related to any specified sums which was agreed upon by the parties as the purchase price of the business was treated to be a revenue expenditure and reliance was placed on the Travancore Sugars' case : [1966]62ITR566(SC) . It is not necessary to deal with the ratio of the case because the conclusion ultimately turned upon following the Supreme Court decision referred to above.

37. It is unnecessary to refer to certain other authorities which were placed before us, as we are satisfied that the stand of the revenue is correct and the payments in question in the respective years did not amount to revenue expenditure. Our answer to the question, therefore, is:

On the facts and in the circumstances of the case the Tribunal was not justified in deleting-

Rs.3,08,012 (in assessment year 1962-63)

Rs. 5,57,658 (in assessment year 1963-64)

Rs. 5,79,336 (in assessment year 1964-65)

Rs. 3,57,681 (in assessment year 1965-66) and

Rs. 5,87,729 (in assessment year 1966-67)

on the ground that the said capital expenditures were Converted into revenue expenditures.

38. As success is divided, we direct parties to bear their own costs of these references.

Mohanti, J.

39. I agree.


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