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Commissioner of Income-tax Vs. Dalmia Dadri Cement Ltd. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtPunjab and Haryana High Court
Decided On
Case NumberIncome-tax Reference No. 12 of 1967
Judge
Reported in[1970]77ITR410(P& H)
ActsIncome Tax Act, 1922 - Sections 10(2)
AppellantCommissioner of Income-tax
RespondentDalmia Dadri Cement Ltd.
Appellant Advocate D.N. Awasthy,; B.S. Gupta and; Avinash Chander Jain,
Respondent Advocate G.C. Sharma and; N.N. Goswami, Advs.
Cases ReferredH. A. Shah and Co. v. Commissioner of Income
Excerpt:
.....retain its character as a capital expenditure. it is well established that the high court is not a court of appeal in a reference under section 66(1) of the act and it is not open to the high court in such a reference to embark upon a re-appraisal of the evidence and to arrive at findings of fact contrary to those of the appellate tribunal. the payment was to be out of the profits of the assessee-company and thus related to its annual profits which flowed from its trading activities and bad no relation to the capital value of its assets. 15. it is also urged on behalf of the assessee-company that for well over a decade before the assessment year 1955-56, the revenue had been taking the payment of compensation to mr. on this consideration this was not a proper case in which the revenue..........the annual payment under the agreement by the assessee-company to mr. prabhu dayal agrawal as revenue expenditure in the hands of the assessee-company prior to the assessment year 1955-56. this was not questioned by the revenue in those years as capital expenditure. the income-tax officer having found in favour of the assessee-company in this respect, it was open, in exercise of his powers of revision under section 33b of the income-tax act, 1922 (xi of 1922) to the commissioner of income-tax if he considered that the order made by the income-tax officer was erroneous in so far as it was prejudicial to the interests of the revenue to pass such order thereon as the circumstances of the case justify, including an order enhancing or modifying the assessment or cancelling the assessment.....
Judgment:

Mehar Singh, C.J.

1. The assessee-company, Dalmia Dadri Cement Ltd., is a manufacturer of cement. Mr. Prabhu Dayal Agrawal had found some kankar deposits, suitable for manufacture of cement, in the former Jind State, and he made available what he had enquired into and found in this respect to Mr. Shanti Prasad Jain. In consequence, and with the assistance of Mr. Prabhu Dayal Agrawal, an agreement was entered into on April 2, 1938, between the then Ruler of the former Jind State and Mr. Shanti Prasad Jain, for the sole and exclusive right of manufacturing cement in the former Jind State by the latter and to win and work the kankar and limestone deposits in that State in the terms and conditions of that agreement. The assessee-company having been formed, Mr. Shanti Prasad Jain transferred the rights under that agreement to it by another agreement of May 4, 1938, on the same terms and conditions as the original agreement. The assessee-company then entered into the business of manufacture of cement in the former Jind State. On May 27, 1938, the assessee-company entered into an agreement, annexure 'B' to the statement of the case, with Mr. Prabhu Dayal Agrawal. In the preamble of that agreement it was stated that Mr. Prabhu Dayal Agrawal, being one of the promoters of the assessee-company, had rendered considerable service in its promotion, had helped in bringing about the agreement of April 2, 1938, between the former Ruler of Jind State and Mr. Shanti Prasad Jain, and had enquired and found kankar deposits in the former Jind State, suitable for manufacture of cement. It was then said that the parties agreed that the said beneficiary (Mr. Prabhu Dayal Agrawal) will get a commission so long as agreement exists between this company and the Government of Jind State at the rate of 1% on the yearly net profits of the company derived from the cement factory at Dalmia Dadri, including all the extensions that will be carried on in the said factory from time to time. Such yearly net profits will be calculated after making all proper allowances and deductions from revenue for interest on loans and advances, repairs, and outgoings for all the usual working charges, depreciation, bounties or subsidies received from Government or from a public body, profits by way of premium on shares sold, profits on sale proceeds and forfeited shares, or profits from the sale of the whole or part of the undertaking of the company but without any deduction in respect of income-tax or super-tax, or any other tax or duty on income or revenue or for expenditure by way of interest on debentures or otherwise on capital account or on account of any sum which may be set aside in each year out of the profits for reserve or any other special fund. In the years following the date of the agreement of May 27, 1938, the income-tax department treated the annual payment under the agreement by the assessee-company to Mr. Prabhu Dayal Agrawal as revenue expenditure in the hands of the assessee-company prior to the assessment year 1955-56. This was not questioned by the revenue in those years as capital expenditure. The Income-tax Officer having found in favour of the assessee-company in this respect, it was open, in exercise of his powers of revision under Section 33B of the Income-tax Act, 1922 (XI of 1922) to the Commissioner of Income-tax if he considered that the order made by the Income-tax Officer was erroneous in so far as it was prejudicial to the interests of the revenue to pass such order thereon as the circumstances of the case justify, including an order enhancing or modifying the assessment or cancelling the assessment and directing a fresh assessment, but this was not done ; if that had been done, it would have been open to the assessee-company to take an appeal against such an order under Sub-section (3) of Section 33B to the Income-tax Appellate Tribunal. So the revenue did not, earlier to the assessment year 1955-56, question the allowance of the payment to Mr. Prabhu Dayal Agrawal by the assessee-company under the agreement as revenue expenditure in its hands.

2. An amount of Rs. 18,597 having been paid by the assessee-company to Mr. Prabhu Dayal Agrawal in the year ending December 31, 1954, with regard to the assessment year 1955-56, the assessee-company claimed this as revenue expenditure. However, earlier to that in 1951, the assessee-company having refused to make payment of the amount due to Mr. Prabhu Dayal Agrawal under the agreement with him, the latter instituted a suit against it making a claim under the agreement. In that suit the parties settled the matter on June 11, 1954, and it is in the assessment order, annexure 'A' to the statement of the case, made by the Income-tax Officer that the settlement between the parties was on the terms that the assessee-company agreed to pay an amount of Rs. 15,000 under the agreement each year for the years 1951, 1952 and 1953, and terminating the agreement of May 27, 1938, on and from June 11, 1954, it agreed to pay a lump sum of Rs. 70,000 in lieu of Mr. Prabhu Dayal Agrawal's claim under the agreement with it. The payments were made to him by June 15, 1954. This latter amount of Rs. 10,000 has been claimed as a deduction by the assessee-company under Section 10(2)(xv) of the Act as a revenue expenditure. The Income-tax Officer allowed the first amount of Rs. 18,597 as revenue expense for the assessment year 1955-56, but disallowed Rs. 70,000 as revenue expenditure being of the opinion that the expenditure having been nude once and for all, absolved the assessee-company from the burden of an onerous character and the payment did not help the carrying on of the business of cement manufacturing one way or the other. On appeal, the Appellate Assistant Commissioner, while maintaining the order of the Income-tax Officer with regard to the amount of Rs. 70,000, reversed the conclusion of the Income-tax Officer with regard to the other amount of Rs. 18,597 being of the opinion that it was capital expenditure. On further appeal, the Income-tax Appellate Tribunal found on both these claims for the assessee-company. The learned Tribunal did not accept the contention on the side of the revenue that the amount of Rs. 18,597 was paid to Mr. Prabhu Dayal Agrawal as promotional expenditure, meaning expenditure in connection with the promotion of the assessee-company, and in its order it was observed that the company was promoted decades ago and it is true that Prabhu Dayal did render some services at the time of its floatation. But the mere fact that some services were rendered then does not establish that the present payment was for services rendered in the promotion of the company. On the other hand, it is clear that the expenditure was made for the services rendered in procurement of the raw materials. The Tribunal further found 'that the payment was made in the past and was always allowed as revenue expenditure. There is no special feature which would entitle one to come to the finding that any special rights were secured by means of this agreement. There is an insurmountable obstacle in proving the case of the department, viz., that the payment was not made to the owner of the lands and, therefore, it cannot be said that it was for securing any capital right. At best the payment would be in the nature of a middle-man's remuneration for services rendered .... if this expenditure be described as capital expenditure, then some capital rights would be secured by the services of Shri Prabhu Dayal, if so, then such capital expenditure itself would be disallowed. There is no trace of any such capital expenditure being disallowed either during the previous year or in any of the earlier years. It means that the revenue itself adopted the view that such expenditure, which was incurred, was only for the purchase of the materials and, therefore, admissible'. Having come to the conclusion that the payment of Rs. 18,597 made in the accounting year ending December 31, 1954, for the services rendered in procurement of raw materials was rightly allowed by the Income-tax Officer, the learned Tribunal was of the opinion that the payment of Rs. 70,000 as compensation for terminating the earlier agreement was also of the same nature admissible as revenue expenditure. So both the items were allowed to the assessee-company as deductions being revenue expenditure. On an application by the Commissioner of Income-tax, Patiala, the Tribunal under Section 66(1) of the Act referred these questions to this court:

'(1) Whether, on the facts and in the circumstances of the case, the payment of Rs. 18,597 by way of commission to Shri Prabhu Dayal was allowable as revenue expenditure and

(2) Whether, on the facts and in the circumstances of the case, the compensation of Rs. 70,000 paid to Shri Prabhu Dayal was allowable as revenue expenditure ?'

3. In Assam Bengal Cement Company Ltd. v. Commissioner of Income-tax, [1955] 27 I.T.R. 34; (1955] 1 S.C.R. 972 (S.C.), at page 44, their Lordships observed :

'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.'

4. And again at page 45 :

'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.'

5. And then at page 46 :

'A lump sum payment can as well be made for liquidating certain recurring claims which are clearly of a revenue nature, and on the other hand payment for purchasing a concern which is, prima facie, an expenditure of a capital nature may as well be spread over a number of years and yet retain its character as a capital expenditure. '

6. In State of Madras v. G.J. Coelho, [1964] 53 I.T.R. 186, 191 (S.C.), their Lordships of the Supreme Court observed :

'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.'

7. So that the answer to the two questions apparently depends upon the answer to the first question, because according as the nature of the amount referred to in that question is to be either revenue expenditure or capital expenditure, that will determine the nature and character of the amount paid as referred to in the second question. In substance, therefore, the answer to both the questions depends upon the same considerations and has to be just one answer.

8. However, the learned counsel for the Commissioner of Income-tax has urged that even if the answer to the first question is in the affirmative, it does not necessarily follow that the answer to the second may also be in the affirmative. His argument is that ordinarily the nature and character of a receipt is the same as that of expenditure with regard to a particular transaction, as an amount of money received as capital receipt would be capital expenditure in the hands of the payer. The learned counsel has in support of this relied on a Division Bench decision of this court concerning the very agreement under consideration in this case and that case is reported as Commissioner of Income-tax v. Prabhu Dayal, [1968] 67 I.T.R. 138 (Punj.). In that case it was urged on the side of the revenue that the very amount of Rs. 70,000 of the second question in this case was in the hands of Mr. Prabhu Dayal Agrawal revenue receipt and n6t a capital receipt, but the learned judges held that the payment of this amount to him was in extinction of the agreement earning him yearly return and so this payment was in the nature of a capital receipt on his part. The learned counsel for the Commissioner of Income- tax contends that this amount must now be held to be capital expenditure with the assessee-company. Apart from this, that now in this case the revenue is taking quite a contradictory stand as opposed to the one taken in Prabhu Dayal's case, the proposition as urged by the learned counsel in his argument is not accepted as universally correct. The observations of their Lordships of the Supreme Court in the cases cited above do not lend support to any such contention of the learned counsel. The learned counsel has also in support of this part of his argument referred to Dalmia Dadri Cement Ltd. v. Commissioner of Income-tax, [1969] 74 I.T.R. 464 (Punj.), but that was a case of payment of compensation for premature termination of a contract of managing agency, which is nothing near to what happened in the present case by bringing to an end the agreement for payment of recurring commission to Mr. Prabhu Dayal Agrawal.

9. It has then been urged by the learned counsel for the Commissioner of Income-tax that the expenditure of Rs. 70,000 was made by the assessee-company with a view to bring into existence an asset or an advantage of an enduring nature to its business, inasmuch as the assessee-company was for all times relieved, of the burden of the payment under the agreement with Mr. Prabhu Dayal Agrawal. The reply on the side of the assessee-company to this has been that no asset has been brought into existence nor any enduring advantage has been brought into existence to the trade or business of the assessee-company by the termination of the agreement with Mr. Prabhu Dayal Agrawal, but that what has happened is that the effect of termination of that agreement has been to secure to the assessee-company more profit by eliminating the annual drain on the profits of the assessee-company by way of commission to Mr. Prabhu Dayal Agrawal. It is said that that is not bringing into existence any asset of the nature of a trade so far as the assessee-company is concerned nor any advantage of an enduring benefit to the business or trade of the assessee-company. It merely results in augmenting the profits of the assessee-company by putting an end to the recurring claim of a revenue nature by Mr. Prabhu Dayal Agrawal under the agreement in his favour. This approach by the learned counsel for the Commissioner of Income-tax cannot apparently be supported. No doubt by the termination of the earlier agreement with Mr. Prabhu Dayal Agrawal the assessee-company has shook off liability for recurring annual payment of commission to him, but thereby there has not come into existence an asset or an advantage of an enduring benefit to the trade or business of the assessee-company. Its effect has been to free the profits of the assessee-company from the claim of Mr. Prabhu Dayal Agrawal. This apparently is not bringing into existence an asset or an advantage for the enduring benefit of the assessee-company's trade or business. So this argument on the side of the Commissioner of Income-tax cannot be accepted.

10. It is further urged by the learned counsel for the Commissioner of Income-tax that the payment of the commission to Mr. Prabhu Dayal Agrawal under the agreement of May 27, 1938, was on account of--(a) enquiry and finding of kankar deposits suitable for manufacture of cement, and (b) efforts as promoter of the assessee-company including the bringing about of the agreement of April 2, 1938, between the Ruler of the former Jind State and Mr. Shanti Prasad Jain. The learned counsel contends that remuneration for promotion of a company cannot be considered revenue expenditure, relying in support of this on Lakshmiratan Cotton Mills Co. Ltd. v. Commissioner of Income-tax, [1969] 73 I.T.R. 634 (S.C.), in which, at page 650, their Lordships observed that:

'The remuneration payable under the managing agency agreement was for a two-fold consideration : (1) the services rendered by the managing agents in the promotion of the company ; and (2) for rendering services to the company. Expenditure incurred for remunerating the persons who had promoted the company was not in law a revenue expenditure admissible under Section 10(2)(xv) of the Income-tax Act.......'

11. The learned counsel says that the other consideration for remuneration to Mr. Prabhu Dayal Agrawal was also connected with the promotion of the company and the beginning of its business and thus has to be treated not differently. The reply to this part of the argument on the side of the Commissioner of Income-tax by the learned counsel for the assessee-company is that the finding of fact given by the Tribunal is that the expenditure of Rs. 18,597 of the first question was in connection with services rendered by Mr. Prabhu Dayal Agrawal in procurement of raw materials. The findings of the Tribunal on this in its appellate order have already been reproduced above and in the statement of the case it is stated:

'As regards the commission of Rs. 18,597, the Tribunal found that the expenditure was made for the services rendered in procurement of the raw materials and so was rightly allowed by the Income-tax Officer as in the earlier years.'

12. The learned counsel for the assessee-company thus says that the finding of fact by the Tribunal has been not that the remuneration was for promotional expenses because it specifically rejected such argument, but for services rendered in procurement of raw materials for the business of the assessee-company. This, the learned counsel presses, is a finding of fact which not having been questioned by the revenue by way of obtaining a reference to this court cannot be challenged in this reference for want of any material in support of it in view of the decision of their Lordships of the Supreme Court in Commissioner of Income-tax v. Imperial Chemical Industries (India) Private Ltd., [1969] 74 I.T.R. 17. 23 (S.C.) (Civil Appeals Nos. 1549 to 1552 of 1968, decided on February 20, 1969)] in which it was held that:

'It is well established that the High Court is not a court of appeal in a reference under Section 66(1) of the Act and it is not open to the High Court in such a reference to embark upon a re-appraisal of the evidence and to arrive at findings of fact contrary to those of the Appellate Tribunal. It is the duty of the High Court while hearing the reference to confine itself to the facts as found by the Appellate Tribunal and to answer the question of law in the context of those facts. It is true that the finding of fact will be defective in law if there is no evidence to support it or if the finding is perverse. But in the hearing of a reference under Section 66(1) of the Act it is not open to the assessee to challenge such a finding of fact unless he has applied for the reference of the specific question under Section 66(1).'

13. There, of course, the matter was sought to be reopened by the assessee, and here that is sought to be done on the side of the revenue, but the position is no different. So on the side of the revenue this finding of fact by the Tribunal stands unquestionable. On this finding, in view of the decisions of their Lordships in the cases of Assam Bengal Cement Company Ltd. and G.J. Coelho, this expenditure of Rs. 18,597 having been incurred in connection with the procurement of raw material for the business and trade of the assessee-company, it cannot possibly be described as of a capital nature, for what is spent by an assessee to run and maintain its business and as a part and parcel of its working capital can only be described as revenue expenditure. In Travancore Sugars and Chemicals Ltd. v. Commissioner of Income-tax, [1966] 62 I.T.R. 566 (S.C.), their Lordships referred to these considerations in the matter of determination of the nature of expenditure as revenue expenditure and not capital expenditure:

'because, (a) payment was for an indefinite period and had no limitation of time attached to it; (b) the payment was related to the annual profits which flowed from the trading activities of the appellant and had no relation to the capital value of the assets ; and (c) the payment was not related to or tied up, in any way, to any fixed sum agreed between the parties as part of the purchase price of the three undertakings.'

14. In the present case the payment of compensation under the agreement of May 27, 1938, by the assessee-company to Mr. Prabhu Dayal Agrawal was for an indefinite period in the sense that it was to continue so long as the agreement of the assessee-company with the former Jind State continued. The payment was to be out of the profits of the assessee-company and thus related to its annual profits which flowed from its trading activities and bad no relation to the capital value of its assets. The payment of the compensation was not related to or tied up, in any way, to any fixed sum between the parties as a part of the acquisition of the assets of the assessee-company even in the beginning. In Travancore Sugars and Chemicals Ltd.'s case, on those considerations their Lordships had come to the conclusion that the payment was a revenue expenditure and not capital expenditure and on the same considerations the conclusion in this case has to be that this payment of Rs. 18,597 was in the nature of revenue expenditure and not capital expenditure.

15. It is also urged on behalf of the assessee-company that for well over a decade before the assessment year 1955-56, the revenue had been taking the payment of compensation to Mr. Prabhu Dayal Agrawal as a revenue expenditure, which, as has already been explained, was never questioned even in revision by the Commissioner of Income-tax. With reference to H. A. Shah and Co. v. Commissioner of Income-tax, [1956] 30 I.T.R. 618 (Bom.), the learned counsel has contended that it is not permissible to the revenue now, in regard to the assessment year 1955-56, to take a different view, there having been no change whatsoever in the facts and circumstances of the case. In that case, Chagla C. J., with whom Tendolkar J. agreed, held that as a general rule the principle of res judicata is not applicable to decisions of the income-tax authorities. An assessment for a particular year is final and conclusive between the parties only in relation to the assessment for that year and the decisions given in an assessment for an earlier year are not binding either on the assessee or the department in a subsequent year. But this rule is subject to limitations, for there should be finality and certainty in all litigations including litigation arising out of the Income-lax Act and an earlier decision on the same question cannot be reopened if that decision is not arbitrary or perverse, if it had been arrived at after due inquiry, if no fresh facts are placed before the Tribunal giving the later decision, and if the Tribunal giving the earlier decision has taken into consideration all material evidence. No doubt in this case earlier the matter was not taken to the Income-tax Appellate Tribunal, but then, as pointed out, it was never questioned by the Commissioner of Income-tax in exercise of his powers of revision which was the mode open to the revenue for reconsideration of the decisions of the Income-tax Officer year after year. It has not been shown in this case that the earlier decisions were either arbitrary or perverse or that by the time of the assessment year 1955-56 fresh facts had come into existence and came before the income-tax authorities. On this consideration this was not a proper case in which the revenue should have gone back on its approach adopted in this case for well over a decade.

16. In consequence the answers to the two questions are in the affirmative. The Commissioner of Income-tax will bear the costs of the assessee-company, counsel's fee being Rs. 250.

Bal Raj Tuli, J.

17. I agree.


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