S.N. Shankar, J.
(1) The following question has been referred to this Court under Section 66(1) of the Indian Income-tax Act, 1922 (Act No. Xi of 1922) (hereinafter referred to as 'the Act of 1922'), and Section 256(1) of the Income-tax Act, 19M(Act No. Xliii of 1961) (hereinafter referred to as 'the Act ofl961') :-
'WHETHERon the facts and circumstances of the case. the Tribunal was right in holding that the payment of Rs. 8,160.00 in each of the years under consideration was of a capital nature and are not a permissible deduction for the purpose of income-tax?'
(2) The assessed in this case is Truck Operators Union in the status of association of persons. The relavant assessment years, are 1961-62 and 1962-63, for which the accounting years were the calendar years 1960 and 1961 respectively. The assessed derived income from commission on booking of trucks and in that connection provided facilities to the truck operators opeating in the Subzi Mandi Market, Delhi. According to the statement of the case, the modus operandi of the assessed Union was to charge commission at the rate of 5% on the gross booking of the truck operators, who were members of the Union, operating in the Subzi Mandi area. After keeping a percentage of 2' the assessed used to return the balance to 'such members'. During the assessment years under consideration the assessed under the terms of agreement paid a sum of Rs. 8,160.00 as allowance to its constituent members. Question arose for determination whether the pay- mem of Rs. 8,160.00 was a permissible deduction for the purpose of the income-tax. The income-tax Officer decided this question against the assessed. On appeal the Appellate Assistant Commissioner decided the question in favor of the assessed. On further appeal the Tribunal held that the above payment was in the nature of capital expenditure. The question reproduced above was thereafter on the application of the assessed referred to this Court.
(3) When the case came up for hearing before us on May 27, 1970, the learned counsels for the parties pointed out that the statement of the case was vague in respect of a material fact and the case should be remitted back to the Tribunal for clarification. We agreed with the learned counsels and in this connection we referred to the following passage in the statement of the case :
'THEmodus operand! of the Union was to charge commission at the rate of 5% on the gross bookings of truck operators (who are member of the Union) operating in the Subzimandi area and after keeping a percentage of 2'% return the balance to such members.'
(4) As it was not clear as to whether 2'% was returned to all the members of the assessed-Union or whether it was returned to those members whose trucks were being booked or whether it was returned to the members whose trucks were not booked, we referred the case back to the Tribunal with a direction to clarify the position.
(5) Supplementary statement of the case has since been filed and it is stated that the commission of 2'% was returned only to those members whose trucks were not booked. It has also been stated that the payment was made to ward off competition from certain truck operators with a view to enable the assessed to enjoy the monopoly of procuring trucks for all the vegetables and fruit vendors.
(6) The decision of the question referred to us turns on the determination whether the payment in question was by way of capital expenditture or a revenue expenditure to qualify for deduction. The line of demarcation beween the two is very thin and no hard and fast rule has been laid down either in 1922 Act or in the 1961 Act or in the reported cases to distinguish one from the other. Each case has to be decided on its own facts. In Assam Bengal Cement Co. Ltd. v. Commissioner of Income-tax, West Bengal : 27ITR34(SC) Bhagwati, J. speaking for the Supreme Court, after noticing this aspect, said :
'CERTAINbroad tests have however been attempted to be laid down and the earliest was the one indicated in the following observations of Bowen, L.J., in the course of the argument in City of London Contract Corporation v. Styles (1887) Tax Cas 239 :-'You do not use it 'for the purpose of your concern, which means, for the purpose of carrying on youi concern, but you use it to acquire the concern.' The expenditure in the acquisition of the concern would be capital expenditure; the expenditure in carrying on the concern would be revenue expenditure.'
(7) After referring to several cases dealing with different aspects of this question, His Lordship made a reference to the full Bench decision of the Lahore High Court reported as in re : Banarsidas Jagannath (2) and after enumerating the broad principles deducible from the decision proceeded to observe as under :
'THISsynthesis attempted by the Full Bench of the Lahore High Court truly enunciates the principles which emerge from the authorities. The cases where the expenditure is made for the initial outlay or for extension of a business or a substantial replacement of the equipment, there is no 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 acquring 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 capital expenditure or a revenue expenditure. The source or the manner of the payment would then be of no consequence.'
(8) In this case the appellant had acquired from the Government of Assam, for the purpose of carrrying on the manufacture of cement, a lease of certain limestone quarries for a priod of twenty years for certain half-yearly rents and royalties. In addition to the rents and the royalties the appellant agreed to pay the Lesser annually a sum of Rs. 5,000.00 during the whole period of the lease as a protection fee and in consideration of that payment the Lesser undertook not to grant to any person any lease, permit or prospecting license for limestone in a group of quarries without a condition that no limestone should be used for the manufacture of cement. The appellant also agreed to pay Rs. 35,000.00 annually for five years as a further protection fee and the Lesser in consideration of that payment gave a similar undertaking in respect of the whole district. The question that arose for consideration before the Court was whether in computing the profits of the appellants, the sums of Rs. 5,000.00 and Rs. 35,000.00 so paid to the Lesser by the appellant could be deducted under section 10 (2) (xv) of the 1922 Act. After examining the various tests governing the decision of this question, on page 47 of the report, the Court held that under clause 4 of the deed the Lesser undertook not to grant any lease, permit or prospecting license regarding limestone to any other party without the condition that no limestone shall be used for the manufacture of cement. This condition was secured in consideration of the payment of Rs. 5.000.00 per annum and its benefit was to ensure for the whole period of the lease. It was not a lump sum payment but was spread over the whole period of the lease and as such could be said to be a recurring payment. The Court, however, held that the fact that it was a recurring payment was immaterial because one had to look to the nature of the payment which in turn was determined by the nature of the asset which the Company had acquired. Proceeding from this angle, on page 47 of the report, the learned Judge observed :
'THEasset which the Company had acquired in consideration of this recurring payment was in the nature of a capital asset, the 'right to carry on its business unfettered by any competition from outsiders within the area. It was a protection acquired by the company for its business as a whole. It was not a part of the working of the business but went to appreciate the whole of the capital asset and make it more profit yielding. The expenditure made by the company in acquiring this advantage which was certainly an enduring advantage was thus of the nature of capital expenditure and was not an allowable deduction under section 10(2) (xv) of the Income-tax Act.'
(9) The same principle was in effect confirmed by the Punjab High Court inBehari Lal Beni Parshad v. Commissioner of Income-tax, Delhi, Ajmer Rajasthan and Madhya Pradesh In this case the assessed paid a competitor in its business a sum of money so that the assessed may itself secure the contract for the purchase of armour plates from the American Field Commission without any competition. It was held that as the amount was paid so that the competitor may withdraw from the competition with the assessed, it was an expenditure in the nature of capital expenditure to prepare ground for securing all the business of armour plates from the American Field Commission and was. thereforee, not a permissible deduction for the purpose of income-tax.
(10) Then again, in Associated Portland Cement . v. Commissioners of Inland Revenue 27 Tax Cas 103 the appellant company sought a deduction from its profits for the purpose of Income- Tax and National defense Contribution in respect of sums of 20,000 and 10,000 paid to two retiring directors S and C. S was a Managing Director of the Company under a service agreement which was due to terminate on December 31, 1939. Some months before that date he intimated his wish to retire from the service of the company at the end of 1939. C who was a director of the company gave a notice sometimes before January 1939 of his desire to resign his position with the company on September 30, 1939, there being no written service agreement between him and the company. Both S and C had been with the Company since its formation in 1900 and had exceptional knowledge of the cement industry and important business contacts, and they would have been free on retirement to engage in competitive activities to the detriment of the Company. The Company in these circumstances entered into agreements with them by which the Company agreed to pay 20,000 to S on December 30, 1939 and 10.000 to C on September 30, 1939 in consideration of their entering into covenants that they would not, after the respective dates of their retirement, without the consent of the company, carry on or be concerned in the manufacture or the selling of cement in any part of the world. Lord Greene, M.R. in his judgment dealt with the matter in the following manner, on page 117 of the report :
'WHATis the true nature of the asset which the Company had acquired It has acquired two choses in action, the benefit of two restrictive covenants against competition, using that phrase again comprehensively, for which it has paid a total sum of 30,000. The danger against which these convenants protected the Company was serious and imminent. It would be quite wrong to allow oneself to think for a moment that the Company was not getting its money's worth. When these gentlemen left the board they were free to compete, not merely in Great Britain, but in Maxico, and indeed in the South Sea Islands. Against that danger the Company has protected itself. What is the true business result of all that When these gentlement left the Company the good-will of the Company would immediately have become extremely vulnerable. When the Company had the monopoly of their services it was in a very advantageous position. As soon as they became potential competitors there was ground for thinking that the goodwill of the Company would receive a serious shock. The risk of competition and damaging competition was great. The Company succeeded in protecting itself against that risk. In effect the Company was buying off two potential competitors. It seems to me that the effect of buying off potential competitors must of its very nature affect the value of the company's goodwill. If ail potential competitors could be bought off, the good will of the business would obviously be very greatly benefited. If some competitors are bought off, if they are dangerous potential competitors, the goodwill is affected substantially. The true nature of what they have done seems to me to be this. They have acquired these rights against these two gentlemen, and by doing so they have enhanced the value of an existing asset, to wit, their goodwill. .............'
(11) We are inagreement with Shri G.C. Sharma the learned Counsel appearing for the Revenue, that the ratio of these decisions is fully attracted to the instant case. The Tribunal has found that the payment of Rs. 8,160.00 was made by the assessed to ward off compstition. This amount was paid only to those members whose trucks were not booked. But for this payment they would have otherwise competed in the business with the assessed. The object of the payment was to eliminate those competitors and to carry on the business unfettered by competition. The assessed made the payment to acuquire this right of these persons. This led to enhance the value of its existing ass- sets to make them more profit yielding. The expense, thereforee, could not be a revenue expense but was of capital nature.
(12) Shri Sharma also referred to the case of Deverell, Gibson Houre. Ltd. v. Rees 25 Tax Cas 467. This also supports the Revenue. In this case owing to difference which arose between H and P, two directors of the Appellant Company .: P handed in a letter of resignation, adding : 'Unless I hear that you want to take over my connection I shall make other arrangements in regard to it'. H was advised that P had no rights over the business connection which he had brought in on becoming director of the Company in 1939, but, being anxious-as found on the basis of evidence- for business reasons that P should not leave the Company under a sense of grievance, H asked P what he wanted ; P asked for 600, and. before his resignation took effect, drew up the following minute which was recorded in the Company's minute book and signed by both H and P :
'ITwas agreed that the Company purchase Mr. P's assets and the sum agreed upon was 450 plus the cancellation of the debt of 150 now appearing as a debt on the Balance Sheet against him'.
(13) The Company claimed a deduction for these 600 pounds in computing its profits. The Revenue contested the claim, and the objection was upheld. It was held that since the effect of the payment was to put P under an obligation not to set up business in competition with the Company the deduction was inadmissible.
(14) Shri S.P. Gupta, appearing for the assessed, however, contended that by making the payment for which deduction is claimed, the Union did not acquire any capital asset. This is not correct. As held by Bhagwati, J. in Assam Bengal Cement Co. Ltd., (1) the right to carry on business unfettered by competition from outsiders was in itself a protection acquired by the assessed for the business as a whole. It went toappieciate the whole of the capital assets and made it more profit yielding. Further in the words of Bowen, L. J. in City of London Contract Corporation v Styles (supra) the expenditure of this nature was used not for the purpose of carrying on the concern but to acquire the concern so that the assessed may carry on its business unhampered. The fact, thereforee, that by this expenditure the assessed did not acquire any tangible capital asset is of no consequence.
(15) The learned counsel then placed reliance on Poona, Electric Supply Co. Ltd. v Commissioner of Income Tax, Bombay City : 57ITR521(SC) where the amounts credited by the appellant Company to the 'Consumers Benefit Reserve Account' were held not to be a part of the assessed's taxable real profits. Schedule Vi of the electricity (Supply) Act, 1948, in this case imposed a duty on the licensee to so adjust its rates for the sale of electricity by periodical revision that his clear profits in any year did not as far as possible exceed the amount of reasonable return'. If the clear profit in any year of account was in excess of 'reasonable return' one-third of such excess, not exceeding 7'% of the amount of reasonable return, was at the disposal of the licensee, one-half of the excess had either to be distributed in the form of proportional rebate on the amounts collected from the sale of electricity and meter rentals or carried forward in the accounts of the licensee for distribution to the consumers in future in such manner as the State Government might direct. During the assessment years in question the appellant Company by reason of its statutory obligation set apart two-amounts and credited these sums to the 'Consumers Benefit reserve Account'. These amounts were held not to be part of appellants' real profit as they had to be returned by the appellant under statutory compulsion. In this context it was observed that income tax was a tax on real income i. e. in the case of business, on profits arrived at on commercial principles. These observations relied upon by the learned counsel are of no assistance to the assessed in this case because there was no such statutory compulsion or as a matter of that any other compulsion in the instant case. The amount for which deduction was claimed was paid voluntarily by the assessed to advance the value of its existing assets and to make them more profit yielding. Poona Electricity Supply Co. 's(6) case, thereforee, does not support the case of the assessed.
(16) Reference was next made by the learned counsel to Dharamvir Dhir v Commissioner of Income Tax, Bihar and Orissa : 42ITR7(SC) - The assessed in this case was an employee of a firm earning a salary of Rs. 10.572.00 and Rs. 500.00 from shares annually. He had entered into a coal raising contract with a coal company, but as he did not have the requisite funds for his business, he entered into an agreement with a public charitable trust for the advance to him of sums up to Rs. 1 1/2 lakhs on payment of interest at 6% and ll/16ths of the profits of the business. He agreed that the coal raising contract would becarried on in accordance with the policy settled between him and the trust : the trust could withdraw its money at any time and stop further advances. The Trust was also not liable for any losses. The assessed had to send monthly returns to the trust. In pursuance of this agreement, the assessed paid Rs. 72,963.00 and Rs. 75,526.00 during the assessment years in question and claimed deductions on these amounts from the income. On these facts, the Supreme Court found that in the commercial sense the payments were an expenditure wholly and exclusively laid out for the purpose of the assessed's business and were, thereforee, deductible as revenue expenditure. This was because the assessed was held to have made these payments 'for the purpose of carrying on his business. The case, thereforee, is of no assistance to the assessed as the payments in the instant case was not made for the purpose of carrying on business but to acquire the rights of the competitors.
(17) Reference was also made by the learned counsel to Badridas Daga v. Commissioner of Income-Tax : 34ITR10(SC) . This was a case of embezzlement of money by an employee and the question was whether the amount embezzelled could be admissible deduction under section 10(2) (xi) of the 1922 Act. There was no specific provision in this Act for such a contingency. It was held that even if a claim for deduction is made for which there was no specific provision under section 10(2) of that Act, the decision will depend on the determination of the fact whether having regard to the accepted commercial practice and trading principles it could be said to arise out of the carrying on of the business and be incidental to it. The loss, it was observed, should be proved to bs one that sprang directly from the carrying on of the business and was incidental to it and not a loss sustained by the assessed even if it had some connection with the business. These observations in this case cannot be availed of by the assessed for the simple reason that according to the findings of the Tribunal the payment was made to ward off competition and not for the carrying on of the business of the assessed.
(18) Great emphasis was then laid by the learned counsel on R. S. Munshi Gulab Singh and Sons v. Commissioner of Income Tax., Lahore where payments made to the competitors by the assessed were held to be expenditure not of a capital nature laid out wholly and exclusively for the purpose of the business but a permissible deduction. The assessed in this case was the owner of a printing and publishing concern. In order to secure full time work for its press and in the interest of the business, he entered into an arrangement with two other rival printing and publishing concerns. By this agreements the parties agreed to quote uniform rates in the tenders given to Government for printing and publishing work, and the assessed agreed to pay its competitors, irrespective of whether there was actual loss or profit, a certain share in the estimated profit, which was arrived at by deducting certain agreed cost contemplated to be incurred in the execution of the job from the amount of the tendered cost. As noticed on page 75 of the report, in the facts of that case. it was found that the payments were made by the assessed to secure full time work for his press and the assessed entered into arrangement with its competitors in terms of which he persuaded them to agree to quote uniform rates with the assessed, in regard to the various tenders given by the assessed as well as the competitors to obtain Government orders for printing and publishing work. There was thus no exclusion of the other competitors in so far as there was no bar to their submitting their individual tenders. In essence, as found by the Court also, this was a reciprocal agreement to share the profits. Expenses incurred for this purpose in these circumstances were held to be allowable under section 10 (2) (ix) of the 1922 Act. Payments made by the assessed in the instant case with the sole object to eliminate completely those persons to whom the amounts were paid cannot be treated on the same level. No assistance can, thereforee, be derived from Munshi Gulab Singh's case (9) also.
(19) The learned counsel then concluded by reference to V. Damodran V. Commissioner of Income-Tax, Kerala : 64ITR26(Ker) In this case the assessed, a forest contractor, carried on business in the trade of timber and paid Rs. 2,577.00 to each of the two rival forest contractors, in order to persuade them not to compete in an auction of a coupe held by the Forest Department and thus secured a portion of the stock-in- trade of his timber business at an advantageous price. It was held that amounts paid to the rival contractors were in the nature of business expenditure. The learned counsel urged that the payment by the asses- see to the members in the instant case was also of a similar nature. The submission cannot be sustained. A careful perusal of the report shows that what the Court in fact affirmed in the cited case was the ratio of the decision in Mohanlal Hargovind v. Commissioner o)'IncomeTax (1949) 17 Itr 473. In Mohanlal's case the assessed, a manufacturer of bidis, by rolling tobacco in tendu leaves, entered into contracts granting him the exclusive right to pick and take tendu leaves from a forest area. The question was whether the expenditure incurred in this connection was of a capital or revenue nature. The Privy Council held that since the expenditure was incurred, for acquiring one of the raw materials of the appellants' manufacture, the expenditure in the business sense was of the revenue account and not of capital account 'just as much as if the tendu leaves had been bought in a shop.' This has no parallel to the case in hand. In Darmodaran's case (10) the same principle has been approved. Unfortunately there is no detailed discussion of the points involved and the reasons on which the conclusion recorded was arrived. We are unable to agree with the learned counsel for the assessed that this case supports the contention of the assessed.
(20) As a result of the above discussion our reply to the question referred is that in the facts and circumstances of this case, the Tribunal was right in holding that the payment of Rs. 8,160.00 in each of the years under consideration was of a capital nature and .was not a permissible deduction for the purpose of income-tax.
(21) Having regard to the circumstances of this case and the points involved we direct that the parties be left to bear their own costs.