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Blaze and Central (P.) Ltd. Vs. Commissioner of Income-tax - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtChennai High Court
Decided On
Case NumberTax Case No. 235 of 1974 (Reference No. 111 of 1974)
Judge
Reported in[1979]120ITR33(Mad)
ActsIncome Tax Act, 1961 - Sections 256(1); Income Tax Act, 1922 - Sections 10(2)
AppellantBlaze and Central (P.) Ltd.
RespondentCommissioner of Income-tax
Appellant AdvocateS.V. Subramaniam, Adv. for ;Subbaraya Iyer, Padmanabhan and Ramamani
Respondent AdvocateJ. Jayaraman and ;Nalini Chidambaram, Advs.
Cases ReferredCity of London Contract Corporation Ltd. v. Styles
Excerpt:
- - these facts clearly attract the decision of the full bench of this court in alaganan chetty v......is a private limited company carrying on business of arranging exhibition of advertisement and film shorts in the licensed public cinema theatres in the four southern states of madras, andhra, kerala and mysore. one m/s. saraswathi publicities, madras, was also carrying on the business of exhibition of film shorts on behalf of m/s. hindustan lever ltd. and lintas ltd. for the said four southern states. the assessee felt that it would be commercially profitable if it could also carry on the business of exhibition of film shorts on behalf of m/s. hindustan lever ltd. and lintas ltd. in the said four southern states. with this object in view it entered into an agreement with m/s. saraswathi publicities on april 1, 1966, under which the latter had agreed to part with its business of.....
Judgment:

Ramanujam, J.

1. The following question of law has been referred to us for our decision by the Income-tax Appellate Tribunal, Madras, under Section 256(1) of the I.T. Act, 1961, at the instance of the assessee, the applicant herein :

' Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that the sum of Rs. 1.5 lakhs was not deductible as an allowable expenditure '

2. The assessee is a private limited company carrying on business of arranging exhibition of advertisement and film shorts in the licensed public cinema theatres in the four southern States of Madras, Andhra, Kerala and Mysore. One M/s. Saraswathi Publicities, Madras, was also carrying on the business of exhibition of film shorts on behalf of M/s. Hindustan Lever Ltd. and Lintas Ltd. for the said four southern States. The assessee felt that it would be commercially profitable if it could also carry on the business of exhibition of film shorts on behalf of M/s. Hindustan Lever Ltd. and Lintas Ltd. in the said four southern States. With this object in view it entered into an agreement with M/s. Saraswathi Publicities on April 1, 1966, under which the latter had agreed to part with its business of exhibiting film shorts and not to compete with the assessee in the business of exhibition of advertisement of film shorts in the four southern States for a period of 9 years in consideration of the assessee paying a sum of Rs. 1,50,000. In the assessment year 1968-69, when the said payment of Rs. 1,50,000 was made by the assessee to M/s. Saraswathi Publicities as per the terms of the said agreement, the same was claimed as a deductible expenditure. The ITO, however, held that the sum of Rs. 1,50,000 was spent by the assessee for obtaining the right to exhibit advertisement films of Hindustan Lever Ltd. and Lintas Ltd. in the four southern States and not for the purchase of any stock-in-trade or raw material, and, therefore, the expenditure incurred was capital in nature. In this view, he disallowed the claim for deduction. On appeal, the disallowance was upheld by the AAC. There was a further appeal to the Tribunal.

3. It was contended by the assessee before the Tribunal that the expenditure had been incurred for carrying on the business more profitably and, therefore, it should be regarded as a revenue expenditure. The revenue on the other hand contended that by parting with a sum of Rs. 1,50,000 the assessee had acquired a right to carry on the business of film shorts in the cinema theatres in the four southern States to the exclusion of the rival and that this had resulted in an advantage of enduring benefit to the business of the assessee as a whole and, therefore, the expenditure has to be treated as capital in nature. The Tribunal held that the expenditure of Rs. 1,50,000 was not related to the carrying on of the business of exhibiting film shorts but has resulted in the acquisition of an asset or a right of a permanent character for a period of 9 years without any competition from M/s. Saraswathi Publicities and that as the expenditure had been incurred for the purpose of securing an enduring advantage to the business as a whole, it cannot be regarded as a revenue expenditure. Aggrieved against the order of the Tribunal the assessee has sought this reference.

4. Before us the learned counsel for the assessee submitted that the sum of Rs. 1,50,000 has been expended by the assessee for acquiring the film shorts of Hindustan Lever Ltd. and Lintas Ltd., for the purpose of exhibition in cinema theatres in the four southern States and, therefore, it should be taken to have been expended for acquitting stock-in-trade of the assessee's business and, therefore, the expenditure should be taken to be revenue in nature. It cannot be disputed that if the amount has been spent lor acquiring stock-in-trade of the assessee's business, the expenditure has to be treated as a revenue expenditure. But on the facts it is not possible to say that the assessee has merely acquired stock-in-trade by expending a sum of Rs. 1,50,000. A perusal of the agreement dated April 1, 1966, entered into between the assessee and M/s. Saraswathi Publicities indicates that the assessee had taken over the latter's business with Hindustan Lever Ltd. and Lintas Ltd. for carrying on the same in the four southern States for a period of 9 years on condition that the latter should not carry on the said business for 9 years in the said four States. The agreement does not indicate that the film shorts of Hindustan Lever Ltd. and Lintas Ltd., as stock-in-trade, were the subject-matter of the bargain. In substance and effect, the agreement involves a transfer of the business of Saraswathi Publicities with the Hindustan Lever Ltd. and Lintas Ltd. in the four southern States to the assessee who was also carrying on the same business herein, for a total consideration of Rs. 1,50,000. We cannot, therefore, agree with the learned counsel for the assessee that the sum of Rs. 1,50,000 was expended for acquiring the stock-in-trade of the business of the assessee.

5. On the facts, we take the view that the assessee has taken over the business of exhibition of film shorts of Hindustan Lever Ltd. and Lintas Ltd. in the four southern States for a period of 9 years for a consideration of Rs. 1,50,000. It cannot be disputed that the business which the asses-see had taken over from M/s. Saraswathi Publicities was intended to generate income for a period of 9 years and the agreement under which the business was taken over for a period of 9 years also provides that M/s. Saraswathi Publicities cannot carry on the same business in the four southern States during the said period. Thus, the assessee has, warded off competition in business by this bargain. In CIT v. Coal Shipments P. Ltd. : [1971]82ITR902(SC) , it has been held that a payment made to ward off competition in business to a rival would constitute capital expenditure if the object of making that payment is to derive an advantage by eliminating the competition over some length of time, and that how long the period of contemplated advantage should be in order to constitute enduring benefit, would depend on the circumstances and the facts of each individual case. In this case, the assessee has not only warded of the business rivalry but also acquired the business of the rival for a period of 9 years in a specified area. By, this arrangement the assessee has not only derived an advantage by eliminating the competition but also acquired a business which actually generates income. Any amount expended for acquiring a business or asset which generates income or for avoiding competition in business has to be treated as capital in nature. This follows from the decision of the Supreme Court referred to above.

6. The learned counsel for the assessee refers to the decision of the Kerala High Court in V. Damodaran v. CIT : [1967]64ITR26(Ker) as supporting his stand that if an expenditure is incurred for avoiding rivalry it will be a revenue expenditure. In that case, an assessee, a forest contractor, carrying on business in timber paid a sum of Rs. 2,577 to each of two rival forest contractors in order to persuade them not to compete in an auction of a coupe held by the forest department. The question arose as to the character of the said expenditure. The court held that the expenditure had been incurred to secure a portion of the stock-in-trade of the assessee's timber business at an advantageous price and, therefore, the expenditure was in the nature of business expenditure and allowable as such. We do not see how that decision will help the assessee in this case. There the amount has been spent for acquiring stock-in-trade at an advantageous price by avoiding a competition in an auction to be held by the forest department. In this case, we have already seen that there is no question of any stock-in-trade. The acquisition was of the right to carry on the business owned by a rival on condition that the rival should not carry on the same business for a period of 9 years. These facts clearly attract the decision of the Full Bench of this court in Alaganan Chetty v. CIT [1928] 3 ITC 44 ; AIR 1928 Mad 902. In that case, the assessee, a carrying contractor, paid a sum of Rs. 12,000 to a rival contractor to induce the latter not to compete with him. As a result of the non-competition of this rival, the assessee obtained the carrying contract at a rate higher than the previous year's rate and this enabled him to make larger profits. The said sum of Rs. 12,000 was claimed as deduction in the computation of the taxable profits under Section 10(2)(ix) of the 1922 Act. The Full Bench took the view that the payment of Rs. 12,000 not being for the purpose of working the contract but for obtaining the same, the expenditure was capital in nature and, therefore, not a permissible allowance under Section 10(2)(ix). In support of its view the Full Bench had relied on the decision in City of London Contract Corporation Ltd. v. Styles [1887] 2 TC 239 , wherein a payment made by a company for taking over a business of another rival company on payment of certain sum was held to be a capital expenditure. In our view, therefore, the Tribunal is right in holding that the sum of Rs. 1,50,000 was not deductible as an allowable expenditure.

7. The question is, therefore, answered in the affirmative and against the assessee. The assessee will pay the costs of the revenue which we fix at Rs. 250.


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