Viswanatha Sastri, J.
1. The following two questions have been referred to us :
1. Whether in the circumstances of the case, the tribunal was right in upholding the decision of the Income-tax Officer that the profit of the firm should be apportioned between the three present partners and not between the five old partners as claimed by the applicants ?
2. Whether in the alternative, the Tribunal was right in disallowing the sum of Rs. 18,911-12 0 paid to the old partners on the ground that the payment has been made out of the profits earned by the applicant firm?
The facts which have given rise to this reference have to be briefly stated. V.N.V. Devarajulu Chetty and Co. a firm of five partners started a wholesale business in piecegoods, Indian and foreign, in September 1940. On 31st October 1942, two of the five partners retired from the firm and the three surviving partners thereafter carried on the business under the same name and style as before, but as a new firm. This new firm is the assessee in the case and the applicant for reference to this Court. Each of the two outgoing partners who had a three annas share in the old firm, was paid a sum of Rs. 6399-6-8 for his share of the assets and profits of the old firm up to the date of dissolution as the result of an arbitration award. This settlement was subject, however, to a reservation of the rights of the two retiring partners in respect of certain forward contracts for the purchase of piecegoods from abroad that had already been entered into by the old firm, but the deliveries under which had not been effected. In respect of these goods, of the quantity of 336 bales, it was decided that the outgoing partners should fix their value and allow the partners of the new firm to deal with the goods and pay the retiring partners a part of the profits. As the deliveries under these for-ward contracts were problematic owing to the conditions created by the last war and the prices of foreign piecegoods were also shooting up, it was not possible at the time of the dissolution of the old partnership to settle the rights of the partners inter se in respect of these forward contracts. A quantity of 317 bales arrived from Manchester about September 1943 and these bales were taken delivery of and sold by the new firm and the profits on such sales were realised by the new firm. The arbitrators directed that each of the two old partners should be paid by the new firm a sum of Rs. 6530/- in respect of the interest of the old partners in the goods and their share of the profits realised by the sale of the 317 bales. A further quantity of 17 bales, arrived sometime later and these goods were also taken delivery of and sold at a profit by the new firm. A sum of Rs. 2935-14-0 was paid to each of the two old partners by the new firm in respect of their interest in these goods and their share of the profits arising from their sale On 16th March 1944, the two old partners executed a deed of release in favour of the new firm consisting of three con-tinning partners reciting therein the aforesaid arrangements and payments. The new firm was assessed by the Income-tax Officer for the year of account ending 31st March 1944, the assessment year being 1944-45, in the sum Rs. 45,088/- as the profits of their business for the year. This sum of Rs. 45,088/- included the sum of Rs. 18,911-12-0 paid to both of the old partners in respect of the goods which arrived under the forward contracts entered into by the old firm but which were sold by the new firm. The new firm, the assessee in this case, claimed that the sum of Rs. 46,088/- should be apportioned among the five old partners and not among the three continuing partners who alone had been registered as a firm in the year of assessment. The asses-see also contended, in the alternative, that in computing the profits of the year of account, the sum of Rs. 18,911-12-0 paid in that year to the old partners by the new firm, should be deducted from the sum of Rs. 45,088/- and the balance alone was liable to be taxed as the profits of the new firm. Both these contentions have been negatived by the Appellate Tribunal as well as the Income-tax Officer and the Appellate Assistant Commissioner.
2. The first contention of the assesses is clearly untenable. The old firm consisting of five partners had been dissolved as early as 31st October 1942 and the formal deed of release dated 16th March 1944, executed by the two retiling partners affirmed this fact. The profits on the sales of the 334 bales were received in the course of the business of the new firm at a time when the new firm was carrying on the business in its own right and handling and selling the goods as owner. The new firm was charged on its profits of the year of accounts 1943-44 without any reference to the old partners who bad retired in 1942. The new firm consisting of the three surviving partners alone had been registered as a firm in 1943-44 and 1944- 45. Consequently the profits of the year of account, namely, 1943-44 whatever they were, had to be apportioned between the three partners of the new firm and not among the five partners of the dissolved firm. The decision of the Revenue authorities and the Appellate Tribunal on this point is correct and the first of the questions referred to us is therefore answered in the affirmative and against the assessee.
3. The second question, however, raises a more debatable point. The case of the assessee is that the sum of Rs. 18,911-12-0 paid to the old partners pursuant to the decision of the arbitrators did not form part of the taxable profits of the new firm, though the sum was paid out of the profits of the business carried on by the new firm and therefore entered as a disbursement in its accounts. It is also claimed that the said sum represented an expenditure laid out wholly and exclusively for the purposes of the business of the new firm and for the purpose of acquiring stock in trade and earning profits by the gale of such stock and that the expenditure was therefore an admissible deduction under Section 10 (2) (15) of the Act. The contention of Mr. Rama Rao Sahib for the revenue authority is that the sum of Rs. 18,911-12 0 paid to the old partners was paid from and out of the profits of the new firm in view of their 6 annas share in the old firm and that a payment made from and out of profits is not exempt from liability to income-tax. His further contention was that the amount in question was paid by the new firm as part of the price payable for the purchase of the interest of the two retiring partners in the old firm's assets and goodwill and was therefore a capital expenditure whose deduction was prohibited by Section 10(2)(15), Income-tax Act. Lastly be contended that even if the forward contracts had to be considered separately and in isolation from the rest of the business, as the arbitrators did, the sum of Rs. 18,911-12-0 was the price paid for the acquisition of the interest of the retiring partners in those unexecuted contracts and would still be in the nature of a capital expenditure whose deduction in computing the profits of the new firm was not permissible. The arguments on both sides were supported by reference to a large number of cases, English and Indian.
4. It is a familiar principle of income-tax law that the destination or application of profits, once they are made or ascertained, is immaterial and the way in which person applies his income, profits and gains does not afloat his liability to tax on such income, profits and gains. Strong reliance was placed by the learned advocate for the revenue authority on the Pondicherry Bail, way Co. Ltd. v. Commr. of Income-tax, Madras where Lord Macmillan observed,
'Payment out of profits and conditional on profits being earned cannot accurately be described as a payment made to earn profits. It assumes that profits have first come into existence. But profits on their coming into existence attract tax at that point and the revenue authority is not concerned with the subsequent application of the profits.'
These general observations were misunderstood to the prejudice of the tax-payer for sometime in later decisions both here and in England. That the above statement of the law was somewhat wide and should not be applied as a touchstone to all oases was recognised by Lord Macmillan himself in his judgment in the case of the Union Gold Storage Co. v. Adamson, (1932) 16 Tax Cas. 293 : 146 L. T. 172. Romer L. J in the Court of Appeal in that case, held that where a company, for the purpose of enabling it to carry on its trade, placed, itself under an obligation to make money payments, the amount which was dependent upon the profits earned, or the payment of which was contingent upon certain profits being earned, payments made in discharge of that obligation were admissible deductions in computing the taxable profits of the company. This decision of the Court of Appeal was affirmed by the House of Lords. With reference to his own earlier pronouncement Lord Macmillan said,
'When therefore in the passage referred to by the Attorney General in the Pondicerry Rly. Co. I said that a 'payment out of profits and conditional on profits being earned cannot accurately be described as a payment made to earn profits', I was dealing with a case in which the obligation was, first of all, to ascertain the profits in a prescribed manner after providing for all outlays incurred in earning them, and then to divide them. Here, the question is whether or not a deduction has to be made in ascertaining the profits and the question is not one of the distribution of profits at all.'
5. In a later case before the Judicial Committee Lord Macmillan who delivered the judgment of the Board disapproved of the interpretation put upon the Pondicherry Railway Co's case, 54 Mad. 691 : A. I. R. 1981 P. C. 165 by the Bombay High Court and held that Tata Sons Ltd., a limited company could in computing the assessable profits of its managing agency, deduct 25 per cent of those profits which it had agreed to pay over to certain financiers of the Tata Power Company Ltd. of which Tata Sons Ltd. was the managing agent. The deduction of a percentage of the profits earned from the taxable profits was allowed as the payment in question was made in consideration of services rendered by way of financial assistance. Lord Macmillan distinguished the Pondicherry Railway Co's case, as being one where the ascertained net profits had to be shared among two persons. See Tata Hydro Electric Agencies Ltd. v. Commr. of Income-tax . In Indian Radio Cable Communications Ltd. v. Commr. of Income tax , Lord Maugham dealt with the position in this way : ''It may be admitted that, as Mr. Litter contended, it is not universally true to say that a payment the making of which is conditional on profits being earned, cannot properly be described as an expenditure incurred for the purpose of earning such profits. The typical exception, is that of a payment to a director or manager of a commission on the profits of a company. It may, however, be worth pointing out that an apparent difficulty here is really caused by using the word 'profits' in more than one sense. If a company having made an apparent net profit of $10,000 has then to pay $1000 to the directors or managers as the contractual recompense for their services during the year it is plain that the real net profit is only $9000. A contract to pay a commission at ten per cent on the net profits of the year must necessarily be held to mean on the net profits before the deduction of the commission, i.e. in the case supposed, a commission on the $10,000.'
6. The true scope and effect of the decision, in Pondicherry Railway Co's case were clearly by Greene M. R. in British Sugar . v. Harris, (1938) 2 K. B. 220 : 107 L. J. K. B. 472. In that case a company which was carrying on the business of sugar manufacture agreed to pay to two other, bodies for a period of four years 30 per cent, of the net profits of the company, in consideration of their giving to the company the benefit of their technical and financial knowledge, experience and advice. Failay J. in the Court of first instance, felt bound by the Pondicherry Railway Co's case , to hold against the inclination of his own opinion that the 20 per cent of the profits paid as remuneration to the two other bodies by the company was not an admissible deduction in computing the annual profits of the company. The Court of appeal reversed the decision and Greene M. R. who delivered the leading judgment observed as follows :
'In the present case, there are two funds of so-called profits which come into the picture. The first one is the fund which has to be ascertained for the purpose of calculating 20 per cent. In that fund as such, the persons entitled to the profits of this company--namely, the shareholders have no concern. It is used for the purpose, and for the purpose only, of ascertaining what is to be paid to the Skoda Works and to the Corporation, NOW, when that amount has been ascertained, that fund ceased to have any usefulness, at all, and it then becomes necessary to ascertain what are the divisible profits, and for that purpose, to take another account and the account that is taken then would be an account which would not only bring in depreciation, but would also take into account the such that had been paid out to the Skoda Works and the Corporation upon the taking of the first account. It seems to me that the circumstances that those two accounts have to be made out throws a very clear light upon the real nature of this transaction and looking at the clause in question as a whole, it seems to me clear beyond any reasonable doubt that the agreement is merely an agreement under which before ascertaining the divisible profits of the company at all, the Skoda works and the corporation are to receive upon a particular conventional basis a commission sum as remuneration for their services.'
The learned Master of the Bolls explained the observations of Lord Macmillan in Pondicherry Rly. Co's case as referring to a division of the real net profits which had nothing to do with the rendering of any service which contributed to the making of the profits. Romer L. J. posed the question arising foe consideration and answered it thus British Sugar . v. Harris, 1938 2 K. B. 220 : 107 L. J. K. B. 472 :
'Is the payment that has to be made by the trader under the contract, which is in question in truth a mere division of profits with another (company) party or is it in (truth a payment to the other party the amount of which is ascertained by reference to the profits? Whether the particular case falls on one side of the line or the other is very often a question of extreme difficulty. The payment is ft payment necessary for the purpose of enabling the company or the trader to earn the profits of its trade and, therefore, it is a legitimate deduction from its profits when ascertained for the purpose of assessment under schedule D.'
7. The fact that payments for services rendered or goods supplied are measured according to share of the profits does not in our opinion affect their admissibility as deductions. It is the quality of the payment that is the test and not its admeasurement. The distinction is between a contract for payment of profits simpliciter and a payment in consideration of service using the expression in a broad sense which is deductible before the taxable profits are ascertained. There may be instances of payments conditional on profits being earned and out of the profits earned, which are yet expenditure incurred for earning such profits, the moat familiar instance being that of a director or manager of a company or an expert advisee or financier being remunerated by a commission based on a percentage of the profits. The real question is, is the payment made by the trader under a contract, a mere division of the profits wish another who has purchased or otherwise acquired a right to a share of the profits or is it a payment to the other party in consideration of work, service or assistance rendered or material supplied, the amount of such payment being ascertained on the basis of the profits earned. The distinction is well brought out in the judgment of Lord Macmillan in the Tata Hydro Electric Power Co.'s case where 25 per cent, of the profits of the managing agency paid to the financiers of the Tata Power Company Lid. was held to be a permissible deduction in computing the profits of Tata Sons and Co. Ltd., the managing agents of the Tata Power Co. Ltd., but not in computing the profits of the Tata Hydro Electric Co. Ltd., who took an assignment of the managing agents rights from the Tata Sons Ltd., undertaking to pay, as part of the consideration for the assignment, the 25 per cent, of the profits payable by the Tata Sans Ltd., to the financiers. As observed in Robert Addie and Sons Ltd, v. Commissioner of Inland Revenue, (1924) 8 Tax. Cas. 671 : 1924 S. C. 231:
'It is necessary to ascertain the true nature of the expenditure and to ask first the question; is it a part of the company's working expenses, is it expenditure laid out as part of the process of profits earning.'
8. To apply the above principles to the pre-sent case, the two old partners had each a three annas share in the old firm. They had certain valuable rights in respect of the forward con-tracts for the purchase of piecegoods as the market was rising owing to war conditions. Their rights in respect of these contracts were isolated and reserved at the time of the dissolution on 31st October 1942 when all other matters were settled. The goods arrived and were taken delivery of and sold by the new firm at a considerable profit. Under Section 37, Partnership Act, the retiring partners had a right to a share of these profits which were made by the new firm with the assets of the old firm. Consequently that part of the profits payable to the old partners by the new firm under an obligation imposed by law was not in truth, the income, profits and gains of the new firm. See Bejoy Singh v. Commissioner of Income-tax, Calcutta .
9. The matter may also be looked at in this way. The arbitrators decided that the sum of Rs. 18,911.12.0 should be paid to the retiring partners by the new firm in respect of the rights of the former under these forward contracts and in consideration of the new firm handling and disposing of the entire 334 bales as part of their stock-in-trade. This sum was paid out of the profits made by the new firm and was paid because the new firm had made profits out of the sale of the 334 bales delivered under the contracts entered into by the old firm. This sum was really part of the price paid by the new firm to acquire full exclusive title to the goods from the old partners and it must be remembered that the goods so acquired were the stock in trade of the new firm which sold the goods and thereby made a large profit. If instead of taking cash, the two old partners who had themselves started their own piecegooods business, had taken delivery each of the 3/6th share of the goods delivered under the forward contracts and sold the goods on their own account, they would well have been within their rights and made a profit directly. In such an event, the new firm could only have sold 10/l6th of the total number of bales and their profits would have been proportionately less. Instead, the new firm acquired the entire quantity of the goods by paying the retiring partners the sum of Rs. 18,911, which, according to the award of the arbitrators represented the percentage of the profits payable to the old partners for their having parted with the goods or their right in the goods in favour of the new firm. The sum though paid as representing the old partners' share of the profits was really the price paid by the new firm for the acquisition of an exclusive right to the goods which formed the stock in trade and is, therefore, a revenue expenditure laid out solely and exclusively for the business of the new firm.
10. Mr. Rama Rao Sahib argues that the sum of Rs. 18,911-12.0 is a capital and not a revenue expenditure of the new firm, because, according to him, the substance of the transaction was that the amount in question was paid as part of the consideration for the acquisition by the new firm of the interest of the partners in the old firm. Sums paid to retiring partners in lieu of their share of the assets and profits of the firm by the continuing partners who acquire the interest of the former and run the business as before, but as a new firm would only be capital expenditure and not a revenue expenditure and its deduction is not permissible in computing the profits of the new firm. The position would be the same whether the stipulation is for payment of the consideration for the acquisition in a lump sum or in annual or other instalments, Delage v. Nugget Polish Co. Ltd., (1905) 92 L. T. 682 : 21 T. L. R. 454 ; United Steal Co. Ltd. v. Cullington, (1940) 23 T. C. 91: 1940 A. C. 812 ; City of London Contract Corporation Ltd. v. Styles, (1884) 2 T. C. 239 : 4 T. L. R. 51; Inland Revenue Commr. v. British Salmson Aero Engines Ltd., 1938 2 K.B. 482: (1938) 3 ALL E. R. 283; Constantinesco v. Rex, (1927) 11 T. C. 730 ; Tata Hydro Electric Agencies Ltd v. Commissioner of Income-tax and Royal Insurance Co. v. Watson, 1897 A. C. l : 66 L. J. Q. B. 1. In the present case, the sum of Rs. 6399-6-8 paid to each of the retiring partners at the time of the dissolution of the partnership as the price of their releasing all interest in the partnership assets including good-will would be in the nature of a capital expenditure. But the two other payments aggregating to Rs. 18,911-12-0 made to the retiring partners in respect of the forward contracts pursuant to the decision of the arbitrator stands on a different footing. It may be observed that in income-tax cases the same result in a business sense may be reached by means of transactions clothed in two different legal forms one of which may attract tax or exemption from tax while the other may not. It has been said on high authority that a person is entitled to so arrange his affairs as not to attract taxes imposed by statute provided he acts within the law, if he succeeds in ordering them so as to secure this result, he cannot be taxed, however unappreciative the revenue authority may be of his ingenuity. Inland Revenue Commissioners v. Duke of Westminster, 1936 A. C. 1 : 104 L. J. K. B. 383; Inland Revenue Commrs v. Fishers Executors, 1926 A.C. 395 : 95 L.J.K.B. 487. If a partnership is dissolved, it is open to the partners to isolate and keep in common an asset of the partnership and if that asset is realised thereafter, it ought to be divided between the partners in proportion to their shares in the original partnership. Gopala Chetti v. Vijayaraghavachariar, 45 Mad. 378 : A. I. R. 1922 P. C. 115. In the present case the sum of Rs. 18,911-12-0 was not paid as consideration for the acquisition of the interest of the old partners in the firm including its good will end other assets, but was paid statedly as the consideration for the acquisition of an exclusive right to the stock-in-trade of the new firm.
11. Even so, Mr. Ram Rao Sahib contends that moneys laid out in acquiring rights under unexecuted contracts which might be of value to a trader or businessman are in the nature of a capital expenditure and he cited the case of John Smith and Son v. Moore, 1921 2 A.C. 13 : 90 L. J. P. C. 149 and The City of London Contract Corporation Ltd. v. Styles, (1884) 2 T. C. 239 : 4 T. L. R. 51, in support of his contention. The following observations of Lord Macmillan in the Tata Hydro Electric Agencies Ltd v. Commissioner of Income-tax , are pertinent in this connection:
'Their Lordships recognise, and the decided cases show how difficult it is to discriminate between expenditure which is, and expenditure which is not, incurred solely for the purpose of acquiring profits or gains. In present case, their Lordship have reached the conclusion that the payments in question were not expenditure so incurred by the appellants. They were certainly not made in the process of earning their profits, they were not payments to creditors for goods supplied or services rendered to the appellants in their business, they did nit arise out of any transactions in the conduct of their business ..... In short the obligation to make these payments was undertaken by the appellants in consideration of their acquisition of the right and opportunity to earn profits, i.e., of the right to conduct the business and not for the purpose of producing profits in the conduct of the business.'
12. For the purpose of the rule permitting deduction of a revenue expenditure and prohibiting deduction of capital expenditure, it is necessary to differentiate between fixed capital and circulating or floating capital. Fixed capital is property which a trader retains in his possession and use in the carrying on or conduct of his business; e.g., land, buildings, plant, machinery, fixtures, good will etc. Circulating or floating capital consists of property which a trader deals in, buys and sells in the ordinary course of business with the object of making profits, e.g., stock-in-trade of every description. Circulating capital is capital which is turned over and in the process of being turned over, yields profits or loss. Fixed capital is not involved directly in that process and remains, unaffected by it. Vanden Bergha Ltd. v. Clerk 1935 A. C. 431 : 104 L. J. K. B. 345, Inland Revenue Commissioner v. Res Rowthers Development Syndicate, 1928 A. C. 132 : 97 L. J. K. B. 317, Floating or circulating capital consists of raw materials to be worked up and of the manufactured articles to be sold in the case of a business of manufacture and sale and of goods which are merely bought and sold in the case of a selling business as in this case. With these goods the business is carried on and it is on the turnover of these and their replacement by further goods bought that the trader makes his profit of loss. Consequently expenses incurred for the purchase of acquisition of goods which from the stock-in-trade or the circulating or floating capital of a business are proper and necessary deductions in computing the profits of the business. Snob expenses are treated differently from expenditure on the fixed capital of a trade or business which is an inadmissible deduction in computing the profits of the trader. The very case cited by Mr. Rama Rao Sahib, John Smith & Son v. Moore, (1921) 2 A. C. 13:90 L J. P. C. 149 illus-rates the difficulty of drawing a line between fixed and circulating capital. There the assesses acquired as part of a running business of coal exporters certain unexecuted contracts for the supply of coal at favourable prices running over a particular period and the price paid for the acquisition of those contracts was as estimated by accountants a sum of $. 30,000 The assesses claimed to deduct the sum of $. 30,000 as part of the purchase price of his stock in trade, namely, coal. There was a difference of opinion among the learned Lords both as to the result and as regards the grounds of decision. Viscount Haldane (who was in the majority) disallowed the claim of the assessee on the following grounds :
'The appellant of course made profit with a circulating capital by buying coal under the contracts he had acquired from his father's estate at the stipulated price of 14 shillings and reselling it for more, but he was able to do this simply because he had acquired, among other assets of his business, including the good-will, the contracts in question. It was not by selling these contracts of limited duration though they were, it was not by parting with them to other masters, but by retaining them that he was able to employ his circulating capital in buying under them. I am accordingly of opinion that, although they may have been of short duration, they were nonetheless part of his fixed capital.'
Different tests have been laid down by learned Judges of the Courts in England to distinguish between capital and revenue expenditure. In Valanbrosa Rubber Co., Ltd. v. Farmer (1907) 5 T. C. 529 Lord Dunedin drew a distinction between expenditure which is paid once and for all and expenditure which will recur year after year and suggested that the former would normally be capital expenditure and the latter expenditure, on revenue account. This was, however, only a rough and ready test. In British Insulated and Helsby Cables v. Atherton, 1926 A. C. 205 : 95 L. J. K. B. 336 Viscount Cave suggested the following test :
'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 as an expenditure as properly attributable not to revenue but to capital.'
The same test was suggested by Rowlatt J. in Onsworth v. Viker Ltd., 1915 3 K. B. 267: 84 L. 3. K. B. 2036, namely, the distinction between expenditure which is to meet a continuous demand and expenditure which is made once and for all. The most common instance of sums paid in respect of a continuous demand would be moneys paid for acquiring stock. Having considered the tests propounded by learned Judges in various cases we are of the opinion that no one test is conclusive in any particular case. The question has to be considered in a reasonable manner and according to the ordinary principles of commercial accountancy,
13. The present case is clearly distinguishable on its facts from the decision of the House of Lords in John Smith, and Son v. Moore, 1921 2 A. C. 13 : 90 L. J P. C. 149. There was no acquisition here of rights under contracts which related to the whole structure of the business or which formed the framework within which the circulating capital operated.
14. Nothing more was purchased or acquired than a certain quantity of piecegoods which the new firm acquired and paid for, There was here no transfer of rights under unexecuted contracts which provided the means of making profits by the retiring partners to the continuing partners. In order to acquire an exclusive title to the goods which formed their stock in trade the new firm had to pay the price actually stipulated as payable to the manufacturers and in addition a sum of Rs. 18.911-12-0 to the quondum partners. In other words, the cost of the goods to the new firm was the invoice price of the goods plus the sum of Rs. 18,911-12-0 paid to the partners. Without such payment, the goods could not have been acquired or sold by the new firm as their goods and the profits could not have been made by them. The payment in question was really part of the price or consideration paid for the purchase or acquisition of the stock-in-trade of the business and the expenditure was part of the ordinary current revenue expenditure of the business. The goods in question were of the kind which the new firm bought and sold as part of its business and they remained the circulating capital of the new firm. The goods were brought for resale and were in fact resold for profit. We do not think that there is anything in the nature of capital expenditure in the purchase of stock required for immediate resale during the year.
15. The other cases referred to by Mr. Rama Rao Sahib do not call for detailed notice. Payments made for the exclusive privilege of excavating shells or chanks for the purposes of a business as distinct from payments made for the purchase of the raw materials themselves have been held to be inadmissible deductions. Commissioner of Income-tax v. Chengalraya Mudaliar, 58 Mad. 1 : A. I. R. 1934 Mad. 617, Commissioner of Income-tax v. Chengalvaroya Chettiar, I.L.R. (1937) Mad. 792: A. I. R. 1937 Mad. 300, Abdul Kayum Sahib Husain v. Commissioner of Income-tax, Madras. 1939 I. T. R. 652. These cases are clearly distinguishable from the present case and would require to be reconsidered in the light of the decision of the judicial committee in Mohanlal Hargovind v. Commissioner of Income-tax, C. P. and Berar, Nagpur that a current expenditure 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 to himself the exclusive supply of raw material for a period of over a year. The present case has reference only to two consignments of goods consisting of 334 bales and the contracts themselves did not provide for any supply of goods for a continuous period of time ahead. There was here no payment for the assignment of rights under contracts whose object was to ensure a handy supply of goods for a considerable time for the benefit of the business.
16. Section 10, Sub-section (2), Clause (15), Income-tax Act authorises the deduction of any expenditure not being in the nature of capital expenditure laid out or expended wholly or exclusively for the purposes of a business when computing its profits and gains. This clause would cover the bulk of the outgoings of a business and authorises the deduction of what would, in most cases, be the main expenditure of a trade or business such as the purchase of raw materials or the stock-in-trade. The decisions of the Houge of Lords on the corresponding but more stringent provisions of the English Income-tax Act have established the principle that if a deduction, though not specifically allowed, is necessary or proper to be made in order to ascertain the profits and gains of a business according to ordinary commercial practice, it ought to be allowed, provided there is no prohibition against such allowance in the statute. The deduction of expenditure incurred for the trade or business is indeed involved in the very idea of profits and the profits and gains of a business have to be ascertained according to ordinary methods of commercial trading, subject to provisions of the Act as require a departure therefrom by way of prohibition of certain deductions. The classical authority for these propositions would be found in the judgments of Lords Parker and Sumner in Usher Wiltshire Brewery Ltd. v. Bruce, 1915 A. C. 433 : 84 L. J. K. B. 417 and in the judgment of Viscount Cave in The British Insulated and Helsby Cables v. Atherton, 1926 A. C. 205:95 L. J. K. B. 336. These principles have been applied to cases under the Indian Income-tax Act by the Judicial Committee in Commissioner of Income-tax, C. P. and Berar V. S. M. Chitnavis and in the recent case of Mohanlal Hargovind v. Commissioner of Income-tax, 1949 2 M. L. J. 571:
. In the last case Lord Greene stated the position quite concisely in these terms :There is no definition of that expression (capital expenditure) which must, in their Lordships' opinion, be construed in a business sense save in go far as there may be rules of construction applicable to it. Their Lordships feel no doubt that in a business sense this expenditure is expenditure on revenue account and not on capital account ....' Applying the test laid down in that case we are of the opinion that the sum of Rs. 18,911-12-0 paid to the old partners by the new firm was an item of revenue expenditure and an admissible deduction in computing the profits of the new firm, the applicant in this reference.
16. The second question referred to us is answered in the negative and in favour of the assessee. The assessee having succeeded in this reference would be entitled to his costs which we fix at Rs. 257/-.