1. This is a reference under Section 66(1), Income-Tax Act & the question on which we are to express our opinion is as follows:
'Whether on the facts & in the circumstances of this case the Tribunal was right in allowing the sum of Rs. 2,100 as a deduction under Section 10(2)(xv), Income-Tax Act;'
The material portion of Section 10 is as follows:
'(1) The tax shall be payable by an assessee under the head 'profits & gains of business, profession or vocation' in respect of the profits or gains of any business, profession or vocation carried on by him.
(2) Such profits or gains shall be computed after making the following allowances, namely :(xv) any expenditure (not being in the nature of capital expenditure or personal expenses of the assessee) laid out or expended wholly & exclusively for the purposes of such business, profession or vocation'.
2. The assessee is a private limited company consisting of four shareholders. It has its registered office at 161/1, Harrison Road, Calcutta & carried on business as dealers in Petroleum & Mobile Oil in the Jorhat area in the District of Sibsagar in Assam. On 15-8-1944 it was the sole agent of the Standard Vacuum Company for sale of kerosene oil. On 15-8-1944, the assessee entered into an agreement with a joint family consisting of two members Chotey Lal Lahoty & Bhagwan Prosad Lahoty (the latter, a minor, being represented by the karta of the family his father, Chotey Lal) & carrying on a joint family business at 10, Murlidhar Sen Lane, Calcutta in the name & style of Chunilal Bhagwan Prosad whereby the joint family agreed to apply to the Oil company for transfer of the agency for kerosene oil standing in its name to the assessee or for the termination of the agency in its favour & for creation of a new agency for kerosene oil in favour of the assessee. The agreement provided that if the oil company agreed to either, & actually appointed the assessee as its agent for sale of kerosene oil in the Jorhat Sibsagar area the agreement would come into operation. The assessee during the continuance of its agency in kerosene oil agreed to pay to tine joint family a net sum of Rs. 600/- only every year according to instalments which are mentioned in the agreement. This sum was duly paid. There are two important clauses in the agreement:
'Cl. (5) In order that the second party (the assessee) to whom the Kerosene business is being transferred by the first Party (the said joint family) may conduct the same efficiently and lucratively along with its allied business in Petrol & Mobile Oil under one management without any fear of competition from the first party either directly & indirectly & in view of the fact that the First Party is being benefited under the present agreement by way of more efficient management lesser establishment charges & better rate of profit..................
the First Party agrees not to participate during the continuance of the agreement either directly or indirectly in its own name or in the Benam of anybody else in any business in Petrol, Mobile Oil & Kerosene Oil under and/or with the Standard Vacuum Oil company, within the Province of Assam without the consent of the second Party first had &obtained; in writing.
Cl. (6) That the Second Party so long as it will carry on business as dealers in Petrol & Mobile oil under the Standard Vacuum Oil Company within the area mentioned in Cl. (7) below, agrees to pay to the first party a net sum of Rs. 2,100/- only every year according to instalments more particularity mentioned below as compensation for the limitations imposed on trading in Petrol, Mobile oil. & Kerosene oil on the First Party as mentioned above'.
The assessment year in question is 1946-47 & the sum of Rs. 2,100/- was paid in terms of the agreement.
3. There was also another provision in the agreement whereby for the upkeep & furtherance of the kerosene business, the joint family agreed to deposit & did deposit a sum of Rs. 7,400/- with the assessee carrying interest at the rate of six per cent. to be paid to the joint family by the assessee. It was further agreed that during the continuance of the agreement this sum would not, be demanded back nor would it be paid back. In terms of the agreement Rs. 518 being the interest was duly paid. But no question arises in this reference in respect of the said sums of Rs. 600/-& Rs. 518. The only question is whether the sum of Rs. 2100/- can be properly allowed as allowance under the section I have already set out.
4. Before the Income Tax Officer it was contended that this sum came within the section, not being an expenditure in the nature of capital expenditure or personal expenses of the assessee, but laid out or expended wholly & exclusively for the purpose of the business.
5. The following conditions must concur in order that a particular item of expenditure may be deductible under this clause:
(1) The expenditure must have been incurred in the accounting year.
(2) The expenditure must be in respect of a business which was carried on by the assessee in the accounting year & the profits of which are to be computed & assessed.
(3) It should not be in the nature of personal expenses of the assessee.
(4) It should not be in the nature of capital expenditure.
(5) It must have been laid out or expended wholly & exclusively for the purpose of such business.
6. It is not possible to lay down any hard & fast rule for distinguishing a capital expenditure from revenue expenditure. There is no standard for making the distinction, except the standard set up by the prudence & experience of merchants. But so far as this case is concerned we are not troubled with the distinction. In our view the case is plain. It is quite clear that this sum of Rs. 2,100/- was not paid for acquiring any assets of the business itself. We may say that the sum of Rs. 600/- was paid for acquiring the agency business, but that is not the case with the payment of Rs. 2,100/- which was paid with a view to keep a competitor out of the area in which the assessee was carrying on its business. Therefore it can in no sense be called a capital expenditure. It was, as the Tribunal has found, a sum which was paid for the purposes of the business & as such it comes within the purview of the section set out above.
7. The Tribunal was right. The answer to the question must be in the affirmative. The assessee is entitled to the costs of this Reference. Certified for one counsel.
8. I agree.