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Commissioner of Income-tax Vs. Hindustan Pilkington Glass Works - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtKolkata High Court
Decided On
Case NumberIncome-tax Reference No. 98 of 1976
Judge
Reported in[1983]139ITR581(Cal)
ActsIncome Tax Act, 1961 - Section 256(1); ;Income Tax Act, 1922 - Section 10(2); ;Income Tax Act, 1954 - Section 13; ;Companies Act
AppellantCommissioner of Income-tax
RespondentHindustan Pilkington Glass Works
Appellant AdvocateS.C. Sen and ;B. Chatterji, Advs.
Respondent AdvocateD. Pal and ;J. Saha, Advs.
Cases ReferredCommissioner of Taxes v. Nchanga Consolidated Copper Mines Ltd.
Excerpt:
- sabyasachi mukharji, j. 1. in this reference under section 256(1) of the i.t. act, 1961, the following question has been referred to this court:'whether, on the facts and in the circumstances of the case, the tribunal was correct in holding that the payment of rs. 2,50,000 made by the assessee-company to m/s. navin glass products did not represent a capital expenditure and that it was an allowable deduction in computing the profits and gains of the business of the assessee-company ?'2. this reference arises out of the assessment order for the assessment year 1970-71, the question relates to the allowance of deduction of rs. 2,50,000 paid by the assessee to m/s. navin glass products and the question in this reference, as often is referred to is whether the expenditure in question is.....
Judgment:

Sabyasachi Mukharji, J.

1. In this reference under Section 256(1) of the I.T. Act, 1961, the following question has been referred to this court:

'Whether, on the facts and in the circumstances of the case, the Tribunal was correct in holding that the payment of Rs. 2,50,000 made by the assessee-company to M/s. Navin Glass Products did not represent a capital expenditure and that it was an allowable deduction in computing the profits and gains of the business of the assessee-company ?'

2. This reference arises out of the assessment order for the assessment year 1970-71, The question relates to the allowance of deduction of Rs. 2,50,000 paid by the assessee to M/s. Navin Glass Products and the question in this reference, as often is referred to is whether the expenditure in question is capital expenditure or revenue expenditure. There is no dispute that the expenditure in question was incurred for the business of the assessee. The amount was paid as a result of a tripartite agreement and the parties to the agreement were, (1) the assessee, (2) Surat Cotton Spinning & Weaving Mills (P) Ltd., the proprietors of Navin Glass Products, hereinafter referred to as 'Navins', and (3) Window Glass Ltd. All these three companies were engaged in the manufacture of wired and figured glasses. The purpose, the motivation and the manner of payment would better be understood in the light of the language used in the agreement. It would, therefore, be material to refer to the relevant portion of the agreement. In the recital clause, after setting out the names of the parties, it is stated as follows :

'WHEREAS the above three companies have come to the conclusion that there is tremendous excess productive capacity within the country for making wired and figured glasses in relation to the demand for these types of glasses (which provides scope for utilisation of only about 25% of the total installed capacity) and losses are being incurred in this line of business by all of these companies and, therefore, to save the Wired and Figured Glass industry from further heavy losses and possible annihilation it will be in the common interest of the three companies if one of the three Wired and Figured Glass Factories do not make such glass for a period of 5 years, and commercial expediency dictates that some arrangement of the type embodied here should be entered into by the three companies.

AND WHEREAS Navins have agreed not to make or sell glass except as provided in this agreement during the subsistence of this agreement in consideration of payment of an agreed compensation by HPG and Windows.

AND WHEREAS HPG and Windows have agreed to purchase for Navins stocks of such glass as Navins have on the terms hereinafter set out,'

3. Thereafter, it is stated as follows:

'1. In consideration of the payment of compensation of Rs. 12.50,000 (rupees twelve lakhs and fifty thousand) only each by HPG and Windows to Navins (amounting to a total of rupees twenty-five lakhs for both in instalments as hereinafter provided, Navins agree not to make or sell except as provided in this agreement whether in India or abroad, directly or indirectly, in any way, the following types of glass (hereinafter referred to as 'the products' during the subsistence of this agreement:

(a) Figured (white, coloured or heat absorbing) glass;

(b) Wired (white, coloured or heat absorbing) glass ;

(c) Profilite type of glass.

2A. The compensation as per Clause (1) shall be payable by HPG and Windows in nine instalments. The first instalment shall be of Rs. 2,50,000 each and shall fall due on the expiration of 12 months from the date of this agreement and thereafter the compensation in instalments of Rs. 1,25,000 each shall be payable at intervals of every six months during the subsistence of this agreement.

2B. The compensation money will be paid within the month of the dates on which it is payable as per Clause 2A.

2C. So long as Navins observe their obligations under this agreement the above compensation shall be payable irrespective of whether :

(a) Navins

(i) Run their rolled glass plant to manufacture products other than 'the products'.

(ii) Keep their plant idle for the agreement period of 5 years, or

(iii) Partially or totally scrap their plant, or

(b) any other party makes or sells 'the products'.

Clause 3 is on the following terms :

'3. Navins agree not to sell, lease, transfer or in any way alienate or part with possession of their rolled glass plant to anybody so as to permit the buyer or lessee or transferee to use the plant in India for manufacture of the products, and there should be a condition made with such buyer, lessee or transferee that he will not manufacture in India from this plant the products during the subsistence of this agreement. If any such buyer, lessee or transferee makes in India any of the products during the tenure of this agreement the same will constitute a breach of the provisions of this agreement by Navins as referred to in Clause 7 hereafter.' Clauses 5A, 5C, 5D, 5G, 5-I and 5K read as follows:

'5A. Navins also agree to sell to HPG and Windows and HPG and Windows agree to buy by September 15, 1968, in the proportion of half and half Navins stocks which are at present insured and will remain so at least till September 15, 1968, at a price of Rs. 21,54,385.75 arrived at as per Schedule A less the glass value of Navins' despatches from May 17, 1968, till the actual date of the purchase of the stocks by HPG and Windows, such prices to be paid by HPG and Windows in equal shares to Navins immediately on the date the sale is effected. Till the date the requisite payment is made to Navins by HPG and Windows of the consideration value of Navins glass calculated as above, HPG and Windows will pay to Navins interest at 9% per annum from the date of this agreementon their respective half shares of the said consideration amount remaining outstanding.

5C. In view of Navins agreeing to assist HPG and Windows in getting financial arrangement respectively from any reputable bank for paying the above price, HPG and Windows agree to pay to the bank full realisation of glass value on the sale of such stocks. They in any case agree to repay to the bank at least Rs. 3 lakhs per month commencing from 1 month after the date of obtaining advance from the bank, if the payment into the bank during any month by sale of glass as in this clause is not equal to that amount, by paying into the bank the balance amount to make up Rs. 3 lakhs.

5D. The price calculated as per Clause 5A is for delivery at Navins factory at Baroda of the already packed glass in packed condition and for the loose glass the value of packing that will have to be done for such of it as is packable has been deducted as in schedule.

5G. Navins will exercise all such care of such stocks as a man of ordinary prudence will take for his own goods, but is hereby made entirely at the risk of HPG and Windows in all matters and in particular as regards breakages, while cutting, packing, shifting, forwarding or any type of deterioration or damage before despatch.

5-I. HPG and Windows may keep at Navins factory at all times one or more responsible representatives of theirs to supervise the cutting, packing, loading and despatching, and all such other matters as regards the glass sold to them as above.

5-K. Since Navins are keen that their godowns should be cleared as expeditiously as possible HGP and Windows jointly and severally agree to try their best to clear the stocks purchased by them from Navins on an average in 12 equal quantitative instalments p.m. of the different types of glass in the 12 months from July, 1968 to June, 1969, HPG and Windows in any case jointly and severally undertake to clear at least 80% of the stocks in aggregate sq. ft. by December 31, 1969, and balance 20% which would be predominantly of coloured and heat absorbing glass, by December 31, 1970, Navins shall be entitled to shift, stack and store at HPG's and Windows' risk such balance 20% at any godown outside its factory at Baroda.'

Clauses 9, 11 & 12 are relevant and those read as follows :

'9. In. case of default of payment of any instalment of compensation of Rs. 121/2 lakhs payable by each of HPG and Windows to Navins on the dates fixed for payment as per Clause 2, the party in default, i.e., either HPG or Windows as the case may be shall be liable to pay forthwith the whole or balance of the said sum of Rs. 121/2 lakhs payable by each of HPG and Windows.' '11. This agreement shall be deemed to have commenced on May 17, 1968. The provisions of this agreement shall be operative for a period of 5 years from the date of its commencement unless earlier terminated by mutual consent in writing of all three parties.

12. Any modification of this agreement shall be expressed in writing and signed by all three signatories to this agreement; otherwise it shall not be operative.'

4. Therefore, it is important to bear in mind, whatever may have been the motivation, the purpose, as the preamble indicated, was to prevent the company from going into 'possible annihilation', as the demand for this particular type of glasses provided a scope for the utilisation of only about 25 per cent. of the total installed capacity, it was considered to be necessary in the common interest of the three companies if one of the three companies did not make certain types of glasses for a period of five years. Therefore, to prevent competition for a period of five years at least, one of the three companies had been prevented from making any production. It is true that the agreement could be brought to an end earlier but that was possible only if there was mutual consent, in writing, by all the three contracting parties. Now, this clause is again important because the period of duration of the agreement was certain but it could be terminated earlier only if all the three contracting parties agreed in writing. Termination of the agreement unilaterally or bilaterally by any or by two of the parties without the consent of all was not possible earlier than five years. In this regard, there was a certainty unlike the clauses in certain other contracts which had come up for judicial consideration as we shall presently notice. It was urged on behalf of the assessee that commercial expediency dictated the arrangement and it was of sufficient permanent durability which would come in the field of operation carried on by the assessee as a certain enduring advantage and, as such, it would be an asset or advantage of enduring nature, which could be termed as a capital asset and also an expenditure incurred for obtaining that advantage or consideration paid for enduring that advantage would be capital expenditure. Now, this question, as is commonly known, has always troubled the courts and though the courts have stated that the principles applicable in determining whether a particular expenditure was capital expenditure or not were fairly settled, their application very often presented acute difficulties to the courts. It would be material for our present purpose to refer to some of the decisions to which our attention was drawn where this problem has been attempted to be tackled as illustrative of the way the courts should try to handle the situation.

5. We may first refer to the decision of the Calcutta High Court in the case of Assam Bengal Cement Co. Ltd. v. CIT : [1952]21ITR38(Cal) , where thisquestion came up for consideration. There, the assessee-company was formed with the object of carrying on business as 'miners of limestone and manufacturers of cement. The assessee had obtained for that purpose a lease of certain limestone quarries from the Govt. of Assam for a period of 20 years for certain half yearly rents and royalties. At the time the lease was obtained, the assessee had just been formed. Under the deed, the lessor placed the assessee under certain special restrictions both as to the actual operations of the business and as to the sale of its products. In addition to the rents and royalties, the assessee agreed to pay the lessor annually a sum of Rs. 5,000 during the whole period of the lease as a 'protection fee' and in consideration of that payment the lessor undertook not to grant any lease, permit or prospecting licence regarding limestone to any other party in respect of a neighbouring group of limestone quarries without a condition that no limestone should be used for the manufacture of cement. The assessee also agreed to pay Rs. 35,000 annually for five years as 'further protection fee' and the lessor in consideration of that payment gave a similar undertaking in respect of another group of quarries. The question was whether in computing its profits the assessee was entitled to deduct the sums of Rs. 5,000 and Rs. 35,000 paid to the lessor under Section 10(2)(xv) of the Indian I.T. Act, 1922. The ITO disallowed the claim on the ground that it was capital expenditure and his order was upheld by the AAC and the Appellate Tribunal. There was a reference to the High Court and it was held that in the circumstances of the case, two sums of Rs. 5,000 and Rs. 35,000 were rightly disallowed as being expenditure of a capital nature and so not allowable under Section 10(2)(xv). There, Chief Justice Chakravarti, at p. 52 of the report, referred to the relevant cases and observed that the assessee-company undertook to make those two payments to the lessor 'in order to buy up its option to let out the neighbouring quarries to other parties for the manufacture of cement'. Learned Chief Justice was of the opinion that there could be little doubt that the company undertook the expenditure, not with a view to meeting any expenses for carrying on the business, but with a view to securing 'conditions of security' in which its business might be carried on. That such conditions would be an advantage to the company could not possibly be disputed. Learned Chief Justice was further of the view that thus the advantage was going to be of sufficient durability and the advantage gained in five years was going to last over the years by which time the company might be expected to be well on its feet. In this connection, reference was made to the observations of Lawrence J. in the case of Van Den Berghs Ltd. v. Clark [1935] 19 TC 390 ; 3 ITR 17 where the expression wasused as the cost of 'sterilising' the neighbouring quarries. Thereafter, the learned Chief Justice observed a p. 56 of the report as follows :

'Before taking up the cases, I might make one general observation. It seems to me that the competition cases, if I may so call them, fall broadly into three groups. There is a class where two or more rival traders came to an arrangement about the prices to be charged for their goods and thereby avoided competitive price-cutting or one put himself in such a position in respect of another that he could control the prices to be charged by both. There is another class where competition was avoided altogether by elimination of the competitor himself. There is also a third class where the main transaction was that a managing or selling agency was terminated by the principal on paying a certain sum to the agents but there was a subsidiary term that the agents would not set up business of the same kind in competition. Expenditure laid out in the first and third class of cases has been held to be revenue expenditure, while that in the second class has been held to be of a capital nature. The cases relied on by Mr. Mitra belong to the first and third classes except two cases of this court which will require special consideration.'

6. Therefore, the learned Chief Justice put a second category of cases where a competitor was eliminated. Now, this decision of the Calcutta High Court went up in appeal before the Supreme Court and was affirmed by the Supreme Court in the decision in the case of Assam Bengal Cement Co. Ltd. v. CIT : [1955]27ITR34(SC) , where after setting out the principle that should be applicable in determining the allowability of expenditure, the court referred to the decision of the Full Bench of the Lahore High Court in the case of In re Benarsidas Jagannath and observed the principles laid down at page 45 of the report. These principles have often been repeated by us and it is not necessary to reiterate those again over here. But, we may refer to the observations of the Supreme Court at p. 47 of the report where after referring to the observations of Lord Greene M.R., in the case of Henriksen v. Grafton Hotel Ltd. [1942] 24 TC 453 the Supreme Court observed as follows (at p. 47 of 27 ITR):

'These are the principles which have to be applied in order to determine whether in the present case the expenditure incurred by the company was capital expenditure or revenue expenditure. Under Clause 4 of the deed the lessors undertook not to grant any lease, permit or prospecting licence regarding limestone to any other party in respect of the group of quarries called the Durgasil area without a condition therein that no limestone shall be used for the manufacture of cement. The consideration of Rs. 5,000 per annum was to be paid by the company to the lessor during the whole period of the lease and this advantage or benefit was to enure for the whole period of the lease. It was an enduring benefit for thebenefit of the whole of the business of the company and came well within the test laid down by Viscount Cave. It was not a lump sum payment but was spread over the whole period of the lease and it could be urged that it was a recurring payment. The fact, however, that it was a recurring payment was immaterial because one had got to look to the nature of the payment which in its turn was determined by the nature of the asset which the company had acquired. The asset 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 de-deduction under Section 10(2)(xv) of the Income-tax Act.

The further protection fee which was paid by the company to the lessor under Clause 5 of the deed was also of a similar nature. It was no doubt spread over a period, of 5 years, but the advantage which the company got as a result of the payment was to enure for its benefit for the whole of the period of the lease unless determined in the manner provided in the last part of the clause. It provided protection to the company against all competitors in the whole of the Khasi and Jaintia Hills District and the capital asset which the company acquired under the lease was thereby appreciated to a considerable extent. The sum of Rs. 35,000 agreed to be paid by the company to the lessor for the period of 5 years was not a revenue expenditure which was made by the company for working the capital asset which it had acquired. It was no part of the working or operational expenses of the company. It was an expenditure made for the purpose of acquiring an appreciated capital asset which would no doubt by reason of the undertaking given by the lessor make the capital asset more profit yielding. The period of 5 years over which the payments were spread did not make any difference to the nature of the acquisition. It was none the less an acquisition of an advantage of an enduring nature which enured for the benefit of the whole of the business for the full period of the lease unless terminated by the lessor by notice as prescribed in the last part of the clause. This again was the acquisition of an asset or advantage of an enduring nature for the whole of the business and was of the nature of capital expenditure and thus was not an allowable deduction under Section 10(2)(xv) of the Act.'

7. If the principles enunciated by the Supreme Court in the aforesaid decision are applied to the facts of this case then perhaps it could be legitimately said that elimination or stabilizing the competition by Navins from producing certain types of glass manufactured by the assessee for five years at least, which was terminable with the consent of all the parties only, would ensure sufficient advantage to the assessee which would enure beyond the period of five years and put the assessee on its feet in the business and prevent 'annihilation' as was anticipated by the assessee.

8. The next decision to which we may also profitably refer is also a decision of this court, namely, the decision in the case of CIT v. Coal Shipments Pvt. Ltd. : [1968]70ITR429(Cal) . There, the assessee and Low & Co. Ltd. became potential rivals in coal export to Burma. The assessee entered into an understanding with Low & Co. that the latter would not export coal to Burma during the subsistence of the agreement but would place coal from that colliery at the ready disposal of the assessee for shipment to Burma and would otherwise assist the assessee in the export business and that the assessee would carry on the actual shipping business and pay to Low & Co. Rs. 1.5 as per ton of coal shipped to Burma. The assessee claimed the above payments made to Low & Co. as admissible business expenditure in the respective years of payment. The ITO disallowed the claim on the ground that these were payments to secure a monopoly and were not allowable as revenue expenses. It was held that in view of the fact that the arrangement was not such as was likely to have an enduring beneficial effect but like all agreements with no certainty in duration, this arrangement could at any time be terminated, revoked or cancelled. The consideration for the agreement was also not paid once for all but the payment was related to uncertain shipments to be made to Burma, the motive behind the arrangement and the terms thereof did not envisage the creation of a monopoly trading right for the assessee as there remained in the field other coal exporters to Burma and that the arrangement secured for the assessee was a certain temporary advantage, the arrangement did not bring about any capital addition to the assessee according to the tests laid down and, therefore, this was not an acquisition of an asset of enduring advantage. There the arrangement was not for any particular period. Furthermore, the arrangement could be brought to an end unilaterally by any one of the contracting parties. This decision also went up to the Supreme Court in the case of CIT v. Coal Shipments P. Ltd. : [1971]82ITR902(SC) . There the Supreme Court emphasised that though an enduring advantage need not be of an everlasting character, it should not be so transitory and ephemeral that it could be terminated at any time at the volition of any one of the parties. We have noticed that, in the instant case before us, though the agreement was terminable by agreement between the parties such termination required consent in writing of all the parties and it could not be unlike the facts in the case of Coal Shipments Co's case, termination at the volition of any one of the parties. The court also noted that payment made to ward off competition in a business to a rival would constitute capital expenditure if the object of making that payment was to derive an advantage by eliminating the competition over some length of time. The same result would not follow if there was no certainty of a duration of the advantage and the same could be put to an end at any time. How long the period of contemplated advantage should be in order to constitute enduring benefit, would, however, the Supreme Court emphasised, depend on the facts and circumstances of each individual case. We have noted the peculiar facts and circumstances of the present case before us. The Supreme Court emphasised that if the cost of the income-earning machine or structure was there as opposed to the cost of performing the income-earning operations, then the same would be for ensuring an advantage of an enduring nature. This test, which the Supreme Court emphasised at p. 908 of the report, is also referred to in the case of Commissioner of Taxes v. Nchanga Consolidated Copper Mines Ltd. [1965] 58 ITR 241 , a decision which we shall also note. For our present purpose, however, it may be relevant to refer to the background and the purpose of entering into the agreement, that is to prevent complete annihilation of the business of the assessee. Before, however, we refer to the decision in Nchanga Company's case, it would be relevant, in our opinion, to refer to the other decisions of the Supreme Court.

9. We may first refer to the decision of the Supreme Court in the case of Empire Jute Co. Ltd. v. CIT : [1980]124ITR1(SC) . There, the assessee was a company carrying on business of manufacture of jute and was a member of the Indian Jute Mills Association which was formed with the object of, inter alia, protecting the trade of its members, imposing restrictive conditions on the conduct of the trade and adjusting the production of the mills of its members. A working time agreement was entered into between the members restricting the number of working hours per week for which the mills were entitled to work their looms. Clause 4 of the working time agreement provided that no signatory should work for more than 45 hours per week. Clause 6(b) provided that the signatories should be entitled to transfer, in part or wholly, their allotment of hours of work per week to any one or more of the other signatories. Under this clause, the assessee purchased 'loom hours' from four mills for the aggregate sum of Rs. 2,03,255 during the previous year relevant to the assessment year 1960-61 and claimed to deduct that amount as revenue expenditure. The Tribunal held that the expenditure incurred by the assessee was revenue in nature and, hence, deductible in computing the assessee's profits.

10. On a reference, the High Court of Calcutta held that the amount paid by the assessee for purchase of loom hours was in the nature of capital expenditure and, was, therefore, not deductible under Section 10(2)(xv) of the Indian I.T. Act, 1922. The Supreme Court, however, reversed the decision of the High Court and held that the allotment of loom hours under the working time agreement to different mills constituted not a right conferred but merely a contractual restriction on the right of every mill to work its looms to their full capacity, and purchase of loom hours by mills had, therefore, the effect of relaxing the restriction on the operation of looms to the extent of number of working hours per week transferred to it so that the transferee mill could work its looms for longer hours than permitted under the working time agreement and increase its profitability. The expenditure incurred by the assessee for the purpose of removing a restriction on the number of working hours for which it could operate its looms with a view to increasing its profits was revenue in nature and allowable as a deduction under Section 10(2)(xv). By the purchase of loom hours, it was held by the Supreme Court, no new asset was created and there was no addition to, or expansion of, the profit-making apparatus of the assessee. The acquisition of additional loom hours did not add to the fixed capital of the assessee. The permanent structure, of which the income was the product or fruit, remained the same. It was not enlarged nor did the assessee acquire a source of profit or income when it purchased the loom hours. The expenditure incurred for the purpose of operating the looms for longer working hours was primarily and essentially related to the operation of the working of the looms which constituted the profit-making apparatus of the assessee and was expenditure laid out as part of the process of profit-earning. It was an outlay of a business in order to carry it on and to earn profit out of this expense as an expense of carrying it on ; it was part of the cost of operating the profit-earning apparatus and it was clearly in the nature of a revenue expenditure. The Supreme Court further observed that it was not a universally true proposition that what might be a capital receipt in the hands of the payee, must necessarily be a capital expenditure in relation to the payer. The fact that a certain payment constituted income or capital receipt in the hands of the recipient was not material in determining whether the payment was revenue or capital disbursement qua the payer. There might be cases where, the expenditure, even if incurred for obtaining an advantage of enduring benefit, might none the less be on revenue account and the test of enduring benefit might break down. The Supreme Court reiterated that it was not every advantage of enduring nature acquired by an assessee that brought the case within the principle laid down in this test. What was material to consider was the nature of the advantage in the commercial sense and it was only where the advantage was in the capital field that the expenditure would be disallowable on the application of the test. If the advantage consisted merely in facilitating the assessee's trading operations or enabling the management and conduct of the assessee's business to be carried on more efficiently or more profitably while leaving the fixed capital untouched, the expenditure would be on revenue account, even though the advantage might endure for an indefinite future. The test of enduring benefit was, therefore, not a certain or conclusive test and it could not be applied blindly and mechanically without regard to the particular facts and circumstances of a given case. The Supreme Court reiterated what was an outgoing of capital and what was an outgoing on account of revenue depended on what the expenditure was calculated to effect from a practical and business point of view rather than upon the juristic classification of the legal rights, if any, secured, employed or exhausted in the process. The question, the Supreme Court emphasised, must be viewed in the larger context of business necessity or expediency. In our opinion, the facts in this case with which we are concerned were entirely different but the principles reiterated by the Supreme Court would be applicable. The expenditure must be viewed in the larger context of business necessity or expediency and must be examined from the practical point of view. In this connection, it is significant to bear in mind that the court was not considering the consideration for working time agreement. The court was not concerned with the question whether the consideration paid between the members of the Indian Jute Mills Association for restricting its business hours would be capital or revenue. The court was only concerned with the payments made, for purchasing the loom hours which was really some kind of stock-in-trade to be utilised by the assessee. Learned advocate for the assessee drew our attention to the observations at pp. 10 and 11, where reliance was placed by the Supreme Court on the decisionin the case of Nchanga Consolidated Copper Mines Ltd. [1965] 58 ITR 241 , referred to hereinbefore, and at p. 12 which are significant. There, the Supreme Court observed, which, in our opinion, distinguishes the present case before us from the case before the Supreme Court, as follows (p. 12 of 124 ITR):

'The source of profit or income was the profit-making apparatus and this remained untouched and unaltered. There was no enlargement of the permanent structure of which the income would be the produce or fruit. What the assessee acquired was merely an advantage in the nature of relaxation of restriction on working hours imposed by the working time agreement, so that the assessee could operate its profit-earning structure for a longer number of hours. Undoubtedly, the profit-earning structureof the assessee was enabled to produce more goods, but that was not because of any addition or augmentation in the profit-making structure, but because the profit-making structure could be operated for longer working hours. The expenditure incurred for this purpose was primarily and essentially related to the operation or working of the looms which constituted the profit-earning apparatus of the assessee. It was an expenditure for operating or working the looms for longer working hours with a view to producing a larger quantity of goods and earning more income and was, therefore, in the nature of revenue expenditure. We are conscious that in law as in life, and particularly in the field of taxation law, analogies are apt to be deceptive and misleading, but in the present context, the analogy of quota right may not be inappropriate. Take a case where acquisition of raw material is regulated by quota system and in order to obtain more raw material the assessee purchases the quota right of another. Now, it is obvious that by purchase of such quota right, the assessee would be able to acquire more raw material and that would increase the profitability of his profit-making apparatus, but the amount paid for purchase of such quota right would indubitably be revenue expenditure, since it is incurred for acquiring raw material and is part of the operating cost. Similarly, if payment has to be made for securing additional power every week, such payment would also be part of the cost of operating the profit-making structure and, hence, in the nature of revenue expenditure, even though the effect of acquiring additional power would be to augment the productivity of the profit-making structure. On the same analogy payment made for purchase of loom hours which would enable the assessee to operate the profit-making structure for a longer number of hours than those permitted under the working time agreement would also be part of the cost of performing the income earning operations and hence revenue in character.

When dealing with cases of this kind, where the question is whether expenditure incurred by an assessee is capital or revenue expenditure, it is necessary to bear in mind what Dixon J., said in Hallstroms Property Ltd. v. Federal Commissioner of Taxation [1946] 72 CLR 634: 'What is an outgoing of capital and what is an outgoing on account of revenue depends on what the expenditure is calculated to effect from a practical and business point of view rather than upon the juristic classification of the legal rights, if any, secured, employed or exhausted in the process.' The question must be viewed in the larger context of business necessity or expediency. If the outgoing expenditure is so related to the carrying on or the conduct of the business that it may be regarded as an integral part of the profit-earning process and not for acquisition of an asset or a right of a permanent character, the possession of which is a condition of the carrying on of the business, the expenditure may be regarded as revenue expenditure. See Bombay Steam Navigation Co. (1953) P. Ltd. v. CIT : [1965]56ITR52(SC) . The same test was formulated by Lord Clyde in Robert Addie and Son's Collieries Ltd. v. IRC [1924] 8 TC 676 in these words: 'Is it a part of the company's working expenses Is it expenditure laid out as part of the process of profit earning or, on the other hand, is it a capital outlay Is it expenditure necessary for the acquisition of property or of rights of a permanent character, the possession of which is a condition of carrying on its trade at all ?' It is clear from the above discussion that the payment made by the assessee for purchase of loom hours was expenditure laid out as part of the process of profit-earning. It was, to use Lord Sumner's words, an outlay of a business ' in order to carry it on and to earn a profit out of this expense as an expense of carrying it on'. [John Smith and Son v. Moore [1921] 12 TC 266, ]. It was part of the cost of operating the profit-earning apparatus and was clearly in the nature of revenue expenditure.'

11. The Supreme Court had again occasion to consider this question in the case of L.H. Sugar Factory & Oil Mills Ltd. v. CIT : [1980]125ITR293(SC) . There, however, the facts were entirely different. There, the assessee, a private company, carrying on business in the manufacture and sale of sugar, had his factory in Uttar Pradesh. During the accounting period relevant to the assessment year 1956-57, the assessee paid two amounts : (i) a contribution of Rs. 22,332 at the request of the collector towards the construction of Deoni Dam and Deoni-Dam Majhala Road which had been completed in 1952-53; and (ii) a contribution of Rs. 50,000 to the State of Uttar Pradesh towards meeting cost of construction of roads in the area around its factory under a sugarcane development scheme under which 1/3rd of the cost of construction of the road was to be met by the Central Govt., 1/3rd by the State Govt. and 1/3rd by the sugar factories and the sugarcane growers. The question was whether these two amounts were deductible in computing the assessee's profits under Section 10(2)(xv) of the Indian I.T. Act, 1922. It was held that the sum of Rs. 22,322 was not deductible expenditure under Section 10(2)(xv) because the amount was contributed long after the dam and the road were constructed and there was nothing to show that the contribution of the amount had anything to do with the business of the assessee or that the construction of the dam and the road was in any way advantageous to the assessee's business : it could not be said that the said sum had been laid out wholly and exclusively for the purpose of the assessee's business. Therefore, this amount we are not concerned with. Because, in our case, there is no dispute that the amount in question had been laid out to the business of the assessee. The only dispute is whether it brought about an advantage of an enduring nature to beconsidered as a capital asset or whether it was a revenue expenditure in earning the profit of the assessee. The second sum, with which the Supreme Court was concerned in the last mentioned case, i.e., the sum of Rs. 50,000,-contributed under the sugarcane development scheme was deductible expenditure under Section 10(2)(xv). The roads under the scheme were undoubtedly advantageous to the business of the assessee as these facilitated the transport of sugarcane to the factory and the outflow of the manufactured sugar from the factory to the market centres. The construction of these roads, therefore, facilitated the business operation of the assessee and enabled the management and conduct of the assessee's business to be carried on more efficiently and profitably. The Supreme Court noted that though the advantage secured for the business of the assessee was of long duration, inasmuch as it would last so long as the roads continued to be in a motorable condition, but it was not an advantage in the capital field, because no tangible or intangible asset was acquired by the assessee nor was there any addition to or expansion of the profit-making apparatus of the asses-see. As it is well known the roads did not belong to the assessee. It was merely assessee's contribution with other manufacturers for maintenance of the road to facilitate the business of the assessee. Therefore, in that background, in our opinion, the Supreme Court held that the expenditure in question was revenue expenditure.

12. Incidentally, we may refer to a decision of the Delhi High Court in the case of Hotel Diplomat v. CIT : [1980]125ITR781(Delhi) . There, what happened was that the four partners of the assessee, a firm which had taken a building on lease for an indefinite term from November 25, 1962, were co-owners of the building. Under the lease any structural alterations or additions were to become the property of the co-owners. By a supplementary agreement the firm was to give six months' notice in the event of its deciding to determine the lease. The firm, in turn, agreed with an embassy to let certain rooms in the building. The agreement dated February 19, 1963, was initially for a period of two years. But by a fresh agreement it was extended for another period of two years from October 1, 1964, with a provision for further extension for a similar period. Pursuant to the agreement with the embassy, the assessee-firm incurred expenditure during the accounting period relevant to the assessment year 1963-64, out of which the sum of Rs. 3,361 represented expenses for construction of additional bathrooms. The Tribunal held that the sum of Rs. 3,361 was capital expenditure because it had been incurred to improve the building to conform to the requirements of the embassy and the improvements made were of an enduring character and would be available to the assessee even if and when the embassy vacated the premises and the mere fact that the lease from the co-owners did not specify the period of the lease didnot make the advantage limited to a short duration because, apart from the safeguard of rent laws, the fact that the partners of the firm owned the property ensured the continuity of its tenure for the foreseeable future. In those circumstances, it was held to be expenditure of a capital nature. If the ratio of the said decision is made applicable to the facts of the present case then, of course, the expenditure incurred in this case should be considered to be capital expenditure. But we need not rest our decision on this, because the principles are well settled by the Supreme Court and the facts with which the Delhi High Court was concerned were significantly different from the facts with which we are concerned in the present case.

13. It would, therefore, in our opinion, be now material to refer to the decision of the Privy Council in the case of Commissioner of Taxes v. Nchanga Consolidated Copper Mines Ltd. [1965] 58 ITR 241. There, by Section 13 of the Income Tax Act, 1954, of the Federation of Rhodesta and Nyasaland, it was stipulated as follows :

'By Section 13 of the Income-tax Act, 1954, of the Federation of Rhodesia and Nyasaland : ' (1) For the purpose of determining the taxable income of any person, there shall be deducted from the income of such person.........(2).........(a) Expenditure.........(not being expenditure......ofa capital nature) wholly and exclusively incurred by the taxpayer for the purpose of his trade or in the production of the income.'

14. The assessee-company, N, together with the companies R and B, formed a group carrying on the business of copper mining, each company being independent of the other, but with overlapping directorates and each with the same deputy chairman. There was a common sales department for handling the disposal of their output ; the copper itself not being sold as the specific product of any one of the three mines. Following a steep fall in the price of copper in the world market the group, in common with other producers, decided voluntarily to cut their production, and did so early in 1958, by 10%, which for the three companies meant a cut of 27,000 tons, and reducing the group's estimated aggregate production for the year of 270,000 tons to 243,000 tons. In effecting this cut, it was agreed that the company B should cease production for one year, that the respondent-company and company R should undertake between them the daily group programme for the year reduced by the overall cut of 10%, and should pay a sum to company B to compensate it for the abandonment of the said company's production for the year. The Appellate Commissioner of Taxes contended that the proportion of the compensation which the respondent-company had paid to company B, i.e., 1,384,569 was expenditure of a capital nature was the cost of acquiring a source of income and, therefore, a capital asset--and disallowed it as an admissible item in the computation of the taxable profit of the assessee-company forthe year ended March 31, 1959. It was held by the Judicial Committee that the compensation paid was an allowable deduction in determining the assessec-company's taxable income. The expenditure bought only the right to have B out of production for 12 months and had no true analogy with an expenditure for the purpose of acquiring a business or the benefit of a long term or enduring contract. It bore a fair comparison with a monetary levy on the production of a given year. What the assessee-company did was to charge its 1958-59 production with the payment of this money in order to settle its share of the group's production programme in the way that suited it best. It was a cost incidental to the production and sale of the output of their mine ; as such, the Privy Council reiterated, this true analogy was with an operating cost. It resembled an outlay of a business 'in order to carry it on and to earn a profit out of this expense as an expense of carrying it on'. Now, there is, it must be emphasised, a significant similarity with the facts of this case, except with this very significant difference that in the case before the Judicial Committee the period was as short as one year and that weighed with Judicial Committee in holding that it could not be an enduring benefit, because the expression 'enduring' though may not be an everlasting must be of a duration beyond a period of one year. Now, in this case, at p. 252 of the report the court observed :

'It bought one right only, the right to have Bancroft out of production for 12 months. While, no doubt, money paid to acquire a business or to shut the business down for good or to acquire some contractual right to last for years may well be a capital expenditure, it seems a contradiction in terms to speak of what Nchanga thus acquired, which exhausted itself and was created to exhaust itself within the 12-month period within which profits are ascertained, as constituting an enduring benefit or as an accretion to the capital or income-earning structure of the business.'

15. In the instant case before us, we have seen that the period was for five years. It was a critical period in the glass manufacture. Navin was a competitor of the assessee. In five years if Navin could be eliminated, the goodwill that would generate in those five years, in our opinion, could be considered to be from a practical and business point of view--a point of view which enjoined the Supreme Court to look into the question--an advantage of sufficient enduring not only beyond one year, not even for five years, but even for longer years, because the goodwill thus acquired would linger beyond the period of five years.

16. In this connection, reference may also be made to the observations of the Supreme Court in the case of Bombay Steam Navigation Co. (1953) P. Ltd. v. CIT : [1965]56ITR52(SC) , where the Supreme Court reiterated that in considering whether an expenditure was revenue expenditure or not, thecourt had to consider the nature and ordinary course of business and the objects for which the expenditure was incurred. The question whether a particular expenditure was a revenue expenditure incurred for the purpose of the business should be viewed in the larger context of business necessity or expediency. If the outgoing or the expenditure was so related to the carrying on or conduct of the business that it might be regarded as an integral part of the profit-earning process and not for acquisition of an asset or a right of a permanent character, the possession of which was a condition to the carrying on of the business, the expenditure might be regarded as a revenue expenditure. Here, we have the declared intention of the parties that the expenditure in consideration was incurred, if not as a condition for the carrying on of the business, but with a view to prevent what the parties have described as annihiliation from business. The expenditure secured an advantage longer than the year in question and might even go to secure such goodwill in the glass field for the assessee by sterilising the operation of a competitor for as long as five years with the profit-earning apparatus of the assessee-company got vastly improved.

17. Our attention was also drawn to the decision in the case of IRC v. Carron Company [1968] 45 TC 18. where Lord Reid observed at pp. 67 and 68 as follows :

'I turn now to the more difficult question whether this expenditure ought to be charged to income or capital account. The case for charging it to capital might appear to be strengthened by the magnitude of of the sums involved, but again I do not think it would be right to take into account the sums paid to the dissident shareholders in deciding what should be done with the cost of obtaining the new charter. If this, taken by itself, is a proper charge against income, it cannot become chargeable to capital because it was first necessary to buy off these shareholders. And if the smaller sum is chargeable against income it is not suggested that the larger sum could be chargeable against capital...

The main argument for the Crown was that by obtaining the new charter the Company obtained an enduring advantage in the shape of a better administrative structure. Of course, they obtained an advantage : companies do not spend money either on capital or income account unless they expect to obtain an advantage. And money spent on income account, for example on durable repairs, may often yield an enduring advantage. In a case of this kind what matters is the nature of the advantage for which the money was spent. This money was spent to remove antiquated restrictions which were preventing profits from being earned. It created no new asset. It did not even open new fields of trading which had previously been closed to the company. Its true purpose was to facilitatetrading by enabling the company to engage a more competent manager and to borrow money required to finance the company's traditional trading operations under modern conditions...'

18. We must, however, bear in mind the background of the facts under which Lord Reid made the aforesaid observations. There, the assessee-company which carried on business of iron founders was incorporated by Charter in 1773. The company's constitution remained virtually unaltered until revised in 1963, as hereinafter mentioned. By the late 1950s many of its features had become archaic and unsuited to modern conditions, and the company's commercial performance was suffering a progressive decline. The most significant disadvantages were the restriction of the company's borrowing powers to 25,000, restrictions on the issue and transfer of shares and the restriction of voting rights to certain members holding at least ten 250 shares. The restriction relating to shares and voting rights prevented the manager of the company's day-to-day commercial business from being given the status of a managing director, and so made it difficult to obtain a suitable person for the post. It was accordingly decided to petition for a supplementary charter under which, inter alia, (a) responsibility for management could be vested in a board of directors so that management could proceed on lines similar to that of a company incorporated under the Companies Acts, (b) the limitation of the company's borrowing powers to 25,000, the restrictions on the issue and transfer of shares and the restriction of voting rights would all be removed, and (c) the members' liability would be limited. A number of the points covered by the proposed charter had little to do with the company's trade.

19. The company petitioned for the supplementary charter in December, 1959, but proceedings were suspended pending the outcome of an action by a shareholder claiming that the procedure adopted in deciding to petition was invalid. After winning the action before the Lord Ordinary and in the First Division of the Court of Session, the company was advised that its prospects of success in the House of Lords were dubious, and the shareholder threatened to raise a further action on new grounds which would once more indefinitely postpone consideration of the petition. Consequently, the company settled the action on the terms that it should pay the pursuer's costs in the action and buy out part of her holding and the whole holding of another shareholder, her nephew, who had for many years been at variance with the company, and, on the other hand, that she and her nephew should desist from further obstruction and he should never again acquire shares in the company. A supplementary charter was granted in January, 1963, substantially in the form proposed; the company's affairs were then reorganised and its commercial performance improved.

20. On appeal against an assessment to income-tax under case I of Schedule D for the year 1964-65 the company claimed to deduct the costs of obtaining the charter (3,107) and defending the action (2,641) and the amounts paid to the two dissenting shareholders in respect of their shares (83,800) and expenses in the action (1,666). For the Crown it was contended that the sums in question were not incurred wholly and exclusively for the purposes of the trade ; alternatively, that they were incurred on capital account. The Special Commissioners found that the significant objects of the new charter were the removal of the restrictions on borrowing and the issue and transfer of shares and qualification for voting, which were obstacles to the proper management and conduct of the business, and that the object of the other expenses was the removal of the obstruction to the charter ; they held that the company was entitled to the deductions claimed.

21. In the courts it was conceded by the Crown that, if the cost of obtaining the charter was deductible, so were the other sums in question.

22. It was held by the House of Lords that the objects of the new charter being to remove obstacles to profitable trading, anything in it beyond that could be disregarded ; that, since the engagement of a competent manager and the removal of restrictions on borrowing facilitated the day-to-day trading operations of the company, the expenditure v/as on income account.

23. As we have noted, the significant facts in that case were only the removal of some obstructions for the running of the company. There was no question of improving the capital structure or the profit earning apparatus or earning capital or paying off a competitor and thereby securing the prospect of business in a better way to the assessee. In that background, in our opinion, the observations of Lord Reid made in the aforesaid decision cannot be applied to the facts and circumstances of this case where, by eliminating competition from the field of operation in which the assessee was operating the assessee gained sufficient foothold in the business and obtained sufficient capital for a purpose no (sic) longer than one year in question, and for a five year which will ensure and help the company far beyond five years. The fact that the agreement was terminable with the consent of all the parties, in writing, does not, in our opinion, affect the position. By arrangements or with the consent of all the parties it could be terminated. Indeed, even a company with the consent of the shareholder or by the order of the court can be wound up but acquisition of a capital asset would nevertheless remain to be capital asset for the assessee. In that view of the matter, we are of the opinion that the expenditure in question must be considered to be capita! expenditure in the background of the facts of this case; The profit making apparatus was improved : it was improved to last beyond the year in question and the business was tobe carried on unfettered by rival competitors which would endure and the benefit would last beyond the period of five years. The view we are taking is in consonance with the view of the Punjab and Haryana High Court in the case of Behari Lal Beni Parshad v. CJT , though , the facts in that case were different. It is also in consonance with the view of the Allahabad High Court in the case of Neel Kamal Talkies v. CIT : [1973]87ITR691(All) , as also with the decision of the Madras High Court in the case of Blaze & Central (Pvt.) Ltd. v. CIT : [1979]120ITR33(Mad) though in that case also the facts were different. Our attention was also drawn to certain observations of the Supreme Court in the case, of CIT v. Finlay Mills Ltd. : [1951]20ITR475(SC) . Bat these observations were made entirely in a different context. There, the expenditure incurred by a company carrying on business of manufacturing and selling textile goods in registering for the first time its trade mark which were not in use prior to February 25, 1937, was considered to be revenue expenditure and an allowable deduction. Here, the facts were entirely different. Reliance was also placed on the observations in the decision of the Supreme Court in the case of CIT v. Ciba of India Ltd. : [1968]69ITR692(SC) . There also the context in which the observations were made by the Supreme Court were entirely different.

24. For the reasons aforesaid, we are of the opinion that the question must be answered in the negative and in favour of the Revenue.

25. The parties will pay and bear their own costs.

Sudhindra Mohan Guha, J.

26. I agree.


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