RANKIN, C.J. - The assessees are the Anglo-Persian Oil Company (India), Limited, a company incorporated in England. They have since 1921 carried on in India the business of selling fuel oil and other products through selling agents paid by commission on sales. Until 1928, the selling agents were Messrs. Shaw Wallace and Company but in that year the assessees determined this agency and a new company called the 'Burma Shell Oil Storage and Distributing Company of India' became the selling agents of the assesses. Pursuant to certain verbal negotiations, the assessees in August 1928, paid to Messrs. Shaw Wallace & Co., the sum of Rs. 3,25,000 as compensation for the loss of their office as agents to the assessees.
The payment made in 1928 came to be considered by the Income Tax authorities when dealing with assessments for the year 1929-30. In that year of assessment, the present assessees - the Anglo Persian Oil Company (India), Ltd. -put forward the payment as a permissible deduction from their gross profits and their claim was allowed. Messrs. Shaw Wallace & Co., the recipients, were at first assessed upon that sum as part of their profits of the previous year, but the question was taken by them to this High Court, were it was decided (13th January 1931) that the sum received was not income, profits or gains within the meaning of the Income Tax Act. The Income Tax authorities appealed from this decision to the Privy Council, but meanwhile proceeded under Sec. 34 of the Act to re-open the question with the present assessees, claiming that as the High Court had held that in the hands of the recipients it was a receipt on capital account, it must needs follow that in relation to the business of the assessees it was in the nature of capital expenditure, or a 'capital payment.' The Income Tax Officer, the Assistant Commissioner, and the Commissioner have all agreed in this and appear to regard it as a simple and obvious truth.
The two questions referred to us by the Commissioner under Sec. 66 of the Act are as follows :-
'1. Whether the sum of Rs. 3,25,000 being money paid by the Company in a lump sum as compensation for loss of agency whereby the Company relieved itself of future annual payments of Commission chargeable to revenue account, can be disallowed as being an improper deduction from the income, profits or gains of the business and whether an equivalent part of the Companys income was chargeable to tax therefor.'
'2. Whether Sec. 34 of the said Act could in law be applied in the circumstances of the case re-open the assessment and review a deduction made and allowed and whether an equivalent part of the income could be subsequently held to be a part of the income which had escaped assessment.'
Now, after this Reference had been made, the appeal in the case of Messers Shaw Wallace & Co., was decided by the Judicial Committee (14th March, 1932). The appeal was dismissed, but the fielding that the money received by Messers Shaw Wallace & Co., was not income, profits or gains within the meaning of the Indian Act was in no way based upon the view that it was a receipt on capital account. Indeed, upon the facts as stated in the case then before their Lordships, they do not appear to me to have thought that view correct in the absence of any assignment of good-will or other asset.
Now, the present assessees, who after all were no parties to the proceedings to assess Messrs. Shaw Wallace & Co., and had no opportunity their in own at any time to put forward any facts about their own business and how they came to make this payment, took the proper steps to do so before the Commissioner in so far as this was necessary to meet the adverse findings of the Income Tax Officer and Assistant Commissioner. Their partition the commissioner has on all material points accepted as a statement of truth and has, very fairly, incorporated in his own statement of the facts. In particular, he has in formulating the first of the two questions submitted, embodied the statement that the Rs. 3,25,000 was 'money paid by the Company in a lump sum as compensation for loss of agency whereof of Company relived itself of future annual payments of commission chargeable to revenue account.' This is part of what was pleaded by the assessees as bringing them within the decision of the English Court of Appeal in Dales case (Anglo-Persian Oil Co. v. Dale) and as showing that the payment was not in the nature of capital expenditure. Save for their reference to the Shaw Wallace case, neither the Assistant Commissioner, nor the Commissioner has dealt on the merits with the contention of the present assessees. Yet the parties are different, the question of law is different and the statement of facts in the two cases is noticeably different.
The Advocate-General at the hearing of this Reference did not seek to support the reasoning of the Income Tax authorities to the effect that the receipt by Messrs. Shaw Wallace & Co., was a capital receipt and that therefore the payment by the present assessees was a capital payment. On the contrary he conceded at an early stage of Mr. Pushs argument that the payment in question was not capital expenditure. We are, therefore, relieved of the duty to examine the principles of law by which expenditure is distinguished as on capital account or revenue account. I think it right to say, however that the Commissioner and his Assistant adopted a wrong method of approach to the present question. The Principle that capital receipt spells capital expenditure or vice versa is simple but it is not necessarily sound. Whether a sum is received on capital or revenue account depends or may depend upon the character of the business of the recipient. Whether a payment is or is not in the nature of capital expenditure depends or may depend upon the character of the business of the payer and upon other factors related thereto. If a tramway company buys six tramway cars from a concern whose business it is to make and sell such articles, I doubt whether the Income Tax authorities would allow the tramway company to lessen its taxable profits for the year by deducting the price, and I doubt still more whether they would listen to an argument from the seller that the price was received on capital account. If a butcher sells his pony to a horse-dealer, or a tradesman sells his delivery van to a dealer in motor vehicles, it is not obvious to me that the price is a revenue receipt though I am certain it is not a capital payment. The case of payer and payee must be considered upon an independent statement of the relevant facts proved in his presence, there being no over-riding principle of law that the Income Tax authorities are entitled to tax once at least on every payment.
As the first question submitted to this Court is limited by its terms to the particular payment of Rs. 3,25,000 made by the assessees in August, 1928, it might well be thought that the Reference was concluded by the Advocate-Generals admission. He asked us, however, to consider two further points, suggesting (a) that the payment was not shown to have been made solely for the purpose of earning profits and (b) that even if this were shown, it was not made solely for the purpose of earning profits in the year of account. For this purpose he expressed himself as willing to accept the statement of facts contained in the assessees own petition filed before the Commissioner.
In my judgment no effect can be given to either argument.
As regards (a), no doubt, if it appeared from the assessees own case or the facts found that the payment was made by way of distribution of profits or was wholly gratuitous or for some improper or oblique purpose outside the course of business management, we could not regard the deduction as permissible. But no such suggestion can be made even upon the facts found in the case stated and there appears to me to be no reason why we should entertain it. The Income Tax authorities do not at any stage appear to have considered that there was any doubt about the matter.
As regards (b) the argument must be held erroneous. Cl. (ix) of sub-sec. (2) of Sec. 10 of the Indian Act does not say and does not mean that the expenditure must be made with a view to produce profits in the year of account. This was held by the Bombay High Court in In re Tata Iron & Steel Co. and though the Vallambrosa case was not decided under our Indian Act, the judgment of the Lord President of the Court of Session in Scotland in that case may conveniently be referred to as very fully disclosing the soundness of the Bombay decision.
The first of the two questions referred to us must in my judgment be answered in the negative - that is, in favour of the assessees.
The second question is really - whether Sec. 34 of the Act could have been applied to the present case, had it appeared that the original allowance of the deduction was unwarranted. Strictly speaking, this question does not in my opinion arise but as the point of law has been fully argued and as it might have been taken as a preliminary objection to the new assessment, think it will to express an opinion on it. I see no way of holding that Sec. 34 is inapplicable to put right an assessment by which a deduction has been improperly allowed. Such a case is in my opinion a case do income escaping assessment - not the whole income of the assessee but a part of it escaping assessment, and there is nothing in Sec. 34 which limits it to cases of non-disclosure by the assessee, or discovery of new matter by the Income Tax authorities or inadvertence as distinguished from erroneous deliberations on the part of these authorities. In most cases of under-assessment of profits it could be said that the whole profits were assessed at a certain figure; but where that figure is shown to be less than the true amount of assessable profit, the balance has in my opinion 'escaped assessment' within the meaning of those words as they appear in Sed. 34. We have been referred to the Madras decision in Raja of Parlakimedis case from which I see no reason to differ and to the English case of Anderson and Halstead Ltd. v. Birrell which does not seem to afford any assistance upon the construction of the Indian Act.
In view of the form of the second of the questions referred to us, however, we need make no formal answer to it.
I think the assessee should be paid their costs of the Reference by the Commissioner. These costs to be taxed by the Registrar, Original Side, Independently of r. 7 of Ch. XXXA of the Original Side Rules, and to include to Counsel.
BUCKLAND J. - I agree.