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Income‑tax Referred Case No. 16 of 1962, decided on 20th August 1963.
Business or capital expenditure‑Purchase of business assets for a consideration of cash payment as well as a percentage of net profits‑Percentage of profits paid every year‑Whether business expenditure‑Indian Income‑tax Act, 1922, S. 10 (2) (xv).
Where the assessee purchased from the Government of Travancore all the assets of a sugar company, a distillery and a tincture factory, in consideration of a cash payment as well as a percentage of the annual net profits to be earned by the assessee:
Held, that the share of the net profits paid by the assessee to the Government of Travancore every year m accordance with the agreement was in the nature of capital expenditure as it was spent not for the purpose of carrying on the assessee's concern but for the purpose of acquiring it, and was therefore not deductible as business expenditure under section 10 (2) (xv) of the Indian Income‑tax Act, 1922.
British Sugar Manufactures Ltd. v. Harris (Inspector of Taxes) (1939) 7 I T R 101 (C A) ref.
G. Rama lyer for the Commissioner.
C. M. Devan, S. Padmanabhan and M. Subbaraya lyer for the Assessee.
--- This is a reference by the Income‑tax Appellate Tribunal, Madras Bench, under section E6 (1) of the Indian Income‑tax Act, 1922. The assessment year concerned is 1958‑59 and the accounting period, the twelve months ended April 30, 1957. The question referred is:
Whether, on the facts and in the circumstances of the case, the payment of Rs. 42,480 by the assessee to the Travancore Government under the agreements dated June 18, 1937, and January 28, 1947, was allowable under section 10 of the Income- tax Act
The assessee, the Travancore Sugars and Chemicals Limited, purchased from the Government of Travancore the assets of the Travancore Sugars Limited, of the Government Distillery at Nagercoil and of the Government Tincture Factory at trivandrum. The agreement dated the 18th June, 1937, An nexure "A" to the statement of the case, deals with this purchase. Apart from the cash consideration recited in the agreement, clause 7 thereof provided for a further payment as follows:
The Government shall be entitled to twenty per cent. of the net profits earned by the company in every year subject however to a maximum of rupees forty thousand per annum, such net profits for the purposes of this clause to be ascer tained by deduction of expenditure from gross income and also after:
(1) provision has been made for depreciation at not less than the rates of allowances provided for in the income‑tax law for the time being in force, and
(2) payment of the secretaries' and treasurers' remuneration.
Clause 7 of the agreement dated the 18th June, 1937, was replaced by a new clause by an agreement between the assessee and the Government of Travancore dated the 28th January 1947. That agreement is given as Annexure "B" to the statement of the case. The new clause 7 reads as follows:
The Government shall be entitled to ten per centum of the net profits of the company in every year. For the purpose of this clause net profits means the amount for which the company's audited profits in any year are assessed to income‑tax in the State of Travancore.
The preamble to the agreement dated the 28th January, 1947, makes it clear that the purchase was not merely for the cash consi deration recited but also for the payment provided by clause 7. i he relevant portion of the preamble is as follows:
Whereas on the 18th June 1937, an agreement (hereinafter called the principal agreement') was entered into between M. R. Ry. Rao Bahadur Rajvaservanirata N. Kunjan Pillai Avl.; Chief Secretary to Government acting for and on behalf of the said Government of his Highness the Maharaja of Travancore of the one part, and Sir William Wright, Kt., C. G. E., of Messrs Parry & Co. Ltd., Madras, acting for and on behalf of the said Messrs Parry & Co. Ltd., of the other part, whereby the said Government should sell and the company should purchase the assets including the lands of the Travancore Sugars Ltd. with the buildings, outhouses, machinery and other things attached thereto and more particularly describ ed in the Schedule A' annexed to the said principal agree ment, the factory known as the Government Distilleries situate at Nagercoil in South Travancore with lands, buildings, machinery and other things attached thereto and more particularly described in the Schedule B' annexed to the principal agreement and all the assets of the factory known as the Government Tincture Factory situated at Trivandrum and more particularly described in the Schedule C' annexed to the principal agreement for the cash consideration in the said principal agreement mentioned and also in consideration inter alia that the said Government should be entitled to 20% (twenty per cent.) of the net profits earned by the company in every year subject however to a maximum of Rs. 40,000 per annum; such net profits for purposes of the said agreement to be ascertained after the deductions set out in clause 7 of the said agreement." The underlining is ours.
It is clear from the above extract that the payment under clause 7 is part of the purchase price and if such is the case, the amounts paid in pursuance of that clause will constitute an ex penditure not of a revenue but of a capital nature. In other words they were spent not for the purpose of carrying on the concern but for the purpose of acquiring it.
In order that an item of expenditure may be deductible under section 10 (2) (xv) of the Indian Income tax Act, 1922, ft should not be in the nature of a capital expenditure. It follows that the question referred has to be answered in the negative and against the assessee. We do so ; but without any order as to costs.
The wording of the new clause 7 is significant. The ten per cent. payable is of the "net profits" of the year and the "net profits" is defined as "the amount for which the company's audited profits in any year are assessed to income‑tax in the State of Travancore." This apparently shows that the ten percent. payable was not intended to have any impact on the assessment to income‑tax.
According to the Department the payment under clause 7 will represent only a division of the earned profits of a common adventure between the assessee and the Government; and the payment will not hence constitute an admissible deduction. In the view we have taken it is unnecessary to evaluate this contention or consider cases like British Sugar Manufacturers Ltd. v. Harris (Inspector of Taxes) ((1938) 1 All E R 149).
A copy of this judgment under the seal of the High Court and the signature of the Registrar will be forwarded to the Appel late Tribunal as required by subsection (5) of section 66 of the Indian Income‑tax Act, 1922.
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