Capital versus revenue expenditure: payments for acquiring an undertaking were not deductible as business expense.

Payments made under the agreements were treated as part of the consideration for acquiring the undertaking, so they formed part of the purchase price rather than expenditure incurred in carrying on the business. Because outlay directed to acquisition of a concern is capital in nature, it was not deductible as revenue expenditure under section 10(2)(xv) of the Indian Income-tax Act, 1922. The fact that the amount was described by reference to net profits did not change its essential character as acquisition cost. The deduction was therefore disallowed and the question was answered against the assessee.

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Issues: Whether the payment made by the assessee to the Government under the agreements was allowable as a deduction under section 10 of the Indian Income-tax Act, 1922.

Analysis: The payment was held to be part of the consideration for the acquisition of the undertaking and therefore formed part of the purchase price. Expenditure incurred for acquiring the concern, and not for carrying it on, is capital in nature and cannot be deducted as revenue expenditure under section 10(2)(xv). The definition of the payment by reference to net profits did not alter its essential character as part of the acquisition cost.

Conclusion: The payment was not an admissible deduction; the question was answered in the negative and against the assessee.

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