1984 (5) TMI 40 - HC - Income Tax

Court rules Rs. 68,000 payment as revenue expenditure, not capital. Decision benefits assessee.

The High Court determined that the Rs. 68,000 payment made by the assessee to M/s. Khanna Financiers upon cancellation of the agreement was a revenue ... Appeal To AAC Issues Involved:1. Nature of the agreement between the assessee and M/s. Khanna Financiers.2. Classification of the Rs. 68,000 payment as revenue expenditure or capital expenditure.3. The Tribunal's decision and its basis.4. Applicability of case law cited by both parties.5. The final determination by the High Court.Detailed Analysis:1. Nature of the Agreement:The assessee, engaged in the business of exhibiting cinema pictures, entered into an agreement with M/s. Khanna Financiers on April 13, 1966. This agreement allowed M/s. Khanna Financiers to exhibit pictures for 104 weeks at a rate of 28 shows per week, with weekly hire charges of Rs. 5,000. The Tribunal noted that this was not a 'lease agreement' but rather an 'agreement to operate the cinema.' The assessee was responsible for office, management, staff, electricity, and other expenses, receiving Rs. 5,000 weekly in return for the 'playing time' being placed at the disposal of M/s. Khanna Financiers.2. Classification of the Rs. 68,000 Payment:The primary issue was whether the Rs. 68,000 paid to M/s. Khanna Financiers upon cancellation of the agreement constituted a revenue expenditure or a capital expenditure. The ITO and AAC initially classified it as capital expenditure. However, the Tribunal disagreed, stating that the payment was made in the normal course of business and was incidental to it. The Tribunal emphasized that the agreement did not create a capital asset or an advantage of enduring nature.3. The Tribunal's Decision:The Tribunal concluded that the payment of Rs. 68,000 was a revenue expenditure. It reasoned that the agreement's termination did not result in acquiring a new capital right but merely altered the mode of using the profit-earning apparatus. The Tribunal noted that the period in question was only 63 weeks, which could not be described as of an enduring nature. Therefore, the revenue authorities erred in treating the amount as capital expenditure.4. Applicability of Case Law:The High Court referred to several cases to determine the nature of the expenditure:- Empire Jute Co. Ltd. v. CIT: The Supreme Court held that purchasing loom hours was a revenue expenditure as it did not enlarge the profit-making apparatus.- Godrej & Co. v. CIT: The Supreme Court held that compensation paid for reducing managing agents' remuneration was capital expenditure. However, the High Court distinguished this case from the present one, noting that the assessee's payment was for altering the profit-earning method, not reducing liability.- J. K. Cotton Manufacturers Ltd. v. CIT: Compensation for voluntary termination of managing agency was held as capital expenditure, but the High Court found it inapplicable due to different facts.- CIT v. Ashok Leyland Ltd.: Compensation for termination of managing agency was treated as revenue expenditure, showing that such decisions depend on specific case facts.- Kettlewell Bullen and Co. Ltd. v. CIT: Compensation for voluntary relinquishment of managing agency was held as a capital receipt.5. Final Determination by the High Court:The High Court agreed with the Tribunal's conclusion that the expenditure was of a revenue nature. It emphasized that the payment was made to alter the method of earning profits from the cinemas, not to acquire a capital asset. The High Court noted that the assessee preferred to run the cinemas itself, taking the chance of earning more or less from the box-office, rather than receiving a fixed weekly sum. Therefore, the Rs. 68,000 payment was necessary to determine the true profit of the assessee-company during the remaining 63 weeks.The High Court answered the referred question in the affirmative, in favor of the assessee and against the Department, concluding that the Rs. 68,000 was a revenue expenditure. The parties were left to bear their own costs.