Capital expenditure treatment for royalty paid as part of purchase consideration for business rights in a patent medicine

Royalty paid under the agreement for acquiring rights in a patent medicine was treated as part of the purchase price for the business source, not as a recurring revenue outgoing incurred solely to earn income. Reading clauses (1) and (2) together, the agreement showed that the royalty formed part of the consideration for acquisition of the business rights themselves. The fact that the royalty amount was variable and became ascertainable only after sales began did not alter its character. The payment was therefore capital expenditure and not deductible under the Indian Income-tax Act.

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Issues: Whether the royalty paid under clause (2) of the agreement for the purchase of rights in the patent medicine was a sum lawfully deductible as expenditure incurred solely for the purpose of earning profits or gains under the Indian Income-tax Act.

Analysis: The agreement had to be read as a whole. Clauses (1) and (2) together formed the consideration for the acquisition of the business rights in the medicine. The royalty was not a separate revenue outgoing incurred merely in the process of earning income, but part of the price paid for acquiring the source of the business itself. Although the amount payable under the royalty clause was variable and not fixed at the date of the agreement, it became ascertainable once sales commenced and therefore did not change its character as part of the purchase consideration.

Conclusion: The royalty payment was capital expenditure and was not deductible under Section 10(2)(ix) of the Indian Income-tax Act.

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