Recurring profit-linked payment treated as revenue expenditure, not capital outlay, because it had no nexus with the purchase price.

An annual payment made under the agreements was characterised by its real commercial nature, not its form: the cash price for the assets was separately fixed, while the disputed payment was a recurring percentage of profits payable for an indefinite period and not linked to any capital sum or the capital value of the undertakings. On that basis, the payment was held to be a business outgoing of a revenue character and not capital expenditure, so it was deductible under section 10(2)(xv); the High Court's contrary view was overruled.

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Issues: Whether the annual payment of Rs. 42,480 made to the Government under the agreements was capital expenditure or revenue expenditure and therefore allowable as a deduction under section 10(2)(xv) of the Income-tax Act, 1961.

Analysis: The nature of the payment had to be determined from the real character of the transaction and the surrounding circumstances, not merely from the form adopted by the parties. The cash consideration for the assets was separately fixed, while the impugned payment was an annual percentage of profits payable for an indefinite period, unrelated to any fixed part of the purchase price and not tied to the capital value of the undertakings. A payment of this kind, dependent upon trading profits and lacking any nexus with a capital sum, bore the character of a recurring business outgoing rather than a capital outlay.

Conclusion: The annual payment was revenue expenditure and not capital expenditure; the High Court's view on this point was overruled.

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