1985 (8) TMI 331 - SC - Income Tax

Supreme Court: Expenditure for Capital Asset Not Deductible under Section 10(2)(xv)

Commissioner of Income-Tax, Central, Bombay Versus Jalan Trading Co. Pvt. Limited

Commissioner of Income-Tax, Central, Bombay Versus Jalan Trading Co. Pvt. Limited - [1985] 155 ITR 536 (SC) Issues Involved:1. Deduction of Rs. 7,93,837 under Section 10(1) or Section 10(2)(xv) of the Indian Income Tax Act, 1922.2. Nature of the expenditure: capital or revenue.3. Real income principle and its application.Issue-wise Detailed Analysis:1. Deduction of Rs. 7,93,837 under Section 10(1) or Section 10(2)(xv) of the Indian Income Tax Act, 1922:The respondent-assessee claimed a deduction of Rs. 7,93,837 in the assessment year 1954-55 under Section 10(1) or alternatively under Section 10(2)(xv) of the Act. The Income Tax Officer (ITO) and the appellate authorities rejected this claim. The High Court, however, held that the payment represented business expenditure and was deductible under Section 10(2)(xv). The Supreme Court examined whether this expenditure was for acquiring a capital asset, which would not be deductible under Section 10(2)(xv).2. Nature of the expenditure: capital or revenue:The Tribunal and the High Court both found that the assessee had acquired an asset of an enduring nature. The Tribunal stated, 'The payment in question was made by the assessee to acquire the right to carry on the sole selling agency of Bharat Barrel Ltd., or in any case to acquire a benefit of an enduring nature.' The High Court concurred, noting that the assessee acquired the right to act as the sole selling agent with a renewal clause, thereby obtaining an asset of enduring nature. The Supreme Court referred to the principles laid down in Assam Bengal Cement Co. Ltd. v. CIT, which distinguished between capital and revenue expenditure based on whether the expenditure was for acquiring an asset or an advantage of enduring benefit.3. Real income principle and its application:The High Court did not examine whether the payment made by the assessee did not form part of its real income, stating, 'It is enough for our purpose that the payment is deductible under s. 10(2)(xv) of the Act.' The Supreme Court, however, addressed this issue. The assessee argued that once 75% of its profits were paid, the real income was reduced to 25%, which should be taxable. The Supreme Court noted that neither the ITO nor the appellate authorities had investigated whether the assessee was separate from the partnership firm. The ITO had doubted the bona fides, stating, 'The payment is also not allowable as it is only an apportionment of profits.' The Supreme Court agreed with the Revenue's argument that if the amount was spent for obtaining a capital asset, it would not be deductible under Section 10(1).Conclusion:The Supreme Court allowed the appeal, vacated the High Court's judgment, and directed that the Tribunal's decision be given effect to. The court concluded that the expenditure was for acquiring a capital asset and was not deductible under Section 10(2)(xv). The principle of real income did not apply to allow the deduction of the amount spent on obtaining a capital asset.