1972 (8) TMI 5 - SC - Income Tax

Nature of expenditure for appointment as sole selling agent: purpose-based test determines capital character, not payment mode

Payment made to secure a sole selling agency is a capital expenditure because the payment's purpose was to acquire an enduring business advantage; ... Nature of expenditure - payment made in the course of and for the purpose of carrying on business or trading activity - appointment of the appellant as the sole selling agent - Whether, between the British India Corporation and the appellant company, the letters of Sri Kailash Nath Agarwal, the letters of managing directors, the sum retained by the British India Corporation and adjusted by it to the credit of Sharma & Co. was the assessable income of the appellant company? - HELD THAT:- The fact that the amount was paid not in lump sum but was paid in instalments through deductions out of the commission due to the appellant would not, in our opinion, make any difference. The answer to the question as to whether the money paid is a revenue expenditure or capital expenditure depends not so much upon the fact as to whether the amount paid is large or small or whether it has been paid in lump sum or by instalments, as it does upon the purpose for which the payment has been made and expenditure incurred. It is the real nature and quality of the payment and not the quantum or the manner of the payment which would prove decisive. If the object of making the payment is to acquire a capital asset, the payment would partake of the character of a capital payment even though it is made not in lump sum but by instalments over a period of time. As observed by this court in the case of Assam Bengal Cement Co. Ltd. v. Commissioner of Income-tax [1954 (11) TMI 2 - SUPREME COURT], if the expenditure is made for acquiring or bringing into existence an asset or advantage for the enduring benefit of the business it is properly attributable to capital and is of the nature of capital expenditure. If on the other hand it is made not for the purpose of bringing into existence any such asset or advantage but for running the business or working it with a view to produce the profits it is a revenue expenditure. If any such asset or advantage for the enduring benefit of the business is thus acquired or brought into existence it would be immaterial whether the source of the payment was the capital or the income of the concern or whether the payment was made once and for all or was made periodically. The aim and object of the expenditure would determine the character of the expenditure whether it is a capital expenditure or a revenue expenditure. The source or the manner of the payment would then be of no consequence. Appellant has referred to clause 13 of the indenture reproduced above and has contended that the appellant could make no claim to the amount, which had been retained by BIC. This fact, in our opinion, would make no material difference so far as the true nature of that amount was concerned. The amount was deducted by BIC in pursuance of the agreement entered into by the appellant with BIC and Sharma & Co., according to which the appellant had to pay that amount in the form of deduction out of its commission in consideration of being appointed the sole selling agent of the Kanpur Cotton Mills. The present is a case relating to the application of income to discharge a liability incurred not in the course of running the business but a liability undertaken for the purpose of acquiring the sole selling agency right which was indisputably an asset of capital nature. The appeal consequently fails and is dismissed with costs. Issues:1. Interpretation of agreement between parties regarding assessable income.2. Determination of whether a specific sum represented an expenditure under section 10.Issue 1 - Interpretation of agreement regarding assessable income:The case involved an appeal against the judgment of the Allahabad High Court concerning the interpretation of an agreement dated July 31, 1956, between the British India Corporation (BIC) and the appellant company. The key questions referred to the court were whether a sum retained by BIC and adjusted to the credit of another company was the assessable income of the appellant company, and whether this sum represented an expenditure under section 10 of the Indian Income-tax Act, 1922. The appellant, a private limited company, was appointed as the sole selling agent of the Kanpur Cotton Mills in place of another firm, and certain financial arrangements were made regarding outstanding dues. The court analyzed the nature of the payment made by the appellant in consideration of acquiring the sole selling agency rights and concluded that the payment was of a capital nature, even though it was made through deductions out of the commission due to the appellant.Issue 2 - Determination of expenditure under section 10:The court examined the real nature and purpose of the payment made by the appellant to BIC in the form of deductions out of its commission. It emphasized that the character of the expenditure, whether capital or revenue, depends on the objective of the payment and not on the quantum or manner of payment. The court cited previous judgments to support the distinction between capital and revenue expenditure, highlighting that payments made for acquiring or bringing into existence an asset or advantage for the enduring benefit of the business constitute capital expenditure. In this case, the payment by the appellant was considered capital expenditure as it was made to acquire the sole selling agency right, which was deemed an asset of capital nature. The court dismissed the appeal, upholding the judgment of the High Court against the appellant.In conclusion, the Supreme Court analyzed the agreement between the parties, the nature of the payment made by the appellant, and the implications of the financial arrangements in determining the assessable income and expenditure under section 10 of the Income-tax Act. The court emphasized the distinction between capital and revenue expenditure based on the purpose of the payment and upheld the decision against the appellant, dismissing the appeal with costs.