Capital expenditure on acquiring a sole selling agency is not deductible merely because it is recovered from commission.

An amount retained from an assessee's commission in consideration of obtaining a sole selling agency was treated as capital expenditure, because its real purpose was to secure an enduring business advantage by discharging the previous agent's outstanding liability. The mode of discharge, whether by instalments or by deduction at source from commission, did not change the character of the payment. The retained sum therefore represented application of income towards the acquisition of a capital asset and was not allowable as revenue expenditure under section 10.

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Issues: Whether the sum retained from the commission payable to the assessee was assessable as the assessee's income and whether the same amount constituted a deductible revenue expenditure under section 10.

Analysis: The amount was retained in pursuance of the arrangement under which the assessee obtained the sole selling agency in consideration of undertaking to discharge the outstanding liability of the previous agent. The character of the payment depended on its real purpose and not on the manner in which it was discharged. A payment made to acquire or bring into existence an asset or advantage for the enduring benefit of the business is capital in nature, even if it is recovered by instalments or by deductions from commission. The fact that the assessee had no claim to the retained amount did not alter the true nature of the payment, which represented application of income towards a liability incurred for acquiring a capital asset.

Conclusion: The retained amount was not allowable as revenue expenditure and the High Court's answer against the assessee was correct.

Final Conclusion: The appeal failed because the payment was treated as part of the consideration for acquiring a capital asset, namely the sole selling agency, and was therefore not deductible.

Ratio Decidendi: Where an amount is deducted from trading receipts or commission as consideration for acquiring a source of income or other enduring business advantage, its character is capital notwithstanding that payment is made by instalments or by retention at source.

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