Payment of commission under income tax law treated as business expenditure when diversion at source exists, deduction allowed.

Payment of commission under section 10 of the Income-tax Act was analysed as to whether it constituted revenue expenditure or an overriding charge diverting income at source. The legal basis is that deductions are allowable only where the amount is not the assessee s income because it is diverted at source; amounts payable by contractual stipulation as a condition of transfer that operate as an overriding charge and are expended wholly and exclusively for business purposes are deductible. Consequently, commission fixed as a percentage of net profits under the agreements is deductible as expenditure incurred for the purposes of trade.

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Issues: (i) Whether the annual payments made by the company to the Government under the agreements are capital expenditure or revenue expenditure; (ii) Whether, if revenue in nature, the payments are allowable as deductions under Section 10(2)(xv) of the Income-tax Act, 1922, including the question whether the payments amount to diversion of income at source or are an overriding charge deductible in computing profits.

Issue (i): Whether the annual payments constitute capital expenditure or revenue expenditure.

Analysis: The contractual terms and surrounding commercial circumstances were examined, including that the company was formed to take over undertakings subject to enduring obligations to pay a percentage of net profits for an unlimited duration, that the payments were related to annual trading profits and were not tied to any fixed capital sum, and that the payments were part of the conditions of transfer and concessions granted. The character of the obligation, its relation to the profit-earning apparatus and its indefinite duration were considered in light of authorities distinguishing payments that are part of purchase price from payments laid out for earning profits.

Conclusion: The payments are revenue expenditure and not capital expenditure.

Issue (ii): Whether the revenue payments are allowable deductions under Section 10(2)(xv), including whether they constitute diversion of income at source or an overriding charge deductible in computing profits.

Analysis: The statutory scheme of Section 10(1) and Section 10(2)(xv) was applied to the contract terms. The question whether the obligation diverted income at source or represented a mere post-profit division was considered by construing the agreement: the company had no volition at inception and accepted enforceable obligations as conditions of transfer; the payments were connected to concessions and ongoing obligations that formed part of the profit-earning structure. Comparative authorities were reviewed to discern when profit-referenced payments are deductible as laid out for business and when they are mere divisions of earned profits.

Conclusion: The payments, being revenue in nature and constituting an enforceable obligation at inception that operates as an overriding charge or expenditure wholly and exclusively laid out for the purposes of the trade, are allowable deductions under Section 10(2)(xv) in favour of the assessee.

Final Conclusion: On construction of the agreements and application of Section 10(1) and Section 10(2)(xv), the payments are revenue in nature and deductible; the appeal by the revenue is dismissed.

Ratio Decidendi: A payment computed by reference to profits is deductible under Section 10(2)(xv) when, on construction of the contract and viewing surrounding circumstances, it is a revenue obligation incurred at the inception as an enforceable charge on the profit-earning apparatus (including diversion of income at source or an overriding charge), and not merely a post-profit division.

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