Service contract payment for modified employment terms held to be revenue expenditure, not capital, absent enduring advantage

A payment made under a supplementary service agreement to modify an employee's terms, including a restraint on private practice, was treated as revenue expenditure because it did not bring into existence any asset or enduring capital advantage. The benefit to the employer was only incidental to the employment arrangement, reflected in improved service and possible operational economies, and did not amount to buying off competitors or enhancing goodwill in a capital sense. The payment was therefore deductible as revenue expenditure.

---

---

Issues: Whether the sum of Rs. 50,000 paid to the employee in connection with the modification of his service terms was capital expenditure or revenue expenditure.

Analysis: The payment was made under a supplementary agreement altering the conditions of employment of a chief executive engineer. The restraint on private practice was incidental to the employment arrangement and did not result in acquisition of any asset of lasting character. The benefit to the assessee in improved service and possible economies in production was only incidental to the contract of employment. The fact that the employee was allowed to retain private practice with one concern and that rival firms could still obtain similar advice from other engineers showed that the payment did not buy off competitors or enhance goodwill in the sense of creating an enduring capital advantage.

Conclusion: The payment was revenue expenditure and deductible as such.

Ratio Decidendi: A payment made under a service contract for securing modified employment conditions and restricting private practice, where no asset or enduring capital advantage is acquired and the benefit is merely incidental to the employment, is revenue expenditure.

---