TaxTMI 
TaxTMI 
1979 (3) TMI 2
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....rs of the firm floated the limited company which is the assessee in this case. The main business of the company was to be the same as that of the firm. By an agreement dated September 24, 1970, the company undertook to take over some of the assets and liabilities in the business done by the firm. The terms and conditions of the agreement would be noticed presently. The company was also to be given the right to carry on the business in continuation of the firm. In consideration of assigning the rights to carry on the business of sole selling agency the firm was to be entitled to a royalty of Re. 1 per case of liquor sold by the company. It was also provided that the company was to pay 2.31 lakhs of rupees in fully paid shares to the partners of the firm, as consideration for the sale. For the accounting year ended 30th September, 1971, the assessee-company paid Rs. 21,584 by way of royalty to the firm. For the accounting year ended September 30, 1972, it paid Rs. 16,165 under the same account and for the year ended September 30, 1973, Rs. 27,492. In their income-tax returns these were claimed as business expenditure. The ITO allowed the claim for the year 1972-73, but he reopened....
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....A collection of the different principles highlighted in various decisions dealing with this aspect of the matter, will be found in the well known treatise by Kanga and Palkhivala on Income-tax (7th edn.) Vol.I, pages 479 to 485. At page 486, the learned authors, after discussions, have stated the position that no test can be said to be of universal application. The learned authors have quoted the Supreme Court's decision in Golan Lime Syndicate v. CIT [1966] 59 ITR 718, 727, where it was stated: " It is not the law that, in every case if an enduring advantage is obtained, the expenditure for securing it must be treated as capital expenditure ". That is only to show that even the principle of enduring benefit or advantage, which at one time rode supreme, cannot be accepted as of universal application. The safe principle to be followed is that the decision must essentially depend upon the facts and circumstances disclosed by each individual case. We turn to the document which is annex. A to the statement of the case. The material part of it reads as follows : " Agreement dated 24-9-70 THIS AGREEMENT made the Twenty-fourth day of September One thousand Nine Hundred and Seventy B....
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....e said Sale, by the Vendor to the company, the company shall pay Rs. 2,31,000 (Rupees Two lakhs Thirty one thousand only) in fully paid 231 equity shares of Rs. 1,000 each but the company shall allot to (1) Thomas Jacob (2) Mrs. Lalitha Jacob (3) Jacob (4) Susan Thomas (5) Jacob Thomas and (6) Mrs. Susan Thomas as Vendors' nominees, 110 shares of Rs. 1,000 each out of the said 231 shares of. Rs. 1,000 each otherwise payable to the Vendors with the result that the Vendors, viz., (1) Susanna Jacob (2) Rachael Thomas (3) Beena Jacob and (4) George Jacob partners of M/s. Jacobs, shall be allotted 121 shares of the nominal value of Rs. 1,000 each as fully paid up. The shares shall be allotted as under : ........ " The provisions of the document have appeared to us to be rather complex and ingenious. The preambulary part states that the vendors are desirous of selling to the company the selective assets and liabilities and have also authorised the company to negotiate and take up the rights of sole selling agency of " McDOWELLS ". At this stage, it appears as if the vendor's desire extended only to sale of the assets and liabilities and to an authorisation to negotiate and take up the....
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....he Supreme Court, when the matter went up again to that court, after remand directed on the earlier occasion, vide CIT v. Travancore Sugars and Chemicals Ltd. [1973] 88 ITR 1 (SC). It would be convenient if we, examine the principle laid down in the Travancore Sugars Ltd.'s case. The appellant-company in that case was floated to take over certain assets of an undertaking by the Government of Travancore. It entered into an agreement with the Government of Travancore, whereby the assets of a sugar company and a distillery and a tincture factory, run by the Government, were agreed to be sold to the appellant-company to be floated for that purpose. The cash consideration for the sale of the assets of the sugar manufacturing concern was Rs, 3.25 lakhs; and that, for the sale of the distillery, was to be arrived at by joint valuation; and that for the tincture factory was to be the book value. The Government agreed to recognise a transfer of the licence for the distillery transferred to the company and also to grant a fresh licence for a period of 5 years after the termination of the existing licence. The company was to sell its products of the distillery to the Government at prices to b....
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....the capital expenditure into a revenue expenditure but the payment of instalments in such a case would always have some relationship to the actual price fixed for the sale of the particular undertaking. As we have already mentioned, there is no specific sum fixed in the present case as an additional amount of price payable in addition to the cash consideration and payable by instalments or by any particular method. In view of these facts we are of opinion that the payment of the annual sum of Rs. 42,480 in the present case is not in the nature of capital expenditure but is in the nature of revenue expenditure and the judgment of the High Court of Kerala on this point must be overruled. " In the light of the principles laid down by the above ruling, counsel for the assessee raised a two-fold argument before us. In the first place, he argued that on a conspectus of the provisions of annex. A, what was sold was only the assets and the business, and the sole selling agency was part of what was included in this sale, and did not, by itself, constitute a separate item of bargain in the document of sale. Secondly, even assuming that the sole selling agency also formed an independent it....
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.... " Mr. Maheshwari has referred to clause 13 of the indenture reproduced above and has contended that the appellant could make no claim to the amount of Rs. 43,333 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. " Counsel for the revenue placed strong reliance on the clear and strong statement of the Supreme Court that the liability undertaken for acquiring the sole selling agency right was indisputably an asset of a capital nature. He placed reliance also on the decision in CIT v. Coal Shipments P. Ltd. [19....
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....titute enduring benefit would depend upon the circumstances and the facts of each individual case. " The decision of the Madras, High Court in Fenner Woodroffe & Co.'s case [1976] 102 ITR 665 refers to and distinguishes the Travancore Sugars' case [1966] 62 ITR 566 (SC). If does not refer to M. K. Brothers' case [1972] 86 ITR 38 (SC). Counsel for the revenue commented that the decision had relied on the dissenting judgment of Sikri C. J. in Devidas Vithaldas & Co.'s case [1972] 84 ITR 277 (SC). He also referred to the comment in Kanga at p. 488 and again at p. 458. The Delhi decision in [1972] 84 ITR 567 (CIT v. Naya Sahitya) is helpful to the revenue. But counsel for the assessee complained that it does not make a comprehensive survey of the authorities. In the light of the principles laid down by the above decisions, and concentrating ourselves on the facts and the circumstances disclosed in this case, and particularly on the provisions of the document, we repeat that, on our analysis, there were two distinct and different items of sale and that the consideration for the sale of the sole selling agency business expressly mentioned in cl. 2 was only expenditure of a capital ....