TaxTMI 
TaxTMI 
1970 (1) TMI 4
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....the company's installations at Bombay, Madras and Calcutta. In the end of 1949, these three installations were returned to the company. For the purpose of carrying on its business and obtaining finance to the extent of Rs. 10,00,000, the company made the first agreement of finance dated August 29, 1953, with Khushalbhai Patel & Sons, a partnership firm carrying on business in Bombay. In connection with the arguments advanced on both sides, details of various clauses in the agreement will require to be noticed hereafter. It may, however, at once be stated that under the agreement the lenders agreed to advance the aggregate sum of Rs. 10,00,000 at interest at the rate of 6 per cent. per annum. The company agreed to pledge all goods imported by the company as security with the lenders. The company agreed to pay commission on all goods imported as provided in clause 13. The agreement was for a period of 10 years and the company agreed to pay even after the expriry of 10 years to the lenders commission as mentioned in clause 25. Thus, the first agreement related to imports to be made at Bombay and to be stored at the company's installation at Bombay. Similar second agreement of finan....
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....ed for default clause on failure of payment of any instalment for acceleration of payment of the whole of the remaining balance of the above sum of Rs. 3,00,000 immediately. For the assessment year 1957-58, the company claimed as deduction the above sum of Rs. 3,00,000 due and payable by the company under the consent decree or in the alternative a deduction of the first instalment of Rs. 60,000 which was paid during the year. The company claimed a further deduction of Rs. 69,645 as legal expenses. These legal expenses consisted of three different items and Rs. 24,719.08 related to costs paid to Messrs. Kanga & Co., Solicitors, in connection with the preparation of the above three agreements of finance and other various deeds. In connection with this item of expense, Mr. Joshi for the respondent has stated that it was revenue disbursement and was liable to be deducted in the assessment year 1937-58. In respect of the assessment year 1958-59 the company claimed a deduction of Rs. 60,000 being the second instalment paid under the consent decree. The revenue authorities including the Appellate Tribunal rejected the claims for deduction. The submission of Mr. Mehta for the company in....
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....ions in B. W. Noble Ltd. v. Mitchell and Anglo-Persian Oil Co. Ltd. v. Dale. Reference was also made to the case of Atherton v. British Insulated and Helsby Cables Ltd. and G. Scammell and Nephew Ltd. v. Rowles. On behalf of the respondent, reliance has been placed on the case of Mallett v. Staveley Coal and Iron Co. Ltd., Van Den Berghs Ltd. v. Clark and Associated Hotels of India Ltd. v. Commissioner of Income-tax. Before referring to these authorities, it is necessary to notice the clauses of the above agreements on which reliance has been placed particularly on behalf of the respondent. The first finance agreement which forms part of annexure "A" contains a recital that the company " intends to import petrol and kerosene oil and other petroleum products and store and stock the same at its Wadala installation." The second recital on which reliance is placed provides that " the financiers agree to finance the company in the manner and on the terms and conditions mentioned in the agreement ". Under clause 2, the interest agreed was 6 per cent. per annum and it was agreed to be paid on Rs. 10,00,000 whether the company took finance or not. Under clause 3, the imports were agreed....
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....and any other authorities to be signed by the company ". Clause 25 provided : "....... during the said period of ten years the company doth hereby covenant with the financiers that if the company shall after the expiration of the said period of ten years continue to carry on the business in petrol and/or kerosene or petroleum products in any area now served by the established oil companies in Bombay ...... the company shall so long as the company continues the said business pay to the financiers as and by way of commission a sum equal to one and a half pies per gallon on liquid oils and one and a quarter per cent. of the c. i. f. value on asphalt dealt in by the company after the expiration of the said period of ten years. " The second agreement is almost on the same terms but in relation to the imports made by the company at the Port of Madras. The third agreement dated January 12, 1955, which also forms part of annexure " A " to the statement of facts modifies certain clauses of the previous agreements and reliance has been placed on behalf of the respondent on the modified clauses 24 and 25 as contained in the third agreement. The clause 24 relates to deposit of Rs. 3,00,0....
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....stalments. The question was whether the payments made by the company to the director were admissible deductions in arriving at its profits for income-tax purposes. Rowlatt J. in the first court referred to the case of Atherton v. British Insulated and Helsby Cables Ltd. and observed : " . . . it is a capital expense if you buy an asset or purchase an enduring advantage. This was not that case, or anything like it. What it is more like, perhaps, is the case of a payment made to remove the possibility of a recurring disadvantage . . . . This gentleman being there as an unsatisfactory servant was not a permanancy. He was no doubt there for his life, but I do not think you can say : 'By an expenditure of capital I will get rid of this nuisance affecting my business, and have his room rather than his company by making this capital expenditure'. I cannot look at it in that way. " In the Court of Appeal Lord Hanworth, Master of the Rolls, observed at page 419 : " It is said, and not unfairly, that you have a sum definitely agreed, a payment no doubt by instalments, but for all practical purposes the sum is immediately ascertained and is in that sense in the nature of a capital pa....
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....enduring benefit for the company's trade by getting rid of an onerous contract... The question is not merely getting rid of an onerous contract, but an onerous contract for what ? If it is an onerous contract for payment of wages or commission which are chargeable to revenue account in the plainest possible way, and if that is the onerous contract that you are getting rid of, it is impossible to suggest that that is a reason for saying that this is a capital expenditure unless you get rid of that onerous contract ... by erecting in its place a capital asset ... But to say that it is a capital expenditure because it secured an enduring benefit by getting rid of an onerous contract is not to state the material thing, and it is completely inconclusive. " In connection with the observation of Lord Cave and the phrase " enduring " the learned judge observed : " What Lord Cave is quite clearly speaking of is a benefit which endures, in the way that fixed capital endures ; not a benefit that endures in the sense that for a good number of years it relieves you of a revenue payment. " The argument of the Attorney-General in that case was same and similar as the argument of Mr. Josh....
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....aracter and may consist in the getting rid of an item of fixed capital, i.e., of an onerous character. Now, in our view, Mr. Mehta is right in relying upon the above observations and in submitting that the facts in the present case are in most respects similar to the facts in the above authority. The assessee-company had in that case appointed another company as its agents in Persia and in the East for a period of years. The assessee-company had found that with the passage of time the amounts payable to the agents by way of commission increased far beyond the amounts originally contemplated. Those difficulties and the difficulty of the business having been entrusted to the agents was obviated and removed by the agreement for payment of pound 3,00,000 in cash. In the present case also, as we will presently notice, whilst dealing with the arguments advanced on behalf of the respondent, similar difficulties arose and the applicant, assessee-company, obviated all these difficulties by agreeing to pay the sum of Rs. 3,00,000 as and by way of damages for termination of the three agreements referred to above. In the case of Mallett v. Staveley Cool and Iron Co. Ltd., the assessee was a....
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....egative covenants. " It was to last during the lives of the two directors in question." That advantage was a solid one. The learned Master of the Rolls distinguished the facts in the case of Mitchell v. B. W. Noble Ltd., in arriving at the conclusion that the disbursement was capital disbursement. In that connection, his main observation was : " But when you are buying off an outside competitor the position is entirely different. " In the case G. Scammell and Nephew Ltd. v. Rowles, the deduction was claimed by the assessee-company in respect of payments made by compromising a suit and counter-claim wherein the respective claims were for a declaration that the debentures were void and for damages for defamation. The main observations on which reliance has been placed by Mr. Joshi appear at pages 52 to 54 of the report. Now, at page 53, the argument advanced was stated in the following words : " But the real weight of the argument that was put before us was on the point as to termination of trading relation, and it was said that where you have a complex relationship, two companies with interlocked boards, the chairman of one holding a controlling interest in the other, a manage....
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....uct of their business ; nor were the merely agreements as to how their trading profits when earned should be distributed as between the contracting parties. On the contrary, the cancelled agreements related to the whole structure of the appellants' profit-making apparatus. They regulated the appellants' activities, defined what they might and what they might not do, and affected the whole conduct of their business. " Mr. Joshi has submitted that these are observations which are applicable to the facts of the present case. In his submission, the various clauses in the agreements between the assessee-company and the lenders relate to the whole structure of the assessee-company's profit-making apparatus. These agreements regulated the activities of the assessee-company and defined what they might and what they might not do and affected the whole conduct of their business. He has, therefore, submitted that following the observations in the case, the damages of Rs. 3,00,000 agreed to be paid by the assessee-company must be held to be payment made for acquiring an enduring advantage. The advantage was to get the right of carrying on the business free from shackles of the three agreeme....
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....s, possession of these installations was agreed to be delivered to them. Somewhat extraordinary right was given to the lenders by providing that the assessee-company should not charter any tanker or tankers for importing the goods into Bombay without obtaining the approval in writing of the financiers. Under clause 24, the lenders were entitled to have an irrevocable power of attorney entitling them to execute for and on behalf of the assessee-company various documents including those required for opening letters of credit' clearing and selling the goods, endorsing insurance policies and such other documents. These rights, as already stated, are normal and ordinary rights usually created in writings and/or deeds of finance agreements in favour of lenders. Such rights are exercised when repayment of loans advanced under finance agreements is not received in accordance with the tenor of such agreements. These rights are in normal circumstances not for taking control of and/or carrying on the business of the borrowers. There is nothing in these agreements which can justify a finding that the agreements were made for entrusting the management of the business of the assessee-company to ....
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.... agreement to pay damages in the sum of Rs. 3,00,000 was expenditure to be made for terminating disadvantageous relationship between the parties and was to remove difficulties in the smooth carrying on of the business of the assessee-company. The agreements of finance were to last for 10 years and the termination of these agreements was not the benefit which would have endured to the company beyond that period of 10 years except in connection with the incidental liability to pay certain small commission even after the period of 10 years. Removal of the obstructions and disadvantages which were the consequences of these three agreements were removal of liabilities rather than procuration of any benefits or enduring benefits as contended by Mr. Joshi. The commission and interest payable under the agreements would have been recurrent liability to be discharged from circulating capital. Similarly, the loans advanced under the agreements were also liabilities to be discharged from circulating capital. These liabilities were made short lived by the compromise made between the parties. It is difficult to accept the contention of Mr. Joshi the benefit which accrued to the assessee-company ....