COMMISSIONER OF INCOME-TAX, KERALA, ERNAKULAM vs. TRAVANCORE SUGAR & CHEMICALS LTD.

CIVIL APPEAL No. 2161/1969Supreme Court[1973] 2 S.C.R. 73827 October 1972Bench: 2 JudgesAuthor: P. JAGANMOHAN REDDY, I.D. DUA14 pages
AI SummaryDismissed

What were the facts?

The appellant company was incorporated to take over three government concerns: a sugar factory, a distillery, and a tincture factory. An agreement dated June 18, 1937, stipulated a cash consideration for the assets, along with other terms. Clause 7 of this agreement entitled the Government to 20% of the net profits earned by the company annually, capped at Rs. 40,000. Net profits were to be ascertained after deducting expenditure, depreciation, and the Secretaries and Treasurers' remuneration. A subsequent agreement reduced the percentage to 10%. For assessment year 1958-59, the amount payable was Rs. 42,480. The assessee claimed this payment as a deductible revenue expenditure under Section 10(2)(xv) of the Income-tax Act, 1922. This claim was initially disallowed by the Income Tax Officer and Appellate Assistant Commissioner but allowed by the Tribunal. The High Court, on reference, held it to be capital expenditure. The Supreme Court reversed this and remanded the matter. On remand, the High Court held the expenditure deductible. The present appeal is against this High Court judgment.

What did the Supreme Court hold?

The Supreme Court held that once the crucial question is decided that the expenditure is of a revenue nature and not capital, the answer to the reference should be affirmative. The Court reasoned that the assessee had no choice at the inception of the company to agree to the terms stipulated by the Government for transferring the profit-earning assets. These obligations, including engaging local labour, training apprentices, and the indefinite period for paying a percentage of net profits, were interlinked with the transfer of assets. The payment was viewed as a stipulation for a concession granted to the company, making it deductible at its inception as an overriding charge on the profit-making apparatus or as an expenditure wholly and exclusively laid out for the purpose of trade. The Court rejected the contention that Section 10(2)(xv) was confined only to payments wholly and exclusively laid out for the purpose of business, including revenue expenditure. The appeal was dismissed.

What were the issues?

1. Whether, on the facts and in the circumstances of the case, the payment of Rs. 42,480 by the assessee to the Travancore Government under the agreements dated June 18, 1937, and January 28, 1947, was allowable under Section 10 of the Income-tax Act, 1922, as a revenue expenditure. Assessee's Contentions: The assessee contended that the payment was an expenditure of a revenue nature and was allowable under Section 10(2)(xv) of the Act, as it was an expenditure made in order to earn profits of the business and not an expenditure paid out of earned profits. The assessee relied on the Supreme Court's earlier decision remanding the case and the subsequent High Court ruling on remand. Revenue's Contentions: The revenue contended that the payment constituted capital expenditure and was not allowable under Section 10(2)(xv) of the Income-tax Act, 1922. The revenue's initial stance was that the expenditure was not deductible.

Which sections of the Income-tax Act were involved?

Section 10(2)(xv),Section 10(1),Section 10

AI-generated summary — verify with the full judgment below

738 COMMI~SIONER OF INCOME-TAX, KERALA, ERNAKULAM v. TRAVANCORE SUGAR & CHEMICALS LTD. October 27, 1972 [P. JAGANMOHAN REDDY AND I.

0.

DUA, JJJ Indian Income· Tax Act 1922, Section 10(2) (xv)-Payment of fixed percentage of the profits annually, apart from the carh consideration, for :aking over of the undtrtaklng, whether deductible, The appellant Company was floated with a ~iew to take over the assets of the three Government concerns, nllllllely, Sugar Factory, a distillery and· tincture factory and to run them. Clause 3 of the agreement provided that the cash consideration !for the sale of assets shall be Rs. 3.25 lakhs. Clause 4(b) a.nd (c) provided for the continuation of the distillery licence in favour of the appellant. The Government wa.s to purchase the phar- maceutical products from the company under clause S(b). The Govern- ment had a right to nominate a Director on the Board of llirectors. Clause 7 of the agreement read "Government shall be entitled to 20% of the net profits earned by the CompBllly in every year subject, however, to the maximum of Rs. 40,000/- per annum. Such net profits for the purpose of this clause to be ascertained by ded\lctions

The order continues below.

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