M. K. BROTHERS (P) LTD . vs. C.I.T. KANPUR

CIVIL APPEAL No. 342/1969Supreme Court[1973] 1 S.C.R. 107729 August 1972Bench: 3 JudgesAuthor: K.S. HEGDE, P. JAGANMOHAN REDDY, HANS RAJ KHANNA7 pages
AI SummaryDismissed

What were the facts?

In 1955, a corporation had a significant amount due from its sole selling agent, a firm. The appellant company, M.K. Brothers (P) Ltd., entered into an agreement where it undertook to discharge this firm's liability in exchange for being appointed the sole selling agent. An indenture in 1956 formalized this, authorizing the corporation to retain 1/7th of the trade discount due to the appellant, with a minimum of Rs. 50,000 annually, to settle the firm's outstanding dues. Clause 13 of this indenture stated the selling agents had no claim to these retained amounts. For assessment year 1956-57, the corporation retained Rs. 43,333 from the appellant's commission. The appellant treated the full commission as income and the retained sum as a deduction. The Department, Appellate Tribunal, and High Court disallowed this deduction, deeming it capital expenditure.

What did the Supreme Court hold?

The Supreme Court held that the retained amount of Rs. 43,333 was not assessable income of the appellant. The Court clarified that the answer to whether money paid is revenue or capital expenditure depends on the purpose of the payment, not its quantum or mode of payment. If the object is to acquire a capital asset or an advantage for enduring benefit, the payment is capital, even if made in installments. Conversely, payments made in the course of and for carrying on business are revenue. The Court found that the appellant obtained the sole selling agency in consideration for agreeing to pay the amount due from the previous agent. The fact that this payment was made through deductions from commission, rather than a lump sum, did not alter its capital nature. The Court cited Assam Bengal Cement Co. Ltd. v. Commissioner of Income-tax and P. B. Divecha v. Commissioner of Income-tax to support its reasoning that the aim and object of the expenditure determine its character. Clause 13, stating the appellant had no claim to the retained amount, was immaterial to the true nature of the expenditure. The expenditure was for acquiring a capital asset (sole selling agency), not for running the business. The appeal was dismissed.

What were the issues?

1. Whether, on the facts and interpretation of the agreement dated 31-7-1956, the sum of Rs. 43,333 retained by the British India Corporation and adjusted to the credit of Sharma & Co. constituted the assessable income of the appellant company? 2. Whether, on the facts and circumstances, the sum of Rs. 43,333 represented an expenditure under Section 10 of the Income Tax Act, 1922? Assessee's Contention: The appellant argued that the retained sum was a deduction from its commission, which was its income, and therefore, it should be allowed as a deduction. The appellant contended that the retained amount was not its income but a deduction from its earned commission. The appellant also implicitly argued that the expenditure was revenue in nature. Revenue's Contention: The revenue contended that the retained amount was not assessable income of the appellant and that it represented a capital expenditure incurred for acquiring the sole selling agency, not a revenue expenditure deductible under Section 10. The revenue relied on the principle that expenditure for acquiring an enduring benefit is capital expenditure.

Which sections of the Income-tax Act were involved?

Section 10,Section 66(1)

AI-generated summary — verify with the full judgment below

) • A M. K. BROTIIERS (P) LTD . v. C.I.T. KANPUR August 29, 1972 1077 B [K. S. HEGDE, P. JAGANMOHAN RE.ODY AND H. R. KHANNA, JJ.] c D E J' G H lncom11-tax Act (11 of 1922)-Amount due to company from Its sole selling agerl.t-Llability undertaken by appellant to pay amount in consi- deraio11 of its appointment as sole selling agent-If Capital or revenue expenditure. in 1955, a large amount was due to a corporation from a. firm which was then its oole selling agent. As a result of an agreement between the appellant, the corporati>Jn, and the firm, the appellant undertook to dis- charge the liability of the firm in consideration of its being appointed the S<,lle selling agent in place of the firm.

In 1956, an indenture was execut· ed by the corporation and the appellant relating to the appointment of the appellant as &Jle selling agent, and in thi; indenture, it was agreed ·that the corporation should be authorised to retain an amount equal to 1 /7 of the trade discount due to the sole selling agents with a minimum of RB. 50,000 a year, for discharging the liability, so that, the amount payable to the sole selling agents would be the amount payable as trade

The order continues below.

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