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

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 of expenditure from gross income and also after (i) provision has been made for depreciation at net loss than the rates of allowance provided for in the Income Ta« Act for the time being in force, and (ii) payment of the Secretaries and Treasmer's remuneration".. By subsequent agreement, the percentage was reduced to 10%. For the assessment yeac 1958-59, the amount payable 10 the Government under the aforesaid clause 7 came to Rs. 42,480/ -. The appellant claimed that the payment of the said amount was an sec expenditure of the revenue nature tion 10(2)(xv) of the Act. The claim was disallowed by the Income Tax Officer and the Appellafe A5'istant Commissioner, but was allowed by the Tribunal holding that the paymClr>t was an expenditure made in order to earn profits of the business and not an expenditure paid out of the earned profits. At the instance of tbe respondent, the Tribunal referred the following question of law to the High Court of Kerala.

allowable under

and was

"Whether on 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 u/s 10 of the Income-tax Act." The Kerala High Court held that the pay ment constituted capital expenditure and was not allowable under section 10(2) (xv) of the Income-tax Act. On appeal by the appellant to Supreme Court, the Supreme Court reversed the High Court judgment and ;·emanded the matter to the High Court. On remand, the High Court held that the said expenditure was deductible.

Rejecting the appeal,

HELD : (i) Once the crucial question is decided that the expenditure is a revenue expenditure and not of capital nature, the answer to the reference should be in the affirmat;ve.. Whether the expenditure is to be

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C.I.T. v. TAAVANCORE SUGAR (Jaganmohan Reddy, !.)

739

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further considered as expenditure incurred at the very inception deductib:e as an over-riding charge on the whole of the profit making apparatus fruling under section 10(1) or whether it is an expenditure which apart from it being a revenue expenditure is also wholly and exclusively laid out for the purpose of trade, would not make any difference to the answer. [7460]

(ii) Held further, the ::,ssessee had no choice at the time of the in ception as a condition of its coming into existence to agree to the several terms stipulated by the Government for transferring the profit-earning assets. There are obUgations in th<> contract which are the transf\!r of assets notwithstanding the fact that the Company paid a pricl! fixed for the transfer of assets. Under the contract, the comp2.,y had t<> engage Qr,Jy the Travancore labour and staff, that it had to take apprcn· tices recommended by the Government and train them and that there \\'06 no limitation as to the period the company had to pay the annual sum out of the net profits, notionally computed for that purpose a'fter deduction of certain items mentioned in clause 7. All this appears to he stipulation for payment of an amount for a concession granted to it and is thcrcf('lr\! deductible at its inception. [751A}

inter-linked with

(iii) Held further, that clause (xv) of Sub-section 2 of &c. IO is con fined to tl1e payments wholly "'"d exclusively laid out for the purpose of business in which expenditure of a revenue nature would also be include<l along with the expenditure of various other categories. The contention that the said clause covers expenditure of both the capiml and revenue nature and also payments wholly ''"d exclusively laid out for the purpo5' of business, was rejected.

Pondicherry Rly. Co. v. /nC()HU'·tax Con11nissio11£•r, 58 I.A. :!39, The Union Cold Storage Co. Ltd. v. Adamson (H.M. Inspector of Taxes). 16 T.C. 292 at 331. Indian Radio Ere. Co. Ltd. v. Commissioner of Income-tax, Bombay. 5 J. T. R. 270 and British S11gar Ma1111fact11rer., Ltd, v. Harris, 7 I.T.R. 101=11938) 2 KB 2W. referred to.

CIVIL APPELLATE Jur1so1CTION : Civil Appeal No. 2161

of 1969.

. Appeal by certificate from the judgment and order dated April 5, 1968 of the Kerala High Court at Ernakulam in Income tax Referred Case No. 16 of 1962.

N. D. Karkhanis, B. D. Sharma and R. N. Sachthey, for the

appellant.

G

Sukumar Mitra and T. A. Ramachandran, for ~he respondent.

The Judgment of the Court was delivered by

JAGANMOHAN REDDY J.-This is a second round of litigation because on the first occasion this Court allowed Appeal No. 324 of J 965 on September 20, 1966 and remanded the case for be ing re-heard and dealt with in accordance with the directions given in that judgment. After the matter went back a Division Bench of the Kerala High Court, Raghavan, J. (as he then was) and Issac, J. heard the matter but as there was difference of opinion

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between the learned Judges the case was placed before Mathew, J. (as he then was) who agreed with the judgment of Raghavan, J. This is an appeal against Iha~ judgment by certificate. Inas much as this Court had earlier considered the case we may take 1he facts as stated in the following passage in that judgment:

"The appellant is a limited company incorporated under the T ravancore Companies Regulation and is carrying on business, in ~he State of Kerala of manufacturing sugar, running a distillery and also a tincture factory. The appellant-company was floate<! with a view to taking over the business assets of a company called in ·Travancore Sugars Ltd." (which was being would up and -.,hich the State Government held the largest number of shares), 1he Government Distillery at Nagercoil and the business assets of :he Government Tincture Factory at Trivandrum. For this purpose :ill agreement dated June 18, 1937, was entered into between the Government of Travancore and Sir William Wright on behalf of !Parry & Co. Ltd., the promoters of 'the appellant-company. Under the said agreement the assets of all the three concerns were :<greed to be sold by the Government of Travancore to the appel iant-company. Clause 3 of the agreement provided that the cash consideration for the sale of asseffi of the Travancore Sugars Ltd. hall be 3.25 lakh rupees. Clause 4(a) provided that the -:ash consideration for the sale of the Government DLtillery shall be Jrrived at as a result of joint valuation by the engineers to be :ippointed by the parties. Clam;e 5(a) stated that the cash consi deration for the sale of assets of the Government Tincture F:1ctory shall be the value according to the books. Under clause .'.(b) and (c) of the agreement the Government undertook to recog :;ise the transfer of the licence from the licensees of the distillery :o the appellant and to secure to it the continuance of the lice11ce ior a continuous ucriod of five years after the termination of the the ihen nisting licence. Under clause 5(b) of the agreement Gowrnmcnt agreed to purchase the pharmaceutical products ,,ianufocturcd by the appellant in the tincture factory, for its medical requirements. Under clause 6 of the agreement all books r f account and connected documents are to be open to inspection t.y the authorised officers ·of the Government. Under clause 10 the Govenm1ent was entitled to nominate a director on the board of directors of the appellant-company who would not be entitled to :my voting power or 1.o interfere with the normal mamu:,ement of !he r.ompany. Apart from the cash consideration referred to in the :igreemcnt, clause 7 of the said agreement provided for further payments as follows :

" ( 7) The Government shall be entitled to

twenty per cent of the net profiffi earned by the company in every forty year subject however to a maximum of rupees

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C.J.T, v. TRAVANCORE SUGAR (Jaganmohan Reddy, J.)

741

\hous~nd per annum, such net profits for the purposes of this clause to be ascertained by deduction of expendi ture from gross income and also after-

(i) provision ha3 been made for depreciation at not less than the rates of allowances provided for in the income-tax law for the time being in force, and

(ii) payment of the secretaries and treasurers' remu

neration."

By another agreement dated January 28, 1947, the follow ing clause was substituted for the above caluse 7 of the original agreement:

"The Government shall be entitled to ten per centum of the net profits of the company in every year. For the purpose of this clause net profits means the amounb for which the company's audited profits in any year are assessed to income-tax in the State of Travancore."

For the assessment year 1958-59 (the corresponding previous year being May 1, 1956, to April 30~ 1957) the amount payable to ~he Government under the aforesaid clause 7 came to Rs. 42,480. The Appellate Assistant Commissioner disallowed ·the claim of the appellant for deduction of this amount on ·the ground that it was virtually mere sharing of profits after they came into existence. The Appellate Assistant Commissioner relied upon the decision in Pondicherry Railway Co. Ltd., v. Commissioner of Income-tax [(1931) 5 lT.C. 363; 58 I.A. 239] indisallowin~ this item of expenditure. The appellant preferred an appeal against the order of the Appellate AssistaJllt Commissioner to the Income Tax Appellate Tribunal which held that the case came within the pri'llciple of the decision in British Sugar Manufacturers Ltd. v. Harris (Inspector of Taxes) (1939) 7 I.T.R. 101 (C.A.), and that the payment' of commission was an expenditure made in order to earn profits, of the business and' not an expenditure paid out of earned profits. In the result the Tribunal allowed :he appeal by the company. At the instance of the respondent the Tribunal referred the following question of law to the High ·courb· of Kerala.

·'Whether, on the facts and in the circumstances of the case, the payment of Rs. 42,480 by the assessee to the Travancore Gov ernment under the agreements dated June 18, 1937, and January 28, 1947, was allowable under section 10 of Income-tax Act?".

the

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. By its judgment dated August 20, 1963, the High Court held that the payment of the aforesaid amount constituted capit.al . expenditure and was not allowable under sec~iQn 10(2)(xv) of the Income·tax Act. In this view the High Court felt it unnecessary to go into. the merits of t~e respondent's contention that the payment represented only a division of profits. The present appeal is brought, by special leave, from the judgment of the High Court of Kcrala dated August 20, 1963.

On behalf of t:he appellant in that case who is the respondent before us it was submitted that the payment of Rs. 42 ,480 was not capital '!Xpenditure but was expenditure of revenue nature which was allowable under s. 10( 2)(xv) of the Act. It was pointed out th?.~ the annual payments under cl. 7 were not part of the purchase price of the assets. Reference was mtl.de to els. 3, 4(a) and 5(a) of the agreement and it was said that separate and full considerations were provided for the .Purchase of the assets of Travancore Sugars Ltd., the Government Distillery and the Gov ernment Tincture Factory. In addition to selling these assels, the Government undertook obligations enumerated in els. 4(b), 4(c) and 5(b) already referred to. It was contended that the appellant agreed to make annual payments to the Government in considera tion of these obligations. On behalf of the respondent the opposite viewpoint was pres~nted and it was said tha~ the preamble to the agreement dated January 28, 1947, indicated that the purchase was not .merely for the cash consideration recited but also for the payment provided by cl. 7. Reference was made to the following por~ion of the preamble of the agreement dated Januarv 28, 194·7:

"Whereas on 18th June 1937, an agreement (here inafter caJled the principal agreement) was entered into between M. R. Ry. Rao · Bahadure Rajyasevanirata N. Kunjan Pillai Ayl. , Chief Secretary to the Government actin.~ for and on behalf of the said Government of His Higlmess the Maharaja of Travancore of the one part and Sir William Wright·, Kt. C.B.E., of . Messrs Parry & Co. Ltd., Madras, acting for and on behalf of the said Messrs Parry & Co., Ltd. of the other part, where· by the said Government should sell and the company should purchase the assets including the lands of the Travanc.ore Sugars Ltd. with the buildings, out-houses. machinery and other things attached thereto and more fully described in the Schedule 'A' annexed to the said principal agreement, the factory known as the Govern ment Distilleries situate at N agercoil in South Travan core with lands, buildings, machinery and other things attached thereto and more particularly described in the

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C,I.T, v. TRAVANCORE SUGAR (Jaganmohan Reddy, J.)

743

schedule 'B' annexed to the principal agreement, and all the assets of thei factory known as the Go\1ernment Tincture Factory situated at Trivandrum and more parti cularly described in he Schedule 'C' annexed to 1he principal agreement for the cash consideration in the said principal agreement mentioned and also in consi deration, inter alia, that the Government should be entitled to 20% of the said net profits earned by the company in every year subject however to a maximum of Rs. 40,000 per annum, such net profits for the pur poses of the said agreement to be ascertained after the deductions set out in clause 7 of the said agreement."

This Cour_t while recognising that it is dif!icult.-as indeed all Judges have found it difficult-to determine whether a particular expenditure is in the nature of capital expenditure or in the nature of revenue expenditure and that it was not easy to distinguish whether an agreement is for the payment of price stipulated in instalments or for making annual payments in the nature of income, observed that not only the documents but the surround ing circumstances have to be looked into to ascertain what was the real nature of the twnsaction from the commercial point of view. It examined the transaction and was of the view that the consi deration for the sale of the three undertakings in favour of the the appellants was (1) the cash consideration mentioned in principal agreement, viz., clauses 3, 4(a) and 5 (a) and (2) the consideration that Government shall be entitled to 20 per cent of the net profits earned by the appellant in every year sub.iect to a maximum of Rs. 40,000 per annum.

With regard to the second part of the consideration there are three important points to be ,noticed. In the firs1 place, the pay ment of commission of 203 on the net profits by the appellant in favour of the Government is for an indefinite period and ·has no limitation of time attached to it. In the second place, the payment of the commissio.n is related to the annual profits which flow from the trading activities of the appellant-company and the payment In the third has no relation to the capital value of the assets. place, the annual paymen1 of 20% ·commission every year is not related to or tied up, in any way, to any fixed sum agreed between the parties as part of the purchase price of the three undertakings; It was also noticed that there is no reference to any capital sum in this part of the agreement but on the contrary, the very nature of the payments excludes the idea that anv connection with the capital sum was intended by the parties. Having considered the several aspects of the transaction and having observed that the mere fact that the capital sum is payable by instalments spread that over a certain length of time will not convert the nature of

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payment from the capital expenditure into a revenue account but the payment of instalments in such a case would have always some relationship to the actual price fixed for the sale of the particular undertaking, this Court rejected the contention of the Revenue that the amount paid to the Govemment by the assessee' was an expenditure of a capital nature in these words :

"In view of these facts we are of opinion tha~ the payment of the 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 over ruled."

After this finding for which this Court found support from the decision in Commissioner of Inland Revenue v. 36/ 49 Holdings Ltd. (In Liquidation) (1), Commissioner of I.T. v. Kolhia Hirda garh Co. Ltd., (2 ) and the decision of the Judicial Committee ·n Jones v. Commissioner of Inland Revenue(') is nonetheless this obserVed that it is not possible for it to finally determine apperif and that even if the payment of commission to the Gov ernment by the assessee is not capital but revenue payment certain questioos would arise for consideration in this case which the High Court has not dealt with in the reference. These questions as stated in that decision were : Firstly, it has to be determined whether the appellant is right in his argumen~ that the payment of commission is 1antamount to diversion of profits by a para• mount citle; secondly, the contention of the respondent that the transaction should be treated as a joint venture with an agreement to share profits between the appellant and the Government, and thirdly, it has to be considered whether the requirements of s. 10(2)(xv) have been satisfied in this case. It was pointed out on behalf of the appellants in that case who are respondents before us that the payment of commission was a payment wholly or exclu sively laid out for purposes of business. In the ciicumstances set out above the matter was remanded to the High Court of Kerala;

the Before that High Court the second contention whether transaction should be treated as a joint vent.ore with an agreement to share profits was not pressed and therefore tha~ matter was not considered. Mathew, J. (as he then was) noted that the Supreme Court had held that the payment was not in the nature of capital payment but was in the nature of revenue payment because the unpai<l purchase price was neither a fixed sum nor an amount which could be ascertained by any method. In this view he con for sidered only the ,first and third contentions which called

(I) 25 T.C. 173.

(2) 17 I.T.R. 545.

(3) [1921] K.B. 711.

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C.I.T. v. TRAVANCORE SUGAR (Jaganmohan Reddy, J.)

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determination by that Court. The the Revenue however at the outset tried to assail the statement of Mathew, J. that the SuQreme Court had held that the amount paid to the Government was not a capital expenditure but a revenue expenditure because he realised that if that finding be assailed. the then it would be immaterial whether the amoun~ paid Government amounted to diversion of the profits before they it was reached the assessee by an over-riding title or whether otherwise an allowable deduction under s. 10(2)(xv) of the· Income-tax Act, 1922. In support of the stand taken by him, he submits that a decision of this Court cannot be otiose and if that is so then it must be assumed that the question whether the amount is of a capital expenditure or revenue expenditure is sti11 open not only for the Kerala High Court to determine but also for this Court to go into. We cannot accept this contention the light of the finding given by this Court where not only did it hold that the amount of Rs. 42,480 was not capital exJll<nditure but that it was al<o a revenue expenditure. Having so held this Court went further and said that the judgment of the Kerala High Court on th<1t point must be over-rul\!(I. Can there be anything more categorical than this finding? We think not. Raghavan, J. did hint at this incongruity when after pointing out that this Court had held that the payment was not in the nature .of a capital payment but was in the nature of revenue payment he said :

in

"Still the Supreme Court observed since the other questions ........ were not decided by this Court the Supreme Court could not give an answer to the question referred.~'

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The learned advocate for the Revenue findipg himself this difficulty attempted to create a dichotomy under which according· to him both the capital and revenue nature of the expenditure as well as the payment being wholly and exclusively laid out for the purpose of the business are included in the aforesaid clause (xv) of sub-s. (2) of s. 10. But we are unable to understand the sequitur. Even supposing that these two kinds of expenditure are included. if the expenditure is of one or the other it be,·omes deductible.

We find no justification for this contention because a cursory reading of that provision would show that it is merely confined to the payments ':"holly and exclusively laid out for the purpose of the business in which expenditure of a revenue nature would also be included along with the expenditure of various other cate-· ~ ories. Section 10 (I ) and 2 (xv) are as follows : -

"(I) The tax shall be payable by an assessee under the head "Profits and gains of business, profession or

746

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[1973] 2 S.C.R.

vocation" in rrspect of the profits and gains of any business, profession or vocation carried on by him.

(2) Such profits or gains shall be computed after

makin_g the following allowances, namely : -

(i) to (xiv)

(xv) any expenditure not being ·an allowance of the nature described in any of the clauses (i) to (xiv) inclusive, and not being in the nature of capital expenditure or personal expenses of the assessee laid out or expended wholly and exclu sively for the purpose of such business, profes sion or vocation."

tax by

•Clause J of the section deals with the payment of the .assessee in respect of the profits and gains of business, prnfes>ion ·Or vocation. It is contended that in constituting the profits of the business any payment made as a diversion from profits by para mount title has to be deducted before computing profits. In so far .as s. l 0(2)(xv) is concerned it take> note of the fact that there may be deductions of the nature described in els. (i) to (xiv) of sub-s. (2) and that such expenditure is not of a capital nature or per sonal expenses of the assessee. The expenditure of a capital natiire is certainly not an expenditure which is deductible for computing profits though it may be an expenditure wholly and exclusively laid out for the purposes of the business etc. If this expe,:iditure is not of a capital nature but of a revenue nature is certainly deductible under this clause. All other expenditure which is not included in (i) to (xiv) or which is not at the very inception deducti ble as an overriding charge on the whole of the profit-making apparatus will be deductible if it is laid out or expended wholly and exclusively for purpo;es of such business. The disallowance of personal expenses is because that has been dealt with under s. 7 which deals with expenses wholly and necessarily incurred in the this performance of duties and therefore are not clause.

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Once the crucial question is decided by this (.ourt

the expenditure is not of a capital nature but is a revenue expendi· ture, we should have thought that the matter ended there and that the answer to 1he reference was certainly the affirmative. Whether the ·expenditure is to be further considered as expenditure incurred at the very ·inception deductible as an over-riding charge on the whole of the profit-making apparatus falling under s. 10( I) or whether it is an expenditure, which apart from it b~ing a ·revenue expenditure, is also wholly and exclusively laid out fat purposes of trade determined upon the principle of ordinary com the answer mercial trading would not make any difference

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C.I.T, v. TRAVANCORE SUGAR (Jaganmohan Reddy, J.) 147

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which could be given on the basis . of revenue expenditure and not capital expenditure.

the expenditure being

Even so, Mathew, J. after referring to the several decisions, posed the question, namely, when a trader makes a payment which is computed in relation to the profits, the question that arises is, does the payment represent a mere division of profits with any party or is it an item of expenditure the amount of which i& ascertained by reference to profits, to which his ariswer was "the in payment would be allowable in the second case but not the first." Even on the other question whether the payment is an expenditure wholly and exclusively laid out for purposes of trade and ascertained with reference to profits, an examination of the several cases to which a reference has been made by tlte learned Judge led him to the conclusion that the payment in question was · such an expenditure deductible under s. 10(2)(xv).

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In considering the nature of the expenditure incurred in the discharge of an obligation under a contract or a statute or a decree or some similar binding covenant, one must avoid being caught in the maze of .iudicial decisions rendered on different facts and which always present distinguishing features for a compari· son with the facts and circumstances of the case in hand. Nor would it be conducive for clarity or for reaching a logical result if we were to concentrate on the facts of the decided cases with a view that of the case which to match the colour of that case with requires determination. The surer way of arriving at a just con· clusion would be to first ascertain by reference to the document under which !he obligation for incurring the expenditure is created and thereafter to apply the principle embalmed in the decisions of those facts. Judicial statements on the facts of a particular case can never assist courts in the construction of an· agreement or a statute wh!ch was not considered in those judgments or to ascertain what the intention of the legislature was. What we must look at is the contract or the statute or the decree, in its terms, the obligation imposed and the purpose for which the trans action \Vas entered into. The tenns of the contract have already been set out. Under those terms, a new company bas to be fom1ed and when it is formed the Government undertook to transfer the assets of all its three undertakings at a certain valuation in order to enable it to earn profits subject to the further stipulation that it should be paid 203 profits for an unlimited duration i.e. as long as the company is working, that under cl. 4(b) the company must further get the present licence of the distillery transferred to it and the Government. is required to recognise such transfer and also grant a fresh licence as soon as the present licence is terminated. By cl 4(d) it is incumbent upon the company to sell its products of the distillery to the Government at prices to be fixed by it and the duty payable by the Government should be at the rate fixed by

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the Madras Government. Under cl. S(b) the Government shall buy medical pruducts at prices not exceeding cost plus 153. Under cl. 7 the Government shall be entitled to 203 of the net profits computed on the gross income less expenditure, depreciation and remuneration to the Secretaries and treasurers and under cl. l 0 the Government is to have a director nominated who would not inter fere with the normal management.

It is contended thai the assessee company was created for the specific purpose o~ taking over the assets burciened with the obli gations set out above, that it had no volition in the matter and had to take over the assets subject to the aforesaid enforceable obliga tions before it came into existence. It is therefore submitted that it was an enforceable obligation at source by which part of the revenues of the businesi. activities of the company were diverted with the result that the part so diverted did not become its income at all. The case of Pondicherry Rly. Co. v. Income-tax Commis sioner(') was sought to be distinguished because it is said in that case the company was already in existence, that the venture was a joint venture between the English company and the French company, that the French company merely contributed to some share of the capital by the grant of a subsidy and land free of charge and that the work in fact was done by the South Indian Railway which was to pay gross receipts less working expenses to the Pondicherry company which divided the nei profils after deduction of rates ·and taxes etc. half and half between it and the Pondicherry company. On these facts Lord Macmillan who delivered the judgment observed at p. 251 : -

"A payment out of profits and conditional on profits being earned cannoi accurately be described as a pay ment made to earn profits. It assumes that profits have first come into existence. But profits on their coming into existence attract tax ai that point, and the revenue is not concerned with the subsequent application of the profits.''

These observations were subsequenily explained by the same learned Law Lord in The Union Cold Storage Co. Ltd. v. Ad11m son (H.M. lmpector of Taxes)("} when they were sought to be made applicable to the facts in that case. Lord Macmillan said :

"The obligation was conceived in language entirely different from the language which your Lordships have been consideriiii! in the present appeal, where there is a common form obligation in the lease to pay rent. When,

( .-) 58 I. A. 239.

(2) 16 TC. 292 at 331

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C.I.T. v. TRAVANCORE SUGAR (Jaganmohan Reddy, J.)

749

therefore, in the 11.assage referred to by the Attorney General in the Pondicherry case I said that "a payment out of profits and conditional on profits being earned cannot accurately be described as a payment made to earn profits", I was dealing with a case in which the obligation was, first of all, to ascertain the profits in a pres~ribed manner, after providing for all outlays incur red in earning them, and then to divide them. Here the question is whether 'or not a deduction for rent has to be made in ascertaining the profits, and the question is not oue of the distribution of profits at all."

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In Indian Radio Etc. Co. Ltd. v, Commissioner of Income-tax Bombay(') Lord Maugham delivering the opinion of their Lord ships of the Privy Council observed at p. 278 :-.

"The sum is in truth made payable .as parh of the consideration in respect of a number of different advan tages which the appellants derive from the agreement and not all of them can be shown to be of a purely temporary character. The agreement as a whole is muyh more like one for a joint adventure for a term of years be:ween the appellant company and the Communict1- tions Company than one for a lease for that period."

In that view it was held that the deduction was not allowable. The Privy Council in order to avoid any misconception was careful enough wliile arriving at that conclusfon to say•that they have not taken the view that the case is governed by the decision in Pondi cherry case though that case no doubt throws light on the natur~ of the problem which has to be solved in the case before them, and they further added that a sentence in the judgment in that case has b~en explained, if explanation was necessary, by Lord ~vfacmillan in the subsequent case of W.H.E. Adamwn v. Union Cold Storage Company (see pages 278-279). The Indian Radio case was under s. 10(2,,)(ix). In British Sugar Ma1111fact11rers Ltd. v. Harris( 2 ) which the Tribunal said on the facts was nearest to the case before us, the company was carrying on.business as manu facturers of beat sugar, had agreed to pay to two bodies in each of four years for division between them as they mutually agreed upon 203 of the ne! profits of the company in consideration of their giving to the company the full benefit of their technical and financial knowledge and experience, and giving to the company and its directors advice to the best of their ability respectively on all questions of or relating to manufacture and finance and dis posal of the company's products. It was held, reversing the deci sion of Finalay J., that in ascertaining the profits or gains of the

(I) S I.T.R. 270.

(2) 7 1.T.R. 101-(1938]2 K.B. 220.

D

E

F

G

H

750

SUPREME COURT REPORTS

,[1973) 2 S.C.R.

company for any year assessable to income-tax the sum payable to the two bodies under this agreement out of the earnings of the company should be allowed as a deduction as being money wholly or exclusively laid out or expended for the purposes of the trade. Sir Wilfrid Green M.R. sa.id at pp. 233-234 : -

"Now bearing all those things in mind, the question arises : On which side of the line does tlle case fall-? I quite accept the prc-position that there is a line between a contract for payment of a share of profits simplic:,·~r and a payment of remuneration which is deductible in truth before the pr9fits divisible are ascertained, and that line in some cases may be very difficulu to draw."

lt appears to us that the amount to be paid by reference to profits can either be that it is paid after the profits become divisible or distributable or ~hat the amount is payable prior to such distri bution or division to be computed by a reference to notional or In as in some decisions what is termed as apparent net profits. the fonner instance it will certainly be a distribution of profits and not deductible as an expenditure incurred in running the business but in the latter it may, on the facts and circumstances of the case, and the agreement or the nature of the obligation under the particular instrument, which governs the obligation be an expenditure incurred as a contribution to the profit earning apparatus or, as it is said, incurred at the inception and deducii ble as an over-riding charge of the profit-making apparatus or is one laid out and expended wholly and exclusively for purposes of such business .. It is true that sub-section(!) of Section 10 of the Indian Income-tax Act, 1922 imposes a charge on the profits and gains of a business which accrue to the assessee while sub-section (2) of the said Section enumerates various items which are a<lmis sible as deduction. Where income which accrues to the assessee is not his income the question of admissibl~ deductions would not arise. Therefore, where income is diverted at source so that when it accrues it is really not his income but is somebody else's income the question as to whether that income falls under sub-section {2) of Section I 0 does not arise. Again, income can be said to be diverted only when it is diverted at source so that when it accrues it is really not the income of the assessee but is somebody else's is :ncome. It is thus clear that where by the obligation income is deductible. But where the income is required to be applied to discharge an obli gation after such income reaches the assessee i9is merely a case of application of income to satisfy an obligation of payment and is therefore not deductible.

· diverted before it reaches the assessee, it

A

B

c

D

E

F

G

H

•

C,l.T. v. TRAVANOOJ.U! SUGAR (/aganmohlln Reddy, /.)

7 51

A

II

c

u

E

F

On a construction of the terms of the contract in this case and the Qbligations axising therefrom we cannot say that the conclu sions of the Kerala High Court are unsustainable. The assessee had no choice at the time of inception, as a condition of its com ing into existence to agree to the several terms stipulated by the Government for transferring the profit earning assets. No dou~ as the learned advocate for the Revenue said, the company paid the Government in full for the value of the assets and the com pany had therefore no obligation to the Government on that account. This may be true to some extent but tl!en there are the other obligations which are interlinked with the transfer of assets notwithstanding the fact that the company paid a price fixed for the transfer of the assets which may not in all cases, as in this case it is not, be the true value of the assets which are subject matter of the transaction. The Government has established businesses and they were willing to part with them at a certain price plus certain stipulation to which we have referred which form the c-inditions of transfer. It may be mentioned that under the contract the com pany had to engage only the Travancore labour and staff, that it had to take apprentices recommended by the Government and train them and that there was no limitation as to the period the company had to pay 203 or as the later agreement revised it to that purpose 103 of the net profits, notionally computed after deduction of certain items mentioned in cl. 7. All this appears to us to be a stipulation for payment of an amount for a concession granted to it and is therefore deductible at its incep tion. Viewing it from any point of view, whether as a revenue expenditure or as an overriding charge of the profit-making appa ratus or a.s laid out and expended wholly and exclusively for pur pose of trade, the answer must be in the affirmative and against the Revenue. The appeal is accordingly dismissed with costs both here and in the High Court.

for

S.B.W.

Appeql dismissed.

13-IA99Sup.C. I .173