Calcutta H.C : Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the sum of Rs. 50,000 paid to Voltas Ltd. was allowable expenditure in computing the profits and gains of the assessee’s business ?

Counsel Appeared

B.K. Bagchi with A.N. Bhattacharjee, for the Revenue : Dr. D. Pal with R.N. Dutt, for the Assessee

SABYASACHI MUKHARJI, J. :

In this reference under s. 256(1) of the IT Act, 1961, the following two questions have been referred to us;

“1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the two payments of Rs. 71,400 and Rs. 1,19,000 made to Tata Robins Fraser Ltd. represented revenue expenditure which should be allowed in computing the profits and gains of the assessee’s business ?

2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the sum of Rs. 50,000 paid to Voltas Ltd. was allowable expenditure in computing the profits and gains of the assessee’s business ?”

This reference is in respect of the asst. yr. 1965-66. The assessee is a company incorporated in the U.S.A. in 1904 under the laws of the State of New York. While engaged in the business of execution of contracts the assessee extended its business activities to India. It entered into, among others, one contract with the Orissa Mining Co. for erection of a ship loading plant at Paradeep Port and another contract with Neyveli Lignite Corporation for erection of a conveying plant at Neyveli. In the assessment for the assessment year under reference the assessee claimed deduction of two amounts, namely, Rs. 71,400 and Rs. 1,19,000 paid to Tata Robins Fraser Ltd., an Indian company, and of a sum of Rs. 50,000 paid to Voltas Ltd., another Indian company. The assessee claimed to have paid those amounts to those two Indian companies as commission for the assistance rendered by them in securing the abovementioned two contracts for the assesseecompany. The payment of those amounts was claimed to be a deductible business expenditure. Along with a letter dated the 13th March, 1968, the assessee forwarded to the ITO a copy of the statement placed before the Board of Tata Robins Fraser Ltd. on February 7, 1964. The ITO held that it was evident from that statement that the assessee had agreed to pay the amount to Tata Robins Fraser Ltd. for its assistance in obtaining Paradeep and Neyveli contracts and as a result of the payments it had got an asset or advantage of an enduring nature in the form of right to execute contracts. With regard to the payment of Rs. 50,000 to Voltas Ltd. the ITO took a similar view. The ITO accordingly treated all these expenditures as capital in nature and disallowed the claim of the assessee.

Being aggrieved, the assessee went up in appeal before the AAC. For the reasons mentioned by him, the AAC upheld the finding of the ITO. There was a further appeal before the Tribunal by the assessee. It was contended that the payments were not made for the initiation of any business of the assessee. The finding of the AAC that the payments were made for the initiation of the business of the assessee was disputed as factually incorrect. A statement of the assessee’s receipts from the contract business between 1958-59 and 1965-66 was placed before the Tribunal in order to show that the assessee’s contract business in India started as early as 29th October, 1957, when it entered into a contract with Hindusthan Steel Ltd. for the erection of a crushing and handling plant. It was further submitted that the payments were closely related to and formed an integral part of the assessee’s profit- making process and that the making of those payments was not a condition of the assessee carrying on its business of execution of contracts. In support of the above submissions certain authorities were cited before the Tribunal. The Tribunal, after considering all the rival submissions, found as follows: “On a consideration of the facts and circumstances of the case and the submissions made before us, we are of the view that the payments in question were of a revenue character and should, therefore, have been allowed as deduction in the computation of the profits from the assessee’s business. From the facts, placed before us it is clear that the contract business of the assessee commenced long before these payments were made. It cannot, therefore be said that the payments in question were made for the initiation of the assessee’s contract business. We do not think it can be said that whenever a new contract was taken up by the assessee for execution, a profit-making machinery was set up or business was initiated. It is not in dispute that taking up contracts and executing these was the business of the assessee. In the course of such business the assessee might have to incur some incidental expenses. Payment of commission to those who rendered assistance to the assessee in securing the contracts can be regarded as incidental to such business. No asset or advantage of enduring nature came into existence as a result of the payment of commission by the assessee to the two Indian companies. It is not as if payments of that commission to those two companies was a condition to be fulfilled by the assessee in order to be able to execute the two contracts and earn the profits therefrom. Even without making those payments the assessee could have executed the contracts and earned profits. The commission paid to those two companies was but reward for the assistance rendered by them in securing the contracts. Since payment of such commission was incidental to the assessee’s business which consisted intaking up contracts and executing these and as no profit-making machinery was set up or any advantage or asset of an enduring nature came into existence as a result of those payments and as those payments were not a condition precedent to the assessee executing the contracts and earning profits therefrom, we hold that the payments were of a revenue nature. We, therefore, direct the ITO to allow deduction of those payments in computing the profits of the assessee.”

It appears, therefore, that the contract business of the assessee com menced long before these payments were made in respect of these particular contracts. The Tribunal, therefore, found that the payments in question were not made for the initiation of the assessee’s contracts. Procuring or obtaining contracts and executing these was the business of the assessee. That was also found by the Tribunal and the Tribunal noted that this was not disputed. In the course of executing such business the assessee had to incur certain expenditure and in order to facilitate the procuring of the business of the assessee the payments in question were made. It was further apparent from the facts found by the Tribunal that by the payments the assessee did not acquire any source for obtaining future contracts. On a consideration of these facts the Tribunal held that the payments in question were incidental to the carrying on of the business and were allowable as revenue expenditure. The principles applicable to differentiate between capital and revenue expenditure have been laid down in several decisions of the Privy Council and the Supreme Court. Though the principles are well settled it is sometimes difficult to apply the principles to the particular facts and circumstances of a case.

Our attention was drawn to the decision of the Privy Council in the case of Tata Hydro-Electric Agencies Ltd. vs. CIT (1937) 5 ITR 202 at 209 (PC) , where their Lordships, though not dealing with revenue expenditure, yet dealing with expenditure which was not incurred solely for the purpose of the business, observed as follows: “Their Lordships recognise, and the decided cases show, how difficult it is to discriminate between expenditure which is and expenditure which is not, incurred solely for the purpose of earning profits or gains. In the present case their Lordships have reached the conclusion that the payments in question were not expenditure so incurred by the appellants. They were certainly not made in the process of earning their profits ; they were not payments to creditors for goods supplied or services rendered to the appellants in their business; they did not arise out of any transactions in the conduct of their business. That they had to make these payments no doubt affected the ultimate yield in money to them from their business but that is not the statutory criterion. They must have taken this liability into account when they agreed to take over the business. In short, the obligation to make these payments was undertaken by the appellants in consideration of their acquisition of the right and opportunity to earn profits, that is, of the right to conduct the business, and not for the purpose of producing profits in the conduct of the business. If the purchaser of a business undertakes to the vendor as one of the terms of the purchase that he will pay a sum annually to a third party, irrespective of whether the business yields any profits or not, it would be difficult to say that the annual payments were made solely for the Purpose of earning the profits of the business. It would seem to make no difference that the annual sum should be made payable out of a particular receipt of a business, irrespective of the earning of any profit from the business as a whole. The case of a transferee of a business undertaking liability, for example, for the rents under current leases of the premises in which the business was carried on by the transferor and is to be carried on by the transferee is quite a different case, for the rents paid are clearly an outlay necessary for the earning of a profit. In the case of Robert Addie & Sons’ Collieries Ltd. vs. IRC (1924) 8 TC 671 (C Sess), the Lord President Clyde, dealing with corresponding words in the British IT Act says at p. 235: ‘What is “money wholly and exclusively laid out for the purposes of the trade” is a question which must be determined upon the principles of ordinary commercial trading. It is necessary, accordingly, to attend to the true nature of the expenditure, and to ask oneself the question. Is it a part of the company’s working expenses; is it expenditure laid out as part of the process of profit earning’?”

6. These principles have been enumerated and clearly laid down by the Supreme Court in the case of Assam Bengal Cement Co. Ltd. vs. CIT (1955) 27 ITR 34 (SC) , where the Supreme Court approved the tests laid down by the Full Bench of the Lahore High Court in the case of Benarsidas Jagannath, In re (1947) 15 ITR 185 (Lah). We need not reiterate those tests which would appear from p. 44 onwards in the report.

Our attention was also drawn to the observations of the Supreme Court in the case of CIT vs. Coal Shipments P. Ltd. (1971) 82 ITR 902 (SC) , where certain payments were made in order to keep out a particular company from a particular field of business. But in view of the fact that the contract was terminable, not for a fixed period, even in respect of such payments, it was held that it was for carrying on the business of the assessee and could not be considered to be expenditure of capital nature. In this case there was no right to get any contracts as such. In the instant case before us no source of obtaining contracts was procured permanently. Only in the course of the assessee’s business, which was to obtain contracts and execute these, the assessee paid certain sums to these two companies for facilitating the procurement of the contracts and working out the contracts. These payments, in our opinion, having regard to the nature of the payments, the magnitude of the payments and the facts and circumstances of the case should be considered in the light of the Supreme Court decisions as revenueexpenditure.

One argument was made that the amount was paid as a reward. It was, therefore, sought to be urged that this was not incidental to the carrying on of the business. It was not wholly and exclusively incurred for the purpose of the business. It was factually not disputed that there was no extra-commercial consideration in the payments involved. In that view of the matter we are of the opinion that the Tribunal was right in the view it took about these payments.

We may incidentally refer to the decision of the Andhra Pradesh High Court, which was referred to on behalf of the Revenue, in Vizagapatnam Sugars & Refinery Ltd. vs. CIT (1963) 47 ITR 139 (AP). But in view of the facts of the case it is not necessary to refer to these in detail. Our attention was also drawn to the observations of the Division Bench of this Court in the case of Hindustan Gas & Industries Ltd. vs. CIT (1979) 117 ITR 549 (Cal), and reliance was placed on the observations of the Court at p. 555, where the Court made it clear that the onus was on the assessee claiming deduction to prove to the satisfaction of the Revenue that it was so entitled. There is no dispute with regard to this proposition. In this case the assessee had adduced evidence. The evidence was considered by the Tribunal. Having regard to the well-settled principles laid down in the decision of the Supreme Court this controversy, as to on whom the onus lies, does not arise for our consideration. In that view of the matter both the questions are answered in the affirmative and in favour of the assessee.

10. In the facts and circumstances of the case, however, the parties will pay and bear their own costs.

SUHAS CHANDRA SEN, J. :

I agree.

[Citation : 141 ITR 278]