Gauhati H.C : Whether, on the facts and in the circumstances of the case, the payment of Rs. 37,500 under an agreement dated July 1, 1976, was an admissible deduction in computing the income of the assessee-firm for the asst. yr. 1976-77 ?

Counsel Appeared

Dr. M. K. Sarma, for the Assessee : D.N. Choudhury & K.H. Choudhury, for the Revenue

DR. B. P. SARAF, J.:

The Tribunal, Gauhati Bench, has referred under s. 256(1) of the IT Act, 1961, the following questions of law to this Court for its opinion :

“(i) Whether, on the facts and in the circumstances of the case, the payment of Rs. 37,500 under an agreement dated July 1, 1976, was an admissible deduction in computing the income of the assessee-firm for the asst. yr. 1976-77 ?

(ii) Whether, on the facts and in the circumstances of the case and upon a reading of the agreement dated July 1, 1975, the Tribunal was justified both in law and in fact in holding that the payment of Rs. 37,500 was part and parcel of the whole transaction for the acquisition of a capital asset of an enduring nature and was not related to the carrying on or the conduct of the business ?”

The reference relates to the asst. yr. 1976-77. The relevant previous year is the calendar year 1975. The assessee is a partnership firm. It was constituted by a deed of partnership dated June 30, 1975. It took over certain running businesses. An agreement was executed on July 1, 1975, between the assessee and the vendors for the purpose. In cl. (3) of the said agreement, there was a stipulation for payment of a sum of Rs. 50,000 by the assessee to the vendor for the use and utilisation of the trade name, pending import licences, contracts and other trading benefits and advantages. During the relevant year, a sum of Rs. 37,500 was paid by the assessee in pursuance of aforesaid stipulation. This amount was claimed deduction as a business expenditure. The ITO did not allow the claim on the ground that it was capital expenditure. On appeal, the CIT (Appeals) sustained the order of the ITO. On second appeal, the Tribunal also upheld the disallowance. The assessee sought for a reference, under s. 256(1) of the Act, of the questions of law arising out of the order of the Tribunal. The Tribunal, on being satisfied that questions of law did arise out of the order, referred the two questions quoted above to this Court. Heard Dr. M. K. Sarma, learned counsel for the assessee as well as learned standing counsel for the Revenue. Considered the facts of the case. Also perused the agreement dated July 1, 1975. The two clauses of the agreement, namely, cls. (3) and (5), which are relevant, read as follows : “(3) That parties hereto mutually agree and the party hereto of the second part undertake to pay the party hereto of the first part a sum of Rs. 50,000 (Rupees fifty thousand only) annually for three years ending 31st March, 1978, for use and utilisation of the trade name, pending import licences, contracts and other trading benefits and advantages and the party hereto of the first part agrees to accept the same in full and final satisfaction of all their right, title, claims, advantages and benefits. (5) That the party hereto of the second part agrees to pay to the party hereto of the first part the value of the assets over the liabilities taken over on the final compilation of the books of account of the aforesaid business as on the 31st day of March, 1975.”

4. From a conjoint reading of the aforesaid two clauses, it is evident that the assessee agreed to pay to the vendor, in addition to the value of assets taken over by it, for a period of three years, a further sum of Rs. 50,000 per year for the “use and utilisation of the trade name, pending import licences, contracts and other trading benefits and advantages”. On a plain reading of cl. (3), it appears that this payment was stipulated not for acquisition of any asset but for use of certain rights, trading benefits, advantages, etc. The question of law that falls for determination is whether such a payment is capital expenditure or revenue expenditure. The expressions “capital expenditure” and “expenditure in the nature of capital expenditure” have not been defined in the Act. These two expressions, however, have been interpreted by Courts from time to time. Some tests have also been evolved to determine when an expenditure can be said to be “capital expenditure” and when it is “revenue expenditure”. A brief resume of the important tests and their evolution may be helpful to answer the questions referred to us in this case. The earliest test can be traced back to the year 19 10 or so when Lord Dunedin said: “In a rough way, I think it is not a bad criterion of what is capital expenditure as against what is income expenditure to say that capital expenditure is a thing that is going to be spent once and for all, and income expenditure is a thing that is going to recur every year.” [see Vallambrosa Rubber Co. Ltd. vs. Farmer (1910) 5 TC 529, 536].

5. Five years later, Rowlatt J. observed : “the real test is between expenditure which is made to meet a continuous demand, as opposed to an expenditure which is made once for all.” (see Ounsworth vs. Vickers Ltd. (1915) 3 KB 267, 273) Then came the oft quoted test evolved by Viscount Cave L. J.: “When an expenditure is made, not only once and for all, but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade, I think that there is very good reason (in the absence of special circumstances leading to an opposite conclusion) for treating such an expenditure as properly attributable not to revenue but to capital.” [see British Insulated and Helsby Cables Ltd. vs. Atherton (1926) AC 205, 213 ; (1925) 10 TC 155, 192 (HL)].

6. This test, on the face of it, was not intended to be of universal application as is evident from the rider added thereto which shows that it would not apply where there are special circumstances leading to a contrary conclusion. Viscount Radcliffe, dealing with the “enduring benefit test” enunciated by Viscount Cave, observed:

” ….it has to be remembered that all these phrases, as, for instance, ‘enduring benefit’ or ‘capital structure’ are essentially descriptive rather than ‘definitive, and, as each new case arises for adjudication and it is sought to reason by analogy from its facts to those of one previously decided, a Court’s primary duty is to inquire how far a description that was both relevant and significant in one set of circumstances is either significant or relevant in those which are presently before it. For example, while it is certainly important that in Atherton’s case (1926) AC 205 (HL) expenditure that did secure an enduring benefit for a company’s business was spoken of as being for that reason a capital expenditure, it would be a misuse of that authority to suppose that it gives any warrant for the idea that securing a benefit for the business is prima facie capital expenditure, so long as the benefit is not so transitory as to have no endurance at all.” [see Commissioner of Taxes vs. Nchanga Consolidated Copper Mines Ltd. (1965)58 ITR 241, 251 (PC)].

7. There is another test that was applied by Viscount Haldane. It is based on the distinction between fixed capital and circulating capital. According to it, an expenditure would be capital in nature if the right or benefit acquired thereby is a part of the fixed capital. This is often referred to as Haldane’s test. [see John Smith & Son vs. Moore (1921) 12 TC 266 (HL)]. Lawrence J. later improved upon Haldane’s test and observed : “. . . where a sum of money is laid out for the acquisition or the improvement of a fixed capital asset it is attributable to capital, but that if no alteration is made in the fixed capital- asset by the payment, then it is properly attributable to revenue, being in substance a matter of maintenance, the maintenance of the capital structure or the capital assets ……” (see Southern (H. M. Inspector of Taxes) vs. Borax Consolidated Ltd. (1942) 10 ITR (Suppl.) 1, 5 (KB)).

8. Some other criteria also emerged from time to time depending upon the facts of particular cases. In regard to intangible assets, ordinary commercial principles in respect of assets were held to be the guide [see Regent Oil Co. Ltd. vs. Strick (1969) 73 ITR 301 (HL)]. These are some of the well-known tests evolved by the English Courts.

9. We may now advert to the tests evolved and accepted by the Courts in India. There are a number of decisions of the Supreme Court and the various High Courts which have dealt with the question of capital expenditure and revenue expenditure, discussed the various tests, accepted some of them with or without riders and evolved new tests and given guidelines to deal with the problem. One test that got the widest application is the test of “enduring benefit” enunciated by Viscount Cave. It was, however, not accepted in all cases without reservation. It was observed that every test has its own shortcomings and that no test is of universal application. The test of enduring benefit was held to be not applicable where the benefit is so transitory as to have no endurance at all. There may be cases where expenditure, even if incurred for obtaining an advantage of enduring nature, may, nevertheless, be on revenue account and the test of enduring benefit may break down. The expressions “enduring benefit” and “right of permanent nature” also came up for interpretation before the Supreme Court in Devidas Vithaldas & Co. vs. CIT (1972) CTR (SC) 28 : (1972) 84 ITR 277 (SC). It was held that the said expressions are only descriptive and not definitive and are relative in meaning, not synonymous with perpetual or everlasting. It should not be so transitory and ephemeral that it can be terminated at any time at the volition of the parties [see CIT vs. Coal Shipments P. Ltd. (1971) 82 ITR 902 (SC)].

10. However, despite various tests evolved in a long string of cases to determine what is attributable to capital and what to revenue, the controversy still persists and has to be decided afresh in each case applying one test or the other. None of the tests, as observed by Hidayatullah J. (as his Lordship then was), is either exhaustive or universal. Each case depends on its own facts and a close similarity between one case and another is not enough, because even a single significant detail may alter the entire aspect (see Abdul Kayoom (K. T. M. T. M.) vs. CIT (1962) 44 ITR 689, 703 (SC)). The following note of caution given by his Lordship is very pertinent “In deciding such cases, one should avoid the temptation to decide cases (as said by Cardozo) by matching the colour of one case against the colour of another. To decide, therefore, on which side of the line a case falls, its broad resemblance to another case is not at all decisive. What is decisive is the nature of the business, the nature of the expenditure, the nature of the right acquired, and their relation inter se, and this is the only key to resolve the issue in the light of the general principles, which are followed in such cases.”

11. This position of law was reiterated by the Supreme Court in a number of cases. The well-accepted position as on today, therefore, appears to be that no test of universal application can be laid down to determine the question whether an expenditure made by the assessee was revenue expenditure or capital expenditure. It must depend on the facts and circumstances of each case and on the application of the proper principles of law. One of the guiding factors, however, should be the aim and object of the expenditure (see CIT vs. British India Corp. Ltd. (1987) 60 CTR (SC) 54 : (1987) 165 ITR 51 (SC)). This Court, dealing with an identical problem in a recent case, CIT vs. Makhan Sarmah Savapandit (1989) 77 CTR (Gau) 237 : (1989) 180 ITR 35 (Gau), referring to some of the leading cases on the subject, observed: “It is in this regard we see tests were laid down in two leading cases Lakshmiji Sugar Mills Co. (P) Ltd. vs. CIT (1971) 82 ITR 376 (SC) and Travancore , Cochin Chemicals Ltd. vs. CIT (1977) 106 ITR 900 . The tests laid down in the former case was confined to the facts of the case in the latter case. In L. H. Sugar Factory and Oil Mills (P) Ltd. vs. CIT (1980) 19 CTR (SC) 185 : (1980) 125 ITR 293 (SC) , the latter case was held to be a case on facts and the former decision in (1971) 82 ITR 376 was resurrected.”

The present state of the law on the subject was aptly described by Raghuvir C. J. as “the state of wobbling of authorities” and it was rightly concluded by his Lordship that “no test of universal application can be laid down by the Courts”. [See CIT vs. Makhan Sarmah Savapandit (1989) 77 CTR (Gau) 237 : (1989) 180 ITR 35 (Gau)]. Therefore, the question whether an expenditure is on account of revenue or capital has to be decided by looking at the facts and circumstances of the case and from the point of view of a practical and prudent businessman rather than from the view point of a tax gatherer upon strict juristic classification of the legal rights, if any, secured in the process. In order to arrive at a just and proper conclusion, one must look at the true nature and character of the advantage in a commercial sense (without giving undue emphasis to the form thereof or the terminology used) in the light of the surrounding circumstances and in the larger context of necessity and expediency. If the expenditure is so related to the carrying on or conduct of the business that it may be regarded as an integral part of the profit-making process and not for acquisition of an asset, or a right of permanent character, the expenditure may be regarded as revenue expenditure even though the advantage may endure for an indefinite future.

The question referred in the case before us, therefore, has to be decided on its own facts bearing in mind the broad principles discussed above. Admittedly, the payment of Rs. 37,500 was made for the “use and utilisation of the trade name, pending import licences, contracts and other trading benefits and advantages”. These rights so acquired evidently facilitated the day-to-day trading operations of the assessee and were intended to increase its profits. No asset or right of permanent nature was acquired thereby. It is not even a case where the advantage will endure for an indefinite future. Considering the nature and advantages in obtaining the user of the rights in question in the commercial sense, we are of the opinion that the payment of Rs. 37,500, in the instant case, was a revenue expenditure.

In our aforesaid conclusion, we are supported by the decision of this Court in CIT vs. Makhan Sarmah Savapandit (supra), wherein expenditure incurred for installation of a new power line and equipment was held to be incurred for the purpose of running the factory efficiently and, as such, revenue expenditure in nature. There is a decision of the Supreme Court in Empire jute Co. Ltd. vs. CIT (1980) 17 CTR (SC) 113 : (1980) 124 ITR 1 (SC) wherein the Supreme Court held that the expenditure incurred for the purpose of operating the looms for longer working hours was primarily and essentially relating to the operation or working of the looms which constituted the profit- making apparatus and was expenditure laid out as part of the process of profit-earning, and, as such, revenue expenditure. In the aforesaid case, the Supreme Court also referred to the analogy of quota rights. It was observed that where acquisition of raw material is regulated by a quota system and in order to obtain more raw material, the assessee purchased the quota right of another, the amount paid for purchase of such quota right would indubitably be a revenue expenditure, since it is incurred for acquiring raw material and is a part of the operating cost. Another instance given by the Supreme Court related to payment made for securing additional power every week. It was observed that such payment would also be part of the cost of operating the profit-making structure, and hence, in the nature of revenue expenditure, even though the effect of acquiring additional power would be to augment the productivity of the profit-making structure. We may also gainfully refer to a recent decision of the Calcutta High Court in CIT vs. Kusum Products Ltd. (1984) 41 CTR (Cal) 357 : (1984) 149 ITR 250, wherein the premium paid on purchase of import entitlements was held to be deductible as revenue expenditure. There is also a decision of the Bombay High Court in CIT vs. Desmet (India) (P) Ltd. (1981) 25 CTR (Bom) 157 : (1982) 138 ITR 382 (Bom), where payment of commission to another company as consideration for execution of unfinished contracts was held to be revenue expenditure. It was observed that no enduring benefit or advantage was obtained from such payment. We find ourselves in agreement with these decisions of the Calcutta and Bombay High Courts.

16. On the analogy of the aforesaid cases and in the light of the principles of law discussed earlier, we hold that the expenditure incurred in the instant case is revenue expenditure and allowable as a deduction in computing the taxable income of the assessee. In the result, we answer the first question referred to us in the affirmative and the second question in the negative. Both the questions are thus answered in favour of the assessee and against the Revenue. The parties shall, however, bear their own costs.

[Citation :183 ITR 31]