M. K. Brothers (P) Ltd. . v. C.I.T. Kanpur

Judgment

CIVIL APPELLATE JuRISDICTION : C.A. No. 342 of 1969. Appeal by certificate under Article 133 of the Constitution of India from the judgment and order dated February 16, 1966 of the Allahabad High Court in Misc. Case No. 434 of 1962. B. P. Maheshwari, for the appellant. T. A. Ramachandran, R. N. Sachthey and S. P. Nayar, for the respondent. The Judgment of the Court was delivered by -Khanna, J. This appeal on certificate granted by the Allaha, bad High Court is directed against the judgment of that court ff M. K. llROS, LTD. V, C.I.T. KANPUR (Khanna, J.) whereby it answered the following two questions referred to it under section 6 6 (1) of the Indian Income Tax Act, i 922 (hereinafter referred to as the Act) against the appt\llant and in favour· of revenue: " ( 1 )

Whether on the facts and on a true and proper interpretation of the agreement dated 31-7-1956, between the British India Corporation and the appellant company, tre letters of Sri Kailash Nath Agarwal, the letters of Managing Directors, the sum of Rs. 43,333/ retained by the British India Corporation and adjusted by it to the credit of Sharma & Co. was the assessable income of the appellant company ? ( 2) Whether on the facts and circumstances of the case, the sum of Rs. 43,333/- represented an expenditure under section 10 ?" The matter relates to the assessmePt. year 1956-57. The appellant is a private limited company and A:ailash Nath Agar.val is one of its directors. As per agreement dated July 31, 1956 the appellant was appointed with effect from April 1, 1955 the sole selling agent of the Kanpur Cotton Mills for the sale of yam and cloth manufactured by the said mills. The Kanpur Cotton Mills is owned by the British India Corporation hereinafter referred to as BIC.

Prior to the appellant's appointment Sharma & Co., a partnership firm, was functioning as the sole selling agent cf the Kanpur Cotton Mills. The amount due by Sharma & Co. to the Kanpur Cotton Mills as on March 21, 1955 was Rs. 8,39,350/15/6 inclusive of interest. On March 23, 1955 a letter was addressed on behalf of Sharm·a & Co. to the Managing Director of BIC stating that an agreement had been entered into with Kailash Nath Agarwal whereby Sharma & Co. had agreed to give up the sole selling agency of the Kanpur Cotton Mills. The Managing Director of BIC was requested to appoint Kailash Nath Agarwal or any firm or company forced by him for this purpose as the sole selling agent in place of Sharma & Co. Reference was also made in that letter to an agreement between Sharma & Co. and Kailash Nath Agarwal in the folloV'{ing words :

"As you will notice from the agreement with Sri Kailash Nath Agarwal we are entitled to receive one seventh of the commission due to the new selling agency or to a sum of Rs. 50,000/- per annum whichever is greater, till your dues with interest are fully liquidated. We do hereby authorise you to retain this amount, thus becoming due to us out of the commission payable to the agency and adjust the san1c to oqr firm's account with the Corporation." (1973] l S.C.R. On the same day, i.e. March 23, 1955 Kailash Nath Agarwal addressed a letter to the Managi.Rg Director of BIC informing hiin of the agreement with Sharma & Co. and requesting for the grant of sole selling agency to the appellant. The letter concluded as follows: "I hereby authorise you in case you are pleased to grant your sole selling agency to my said firm to retain one-seventh of our commission for adjustment in the account of M/s. Sharma & Co. with minimum of Rs. 50,000/- per annum till your dues against them are cleared with interest."

The Mananging Director of BIC later on that day, i.e. March 23, 1955 addressed a letter to Sharma & Co. accepting its resignation from the sole selling agency of the Kanpur Cotton Mills and about the appointment 'Of Kailash Nath Agarwal or his nominee as the sole selling agent in succession to Sharma & Co. In regard to the liquidation of dues from Sharma & Co. the Managing Director of BIC wrote : "As agreed between Shri Kailash Nath Agarwal and yourselves we shall deduct one seventh of the commission or Rs. 50,000/- whichever is greater out of the commission earned by the new sole selling agents and credit the same to your account with us till our dues against you standing today at Rs. 8,39,350/ 15/6 are completely liquidated with interest thereon at 6% ."

On July 31, 1956 on indenture was executed by BIC and the appellant relating to the apointment of the appellant as the sole selling agent of the ;Kanpur Cotton Mills for the sale of yarn, cloth and cotton manufactures with effect from April I, 1955. In this indenture the appellant ratified the agreement entered into by Kailash Nath Agarwal with Sharma & Co. on March 23, 1955 and authorised BIC "to give cffoct to the said agreement generally and in particular to retain an amount equal to one-seventh of the trade discount of U% due to the sole selling agents with a minimum of Rs. 50,000/ per annum so that the amount payable to the sole selling agents shall be the amount payable at the rate of U % minus the aforesaid amount retained by the corporation as payable to M/ s Sharma & Co." Clauses 12 and 13 of the indenture were as under :

"Clause 12 That in the event of the dissolution of M/ s Sharma & Co. before the complete repayment of their liability the sole selling ·agents agree that the corporation may continue ·to retain an amount equal to one-seventh of . -1 0 r M. K. BROS. LTD. v. C.I.T. KANPUR (Khanna, J.) the trade discount of I 3/4% or 50,000/· whichever is greater and adjust it towards such dues of M/s Sharma & Co. as may them be standing. Clause 13 That the authority given above to the corporation to retain and adjust a part of the trade discount towards the outstanding against M/s Sharma & Co. will not be revocable and will be binding on the sole selling agents, their succ'essor, or assigns only so Jong as they act as the corporation's sole selling agents and will be deemed to be a condition on which the sole selling agency has been granted to the agents.

The agents will have no claim whatsoever to any such aniounts retained out of their normal trade discount and adjusted in the . aceount of M/s Sharma & Co. as if the amount so retained was not payable to 1;hem." During the year under reference, the commission as per terms of the indenture dated July 31, 1956 payable to tlie appellant amounted to Rs. 2,06,283. Ouu of this amount, Rs. 43,333 were retained byBIC under the contract for adjustment against the outst.anding dues of Sharma & Co. in accordance with the terms Qf the indenture. In its statement of account the appellant cre- .dited the full amount of commission of Rs. 2,06,283 to its profit and·loss account. The sum of .Rs. 43,333 was, however, shown as a deduction therefrom. During the assessment proceedings, the Income Tax Officer disallowed the above deduction.

The order of the Income Tax Officer in this respect was upheld by the Appellant Assistant Commissioner in appeal as well a> by the Income Tax Appellate Tribunal in second appeal. On applica-' tion filed by the appellant, the Tribunal referred the questions re- · produced earlier to the High Court. The High Court, as stated · above, answered the two questions against the appellant. In appeal Mr. Maheshwari on behalf of the appellant has ·argued that the amount of Rs. 43,333 was a permissible deduction and the High Court wa> in error in decidinp: this matter against the appellant. There is, in our opinion, no fore,, in this contP-n· tion and we agree with Mr. Ram Chandran, learned counsel for the respondent, that the judgment of the High Court shonld be unhdd. It would appear from the resume of facts j!iven above that ;n March 1955 an amount of Rs. 8,39,350/15/6 was due to BIC from the fim1 Sharrn;i & Co. who was the previous sole selling a.~ent of the Kanpur Cotton Mills.

As a result of agreement ktween the apvellant, BIO and Sharma & Co. the -appellant undertook to discharge the liability of Sharma & Co. in lieu of being. appointed the sole selling agent of the Kanpui' Cotton . Mills in place of Sharma & Co. It can, therefore, be said that fl 973] 1 S.C R. the appellant got the sole selling agency of th~ Kanplli . Cotton Mills in consideration of its agreeing to pay Rs . . 8,39,350·15·6 which was the amount due from Shanna & Co: to BIC, It is·nQt disputed by Mr. Maheshwari that if the amount of Rs. 8,39,350 15/ 6 had been paid by the appellant in lump sum, in consideration of its· being appointed the sole selling agent of the Kanpur Cotton Mills, the payment would have constitut,Cd capital expenditure. as it was an amount paid for acquiring or bringing into existence an asset or advantage for the enduring benefit of the business.

The fact that the amount was paid not in lump sum but was paid in insta1ments through deductions our of the commission due to the appellant would not, in our opinion, make any difference. The answer to the question as to whether the money paid is a re· venue.expenditure or capital expenditure depends not so much upon the fact as to whether the amount paid is large or small or whether it has been paid in lump sum or by ins~alments , as it does upon the purpose for which the payment has been made and expenditure incurred. It is the re<ll nature and quality of ~he payment and not the quantum or the manner of the payment which would prove dedsive. If the object of making the payment is to. acquire a capital asset, the payment would partake of the .character of a capital payment even though it is made not in Jump sum but by instalments over a period of time.

On the contrnry, payment made in the course of and for the purpose of parrying on bus irr~ss or trading activity would be revenue expen- .diture even thouJ?h the pay.l11ent is of a large amount and has not -~o be made periodically. As observed by this Court in the case of Assam Bengal Cement Co. Ltd. v. Commissioner of Income Tax, West Benga1(1), if the expenditure is made for acquiring or bringing ·into existence an asset or advantaee for the enduring benefit of the business it is properly attributable to capital and is of ·the pature of capital enxpenditure. If on the other hand it is mad~ not for the purpose 9f bringing into existence any such asset or advantage but for running the business or working it with a view to produce the profits it is a revenue expenditure.

If any such asset or advantage for the en.durinj?; benefit of 1Jhe business is thus -acquired or brought into existence.. it would be immaterial whether the source of the payment was tlhe capital or the income of the concern or whether the payment was made once and .for all or was made periodically. The aim and obiect of the expenditure would determine the character of the expenditure whether it is a capital expenditure or a revenue expenditure. The source or the manner of the payment would then be of no consequence. We may also in this r.nnnt>r.tinn refer to 1'le follnwine: observations of this Court in the case of P. H. Divecha (Deceased) and A ft er H;;.11 H;s Legal ReTJresentntiv~.<: and Another v. Commissioner of Income Tax, .Bombay City 1(2 ) . (I) [1955] 27 T.T.R. 34 (on p. 45). (2) [ 1963] 48 T.T.R . 222. 0 M. K. BROS. LTD. v. C.I.T. KANPUR (Khanna, !.)

"It may also be stated as a general rule that the fact that the amount involved was large or that it was periodic in character have no decisive bearing upon the matter. A payment may even be describe1 as "pay" "remuneration", etc., but that does not determine its qualify, though the name by which it has been called may be relevant in det,ermining its true nature, because this gives an indication of how the person who paid the money and the person who received it viewed it in the first. instance. The periodicity of the payment does not make the payment a recurring income because periodicity may be the result of convenience and not necessarily the result of the establishment of a source expected to be productive over a certain period. These general principles have been settled firmly by this court in a large number of cases." Although the above observations were made in the context of periodic receipts, they have a direct bearing even on cases relating to periodic payments. Mr. Maheshwari lias referred to clause 13 of the indentur1 reproduced above and has contended that the appellant could make no claim to the amount of Rs. 43,333 which had been rotained by BIC.

ThiS fact, in our opinion, would make no material difference so far as the true nature ofthat amount was concerned. The amount was deducted by BIC in pursuance of the agreement ente.red into by the appellant with BIC and Sharma & Co., according to which the appellant had to pay thRt amount in the form of deduction out of its commission in consideration of being appointed the sole selling agent of the Kanpur Cotton Mills. The present is a case relating to the application of income to discharge a liability incurred not in the course of running the business but a liability undertaken for the purpose of acquiring the sole selling agency right which was indisputably an asset of capital nature. The appeRI consequently fails and is dismissed with costs. V.P.S. Appeal dismisstd.