C.I.T. West Bengal II, Calcutta Vs.
Coal Shipment (P) Ltd.  INSC 283 (14 October 1971)
KHANNA, HANS RAJ KHANNA, HANS RAJ HEGDE, K.S.
CITATION: 1972 AIR 541 1972 SCR (1)1089 1971
SCC (3) 736
Incometax Act, (11 of 1922). s.10(2) (xv)--Payments
made to rival trader to ward off competition-When constitutes revenue or
In pursuance of an agreement between the
assessee-respondent and another firm L & Co., by which, L agreed to assist
the respondent in procuring coal for export whenever asked to do so and not to
export any coal during the subsistence of the agreement, L supplied various
quantities of coal to the respondent and the respondent made payments as pet
the agreement. The respondent claimed the payments as admissible expenditure
under s. 10(2)(xv) of the Income-tax Act, 1922, during the relevant assessment
years. The Department held that they were payments. to secure a monopoly and
were therefore not allowable as revenue expenditure. The Tribunal found that
the respondent did not acquire any monopoly rights, that the payments were only
made to carry on trade in a more facile and profitable manner, that the
arrangement was a temporary measure liable to be terminated at will, that the
respondent did not derive any advantage of an enduring character and that
the expenditure was attributable to revenue
and not to capital. and held in favour of the assessee. The High Court, on,
reference, agreeing with the findings of the Tribunal and holding that the
consideration was not paid once for all but was related to uncertain shipments
to be made, decided in favour of the assessee.
In appeal to this Court it was contended that
though the payment for assistance to the Respondent in procuring coal was an item
of revenue expenditure, that part of the payment which was made because of L
agreeing not to export coal during the subsistence of the agreement constituted
a capital expenditure and not a revenue expenditure.
Dismissing the appeal,
HELD : Although payments made to ward off
competition in business, to a rival dealer would constitute capital expenditure
if the object of making that payment is to derive an advantage by eliminating
the competition over some length of time, the same result would not follow if
there is no certainty of the duration of the advantage and the same can be put
to an end at any time. How long the period of contemplated advantage should be
in order to constitute an enduring benefit would depend upon the circumstances
and facts of each individual case. An enduring benefit need not be of an
everlasting character, but it should not, at the same time, be so transitory
and ephemeral that it can be terminated at any time at the volition of any of
the parties. [1096 B; 1097 B-C] Further, the payments were related to the
actual shipments of coal in the course of the trading activities of the
respondent and had no relation to the capital value of the assets. The payments
were not related to or tied up in any way to any fixed sum agreed between the
parties. It was not a case of monopoly value payments being permitted to be
paid in installments giving a false appearance of periodicity.
[1097 F-G; 1099 G-H] 1090 Travancore Sugars
and Chemicals Ltd. v. C.I.T., Kerala 62 I.T.R. 566, followed.
Atherton v. British Insulated and Halaby
Cables Ltd. 10 T.C.
155, Robert Addie and Sons' Collieries Ltd.
v. Commissioners of Inland Revenue, 8 T. C 67 1, Assam-Bengal Cement Co. Ltd. v.
C. I. T., West Bengal, 27 I.T.R. 34, Commissioner of Taxes v. Nchanga Consolidated
Copper Mines Ltd. 58 I.T.R.
241 and Hanrikesen (Inspector of Taxes) v.
Grafton Hotel Ltd., 11 I.T.R. 10, referred to.
CIVIL APPELLATE JURISDICTION: Civil Appeals
Nos. 1494 to 1498 of 1971.
Appeals by special leave, from the judgment
and order dated November 15, 1967 of the Calcutta High Court in Income-tax
Reference No. 13 of 1963.
S. T. Desai, S. K. Aiyar, R. N. Sachthey and
B. D. Sharma, for the appellant (in all the appeals).
N. A. Palkhivala, T. A. Ramachandran and D.
N. Gupta, for the respondent (in all the appeals).
The Judgment of the Court was delivered by
Khanna, J. This judgment would dispose of five Civil Appeal Nos. 1494 to 1498
of 1971 by Special Leave filed by the ,Commissioner of Income-tax, West Bengal
against the judgment of Calcutta High Court whereby the question referred to
that ,Court under section 66(1) of the Indian Income-tax Act, 1922 (hereinafter
referred to as the Act) for five assessment years was answered in favour of the
assessee-respondent-Coal Shipments (P) Ltd. During the pendency of the appeals,
the name of the respondent was changed to Heilgers Investment Ltd.
The matter relates to the assessment years
1951-52, 1952-53, 1953-54, 1954-55 and 1955-56, the corresponding accounting
years for which ended on 31-3-1951, 31-3-1952, 31-3-1953, 31-3-1954 and
The respondent was one of the companies which
exported coal from India to Burma before the Second World War. Amongst the
other exporters were Messrs. Karamchand Thaper & Bros.
Ltd., Messrs" Macheill Barry Ltd.,
Messrs. Andrew Yule & Co. Ltd. and Messrs. R. V. Low & Co. Ltd. The
shipment of coal to Burma Railways before the war was the subject of open
tender. After the cessation of hostilities in 1946, it became possible to
resume the export of coal to Burma. In order to overcome the difficulties in
the conduct of the trade following the war, the members of the coal trade in
Bengal formed an association styled Coal Exporters and Charters Association.
The respondent company as well as M/s. H. V. Low & Co. Ltd. were two of the
major members 1091 of the said association. When M/s. H. V. Low & Co.
learnt of the, resumption of coal export to Burma by the respondent in 1946,
they also expressed intention to export coal to Burma. Thereupon the two
companies came to an understanding and arrived at a mutual arrangement or
agreement on the following lines :(i) M/s. H. V. Low & Co. Ltd. would not
export coal to Burma during the subsistence of the agreement.
(ii) M/s. H. V. Low & Co. Ltd. would
assist the respondent in procuring coal for shipment to Burma.
(iii) The respondent would carry on the coal
shipping business and pay M/s. H. V. Low & Co. Ltd. Rs. 151per ton
(subsequently raised to Rs. 1-5per ton) of coal shipped to Burma.
According to the respondent, the last
shipment of coal under the above arrangement was made in June, 1954 after which
the arrangement came to an end automatically and the Government of Burma made
some other arrangement for its coal requirement.
The assessee respondent claimed to have made
the following payments to M/s. H. V. Low & Co. Ltd. or their nominees in
pursuance of the aforesaid agreement during the period of five accounting years
from 1st April, 1950 to March 31,1955:Rs.
1952-53................... . 1,77,898 1953-54...................... 3,03,631
1954-55.......... .............. 2,32,355 1955-56....... ..................
79,917 The amounts mentioned above were taxed in the hands of M/s.
H. V. Low & Co. Ltd. The respondent
claimed the payment of the above amounts as admissible business expenditure for
the assessment years in question. The Income-tax Officer held that the
expenditures claimed could not be allowed, as there was no written agreement in
proof of the alleged arrangement and it was not possible to say that the
payments were made for the purpose of the assessee's business. The Income-tax
Officer further held that even assuming that the payments were made to keep off
M/s. H. V. Low & Co. Ltd. from the Burma trade, they were payments to secure
a monopoly and were not, therefore, allowable as revenue expenditure. The
Appellate Assistant Commissioner on appeal upheld the order of the Income-tax
When the matter came up in second appeal
before the Income tax Appellate Tribunal, the Tribunal found that there was
some 1092 discrepancy in the facts stated on behalf of the assessee and the
Revenue. The Tribunal thereupon required the respondent company to swearan
affidavit in support of the facts relied upon by it. In pursuance thereof, Sir
Walter Michelmore, Director of Managing Agents of the respondent company filed
an affidavit. Sir Walter was also examined orally before the Tribunal. The case
was thereupon remanded to the Income-tax Officer to verify the facts as stated
in the affidavit of Sir Walter and report back to the Tribunal.
The Income-tax Officer after making further
investigation submitted his report. In deciding the appeal, the Tribunal
formulated two points for its decision :
(1) Were the payments made for the purpose of
the assessee's trade in terms of the alleged agreement? (2) If the answer to
the above question is in the affirmative, did the assessee acquire a monopoly
by such payment ? Both the questions were answered in favour of the respondent
by the Tribunal. It was held that the payments were made in pursuance of the
alleged agreement in the interest of the respondent's trade. The version of the
respondent about its agreement with M/s. H. V. Low & Co. Ltd. was accepted.
According to the agreement, M/s. H. V. Low
& Co. Ltd.
agreed to assist the respondent in procuring
coal for export to Burma whenever asked to do and further agreed not to export
coal to Burma during the subsistence of the arran gement. The agreement was
found to have been acted upon and it was held that M/s. H. V. Low & Co.
supplied varying quantities of coal to the
respondent for shipment to Burma. It was further held that the respondent
company did not acquire any monopoly rights to carry on Burma trade and the
impugned payments were made to carry on the trade in a more facile and
profitable manner. The Tribunal found that the arrangement arrived at verbally
between the respondent and M/s. H. V. Low & Co. Ltd. was a temporary
measure liable to be terminated ,at will and the respondent company did not
derive any advantage of an enduring character by such payments. The
expenditures in question were, in the opinion of the Tribunal, attributable to
revenue and not to capital. As such, they were held to be permissible
expenditures under section 10(2) (xv) of the Act.
On application filed by the Revenue, the
following question was referred to the High Court "Whether on. the facts
and in the circumstances of the case, the payments made by the assessee to M/s.
H. V. Low & Co. Ltd.
or their nominees were of a capital nature
and as such not allowable under section 10(2) (xv) of the Income-tax Act, 1922
?" 109 3 .lm0 It was not disputed before the High Court that there was an.
agreement between the respondent and M/s. H. V. Low & Co. Ltd. on terms stated
by the respondent and that the payments in question were made under that
agreement. The High Court held that the arrangement entered into by the
respondent with M/s. H. V. Low & Co. Ltd. was not such as was likely to
have an enduring beneficial effect. In the opinion of the High Court, there was
no cert ainty of duration and the arrangement could be terminated or revoked at
any time. The consideration of the arrangement, it was observed, was not paid
once for all but was related to uncertain shipments to be made.
The arrangement, it was further held, did not
create any monopoly or bring about any capital advantage to the assessee. The
respondent was held entitled to claim the deduction of the expenditures under
section 10 (2) (xv) of the Act. In the result, the question referred to the
Court was answered in the negative and in favour of the assessee.
We have heard Mr. Desai on behalf of the
appellant and Mr. Palkhiwala on behalf of the respondent and are of the opinion
that there is no merit in these appeals. The Tribunal has found that the
amounts in question were paid by the respondent to M/s. H. V. Low & Co.
Ltd. in pursuance of the agreement according to which M/s. H. V. Low & Co.
were to assist the respondent in procuring
coal for shipment to Burma and were themselves not to export coal to Burma
during the subsistence of the agreement. The above findings of fact are, for
the purpose of these proceedings, binding upon the appellant and consequently
no attempt was made either in the High Court or in this Court to assail them.
The payments which were made by the
respondent to M/s. H. V. Low & Co. Ltd., it would thus appear, were because
of the assistance rendered by them for shipment of coal to Burma and for
abstaining from exporting coal to Burma during the subsistence of the
So far as the payment is concerned which was
made to M/s. H. V. Low & Co. Ltd. for assistance to the respondent in
procuring coal for shipment to Burma, it was admittedly an item of revenue
expenditure. The controversy between the parties has centered on the point as
to whether that part of the payment which was made because, of M/s. H. V. Low
& Co. Ltd. having agreed riot to export coal to Burma during the
subsistence of the agreement constituted capital expenditure or revenue expenditure.
Mr. Desai on behalf of the appellant contends
that as the payment was made for warding off competition by rival coal
exporter, that payment should be held to be a capital expenditure. The fact
that there was no certainty of the duration of the arrangement between the
respondent and M/s. H. V. Low & Co. and the same could be terminated at any
time, according to the learned counsel, 1094 is wholly immaterial. As against
that, Mr. Palkhiwala argues that in order to constitute capital expenditure, the
object of the expenditure should be to secure an advantage of enduring nature.
When there is no certainty of the duration of the arrangement and the same can
be revoked at any time, the advantage cannot be said to be of an enduring
character and the expenditure cannot be held to be of a capital nature.
Further. as the payment was related to the quantum of coal shipped to Burma in
the course of trading activity and was not connected with the capital value of
the assets, the payment, Mr. Palkhiwala submits, should be considered to be
revenue expenditure. In our opinion, there is considerable force in Mr.
Judicial decisions have, from time to time,
laid down some broad principles in order to determine whether an expenditure is
of a capital nature or revenue nature. Despite the enunciation of those
principles, it is not always easy to decide the question in the context of the
circumstances of an individual case. Considerable difficulty is experienced in
border line cases. It was in this connection that Hidayatullah, J. (as he then
was) observed in Abdul Kayoom v. Ccommissioner of Income-tax(1) that "none
of the tests (laid down in various authorities) is either exhaustive or
universal. Each case must depend 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. In deciding such cases, one should avoid
the temptation to decide cases .... by matching the colour of the one case
against the colour of another".
It may be apposite at this stage to refer to
some of the broad tests which have been.laid down to distinguish the capital
expenditure from revenue expenditure. In the case of Atherton v. British
Insulated and Helsby Cables Ltd.(2)-, Lord Cave, L.C. laid down the following
criterion which has been referred to in most of the subsequent cases :"But
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 the special
circumstances leading to an opposite conclusion) for treating such an
expenditure as properly attributable not to revenue but to capital." The
Courts have to bear in mind, according to the dictum laid down in the above
case, whether it was an expenditure forming " part of the cost of the
income-earning machine or structure" as (1) 44 I.T.R. 68 . (2) 10 T.C.
1095 opposed to part of "the cost of
performing the income earning operations". In that case, the House of
Lords dealt with a fund which had been created by the respondent company as a
nucleus of a pension fund for its employees. After handing over the money to
trustees for the employees, the company claimed that the money should be
charged to revenue.
The claim of the company was rejected by the
House of Lords on the ground that the payment of money created for itself an
enduring benefit or advantage which was of a capital nature.
In the case of Robert Addie and Sons'
Collieries Limited v. The Commissioners of Inland Revenue(1), Lord President
Clyde gave the following test:-"It is necessary accordingly to attend to
the true nature of the expenditure, and to ask one's self 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 ?--or, on the other hand, is it a capital outlay
?-is it expenditure necessary for the acquisition of property or of rights of a
permanent character, the process of which is a condition of carrying on its
trade at all ? The expression 'once and for all' used in the dictum laid down
in Atherton's case (supra) was referred to by Bhagwati, J. speaking for this
Court in the case of Assam Bengal Cement Co. Ltd. v. Commissioner of
Income-tax, West Bengal(2) and it was observed that the expression was used to
denote an expenditure which is made once and for all for procuring an enduring
benefit to the business as distinguished from a recurring expenditure in the
nature of operational expenses. The character of the payment can be determined,
it was added, by looking at what is the true nature of the asset which has been
acquired and not by the fact whether it is a payment in a lump sum or by installments.
It is also an accepted proposition that the words 'permanent' and ' enduring'
are only relative terms and not synonymous with perpetual or ever-lasting.
There are some other tests like those of
fixed capital and circulating capital for determining the nature of the
expenditure. An item of disbursement can be regarded as capital expenditure
when it is referable to fixed capital.
It is revenue when it can be attributed to
circulating capital. It is not the case of any party that this test of fixed
and circulating capital can be invoked in this case nor has reference been made
to some of the other tests. The case which has been set up on behalf of the
revenue is that as the object of making the payments in question was to
eliminate competition of a rival exporter, the benefit which enured to the
respon(1) 8 T.C. 671. (2) 27 I.T.R. 34.
109 6 dent was of an enduring nature and as
such, the payment should be treated as capital expenditure. We find ourselves
unable to accede to this contention because we find that the arrangement between
the respondent and M/s. H. V. Low & Co. Ltd. was not for any fixed term but
could be terminated at any time at the volition of any of the parties. Although
an enduring benefit need not be of an ever-lasting character, it should not, at
the same time,, be so transitory and ephemeral that it. can be terminated at
any time at the volition of any of the parties. Any other view would have the
effect of rendering the word 'enduring' to be meaningless. No cogent ground or
valid reason has been given to us in support of the contention that even though
the benefit from the arrangement to the respondent may not be of a permanent.
or enduring nature, the payments made in pursuance of that arrangement would
still be capital expenditure. Such a contention indeed was repelled by the
Judicial Committee in the case of Commissioner of Taxes v. Nchanga Consolidated
Copper Mines Ltd.(1). The respondent company in that case together with two
other companies Rhokana Corporation Ltd. and Bancroft Mines Ltd. formed a group
for carrying on the business of copper mining.
Following a steep fall in the price of copper
in the world market the group, in common with other producers, decided
voluntarily .to cut their production by 10 per cent. In effecting the cut, it
was agreed that Bancroft Mines Ltd.
should cease production for one year and that
the respondent company and Rhokana Corporation Ltd. should undertake between
them the whole group programme for the year reduced by the overall cut of 10
per cent. It was further agreed to pay a sum of Bancroft Mines Ltd. to
compensate it for the abandonment of the production for the year. ,Question
arose whether the compensation which the respondent company had paid to
Bancroft Mines Ltd. was expenditure of capital nature ? The Judicial Committee
held that the compensation paid was an allowable deduction in determining the
respondent company's taxable., income. The expenditure, in the view ,of the
Judicial Committee, had no analogy with expenditure for the purpose of
acquiring a business or a benefit of long term or enduring contract. Viscount
Radcliffe who delivered the judgment while dealing with the question of
"It bought one right only, the right to
have Bancroft out of production for 12 months.
While, no doubt, money paid to acquire a
business or to shut a business down for good or to acquire some contractual
right to last for years may well be capital expenditure, it seems a
contradiction in terms to speak of what Nchanga thus acquired, which exhausted
itself and was created (1) 58 I.T.R. 241.
1097 to exhaust itself within the 12 months'
period within which profits are ascertained, as constituting an enduring
benefit or as an accretion to the capital or incomeearning structure of the
business. If the expenditure is to be treated as capital expenditure at all, it
cannot be for any reason such as that".
Although we agree that payment made to ward
off competition in business to a rival dealer would constitute capital
expenditure if the object of making that payment is to derive an advantage by
eliminating the competition over some length of time, the .same result would
not follow if there is no certainty 'of the duration of the advantage and the
same can be put to an end at any time. How long the period of contemplated advantage
should be in order to constitute enduring benefit would depend upon the
circumstances and the facts of each individual case.
In the case of Assam Bengal Cement Co.
Ltd.(1) the appellant company acquired from the Government of Assam a lease of
certain lime-stone quarries for a period of twenty years for the purpose of
carrying on the manufacture of cement: In addition to the rent and royalties,
the appellant agreed to pay the lessor annually a sum of Rs. 5,000/during the
whole period of the lease as a protection fee and in consideration of that
payment the lessor undertook not to grant to any person any lease, permit or
prospecting licence for lime-stone in a group of quarries without a condition
that no limestone should be used for the manufacture of cement. The appellant
also agreed to pay Rs. 35,000/annually for five years as a further protection
fee and the lessor in consideration of that payment gave a similar undertaking
in respect of the whole district. It was held by this Court that as a result of
the annual payment of the amounts of Rs. 5,000/and Rs. 35,000/-, there endured
an advantage to the appellant for the whole period of the lease and as such it
was capital expenditure.
Apart from the above, we find that the
payments made to M/s. H. V. Low & Co. Ltd. were related to the actual
shipment of coal in the course of the trading activities of the respondent and
had no relation to the capital value of the assets. The payments were not
related to or tied up in any way to any fixed sum agreed between the parties.
The dictum laid down by this Court in Travancore Sugars and Chemicals Ltd. v.
Commissioner of Income-tax, Kerala(2) in the circumstances is attracted. The
appellant company in that case was to take over the assets of sugar manufacturing
concern, a distillery and a tincture factory of the Government of Travancore.
The promoters of the appellant company in that connection entered into an
agreement with (1) 27 I.T.R. 34.
(2) 62 I.T.R. 566.
18-LI 19 Sup Cl/72 1098 the Government. The
cash consideration for the sale of the assets of the' sugar manufacturing
concern was Rs. 3.25lakhs, that for the sale of the distillery was agreed to be
arrivedat as a result of joint valuation and that for the sale of the assets of
the tincture factory was the book value. The Government agreed to recognise the
transfer of the licence for the distillery to the appellant company and to
secure the continuance of the licence for a period of 5-years after the
termination of the existing licence. The Government also agreed to purchase the
pharmaceutical products manufactured by the appellant company. Apart from the
cash consideration, clause 7 of the agreement provided that the Government
would be entitled to 20 per cent of the annual net profits subject to a maximum
of Rs. 40,000/after providing for depreciation and remuneration of the
secretaries and treasurers. Clause 7 was amended in January, 1947 to the effect
that the Government would be entitled to 10 per cent of the annual net profits.
Question arose whether an amount of Rs. 42,480/which was, payable under clause
7 of the agreement was a permissible expenditure under section 10 of the
Incometax Act. It was held that the above payment was in the nature of revenue
expenditure and not capital expenditure. Ramaswami, J.
speaking for the Court dealt with the matter
in the following Words :"Examining the transaction from this point of
view, it is clear in the present case that the consideration for the sale of
the three undertakings in favour of the appellant was :
(1) the cash consideration mentioned in the
principal agreement, viz. clauses 3, 4(a) and 5(a) and (2) the consideration
that Government shall be entitled to twenty per cent of the net profits earned
by the appellant in every year subject to a maximum of Rs. 40,000/per annum.
With regard to the second part of the consideration there are there important
points to be noticed. In the first place, the payment of commission of twenty
per cent 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 commission is related to the annual profits
which flow from the trading activities of the appellant-company and the payment
has no relation to the capital value of the assets.
In the third place, the annual payment of 20
per cent 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
There is no reference to any capital sum in
1099 this' part of the agreement. On the contrary, the very nature of the
payments excludes the idea that any connection with the capital sum was
intended by the parties.
The above observations, in our opinion, have
a direct bearing on the present case.
Mr. Desai has referred to the following
observations of Lord Greens in Henriksen (Inspector of Taxes) v. Grafton, Hotel
Ltd.(1) :"It appears to me that there can be no difference in principle
between a payment outand-out for monopoly value and a payment in respect of a
term. Each licence granted for a term must stand by itself since an application
for its renewal falls to be treated as an application for a new licence. This
is what I mean when I say that there is a false appearance of periodicity about
these payments. Whenever a licence is granted for a term, the payment is made
as on a purchase of a monopoly for that term. When a licence is granted for a
subsequent term, the monopoly value must be paid in respect of that term, and
so on. The payments are recurrent if the licence is renewed; they are not
periodical, so as to give them the quality of payments which ought to be
debited to revenue account.
The thing that is paid for is of a permanent
quality, although its permanence, being conditioned by the length of the term,
is short-lived. A payment of this character appears to me to fall into the same
class as the payment of a premium on the grant of 'a lease which is admittedly
Particular reliance has been placed by Mr.
Desai upon the concluding part of the above observations. The portion relied
upon, in our opinion, has to be read in the context of the preceding lines and
the facts of that case. The lessees of the licenced premises in that case,
under. a covenant in their lease, paid annually certain sums imposed by the
licensing justices as installments of the monopoly on the grant and renewal of
the licence for three years period.
It was contended that those sums were not
capital payments but should be regarded as revenue payments. It was held that
monopoly value payments were imposed for the term of the licence on grant or
renewal though the fact that permission was given to pay by yearly installments
gave a false appearance of periodicity. Such payments in the opinion of the
Court, fell into the same class as a premium paid (1) 11 I.T.R. 10.
1100 on the grant of a lease and as such
should be regarded as of capital nature. It is obvious that the question
involved in that case was different and the appellant can derive no assistance
The appeals consequently fail and are
dismissed with costs.
One set of costs.
V.P.S. Appeals dismissed.