Travancore Sugars and Chemicals Ltd. Vs.
Commissioner of Income-Tax Kerala [1966] INSC 171 (20 September 1966)
20/09/1966 RAMASWAMI, V.
RAMASWAMI, V.
SHAH, J.C.
BHARGAVA, VISHISHTHA
CITATION: 1967 AIR 477 1967 SCR (1) 423
CITATOR INFO:
R 1972 SC1634 (16) R 1973 SC 318 (17,19,20)
RF 1973 SC 982 (1) D 1985 SC1656 (6,8,9,10) RF 1987 SC 798 (11)
ACT:
Indian Income-tax Act, 1922, s.
10(2)(xv)--Purchase of industrial undertaking from Government-Agreement to pay
percentage of net profits to Government annually-Such payment whether revenue
or capital expenditure.
HEADNOTE:
The appellant company was formed with a view
to taking over certain industrial undertakings from the Government of the
erstwhile State of Travancore. Apart from the cash consideration for the said
purchase the appellant agreed to pay to the Government a certain percentage of
its net profits every year. In proceedings under the Indian Incometax Act,
1922, for the assessment year 1958-59 the appellant claimed the amount so paid
to be expenditure allowable under s. 10(2) (xv). The High Court in reference
proceedings held against the appellant who thereupon came to this Court. It was
urged on behalf of the appellant that the annual payment was in the nature of
revenue expenditure because it was not related to any part of the purchase
price of the assets; on the other hand the Government had undertaken certain
obligations under the agreement and the payment was in lieu of these. On behalf
of the respondent it was urged that the payment formed part of the
consideration for the purchase.
HELD:(i) No single test of universal
application can be discovered fora solution of the question whether a
particular expenditure is in the nature of capital expenditure or revenue
expenditure. The name which the parties may give to the transaction which is
the source of the receipt and the characterisation of the receipt by them are
of little consequence. The court has to ascertain the true nature and character
of the transaction from the covenants of the agreement tested in the light of
surrounding circumstances. [427 D-E] (ii) The percentage of the net profits
payable by the appellant company to the Government under the agreement was
payable for an indefinite period without limitation; it was related to the annual
profits which flowed from the trading activities of the company havingno
relation to the capital value of the assets; it was -also not tied up in any
way to any fixed sum a,-reed between the parties as part of the purchase price
of the three Government undertakings. There was no reference to any capital sum
in this part of the agreement. On the contrary the very nature of the payment
excludes the idea that any connection with the capital sum was intended by the
parties.
It is true that the purchaser may buy a
running concern and fix a certain price and the price may be payable in a lump
sum or may be payable by installments. The mere fact that the capital sum is
payable by installment specified over a certain length of time will not convert
the nature of that payment from the capital expenditure into, a revenue
expenditure, but the payment of installments in such a case would always have
some relationship to the actual price fixed for the sale of the particular
undertaking. As there was no specific sum fixed in the present case as an additional
amount of price payable in addition to the-cash consideration and payable in installments
or by any particular method the annual payment 424 made to the Government could
not be held to be in the nature of capital expenditure. It was revenue
expenditure.[428A-C] Case-law referred to.
CIVIL APPELLATE JURISDICTION : Civil Appeal
No. 324 of 1965.
Appeal by special leave from the judgment and
order dated August 20,1963, of the Kerala High Court in I.T.R. Case No. 16 of
1962.
A. K. Sen, G. L. Sanghi, and B. R. Agarwala,
for the appellant.
S.T. Desai, S. K. Iyer and R. N. Sachthey for
the respondent.
The Judgment of the Court was delivered by
Ramaswami, J.-The appellant is a limited company incorporated under the
Travancore Companies Regulation and is carrying on business, in the State of
Kerala,of manufacturing sugar, running a distillery and also a tincture
factory. The appellant-company was floated with a veiw to taking over the
business assets of a company called 'Travancore Sugars Ltd. (which was being
wound up and in which the State Government held the largest number of shares),
the Government Distillery at Nagercoil and the business assets of the
Government Tincture Factory at Trivandrum. For this purpose an 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 agreed to be sold by the Government of Travancore to the
appellant company. Clause 3 of the agreement provided that the cash
consideration for the sale of assets of the Travancore Sugars Ltd. shall be 3
.25 lakhs rupees. Clause 4(a) provided that the cash consideration for the sale
of the Government Distillery shall be arrived at as a result of joint valuation
by the Engineers to be appointed by the parties. Clause 5(a) stated that the
cash consideration for the sale of assets of the Government Tincture Factory shall
be the value according to the books. Under cl. 4(b) and (c) of the agreement
the Government undertook to recognise the transfer of the licence from the
licensees of the Distillery to the appellant and to secure to it the
continuance of the licence for a continuous period of five years after the
termination of the then existing licence. Under cl. 5(b) of the agreement the
Government agreed to purchase the pharmaceutical products manufactured by the
appellant in the Tincture Factory, for its medical requirements. Under cl. 6 of
the agreement all books of account and connected documents are to be open to
inspection by the authorised officers of the Government. Under cl. 10 the
Government was entitled to nominate a director on the Board of Directors of the
appellant425 company who would not be entitled to any -voting power or to
interfere with the normal management of the company. Apart from the cash
consideration referred to in the agreement, cl. 7 of the said agreement
provided for further payments as follows:
" (7). The Government shall be entitled
to twenty per cent of the net profits earned by the company in every year
subject however to a maximum of Rupees forty thousand per annum, such net
profits for the purposes of this clause to be ascertained by deduction of
expenditure from gross income and also after(i) provision has 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
& Treasurers' remuneration." By another agreement dated January 28,
1947 the following clause was substituted for the above cl. 7 of the original
agreement:
"The Government shall be entitled to ten
per cent of the net profits of the Company in every year. For the purpose of
this clause net profits means the amount 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 Government
under the aforesaid cl. 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 The
Pondicherry-Railway Company v. C.I.T.(1) in disallowing this item of
expenditure. The appellant preferred an appeal against the order of the
appellate Assistant Commissioner to the Income-tax Appellate Tribunal which
held that the case came within the principle of the decision in British Sugar
and Manufacturers Ltd. v. Harris. Inspector of Taxes(2) 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 the appeal by the Company. At the instance of the respondent the
Tribunal referred the following question of law to the High Court 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 Government under the agreements dated (1) 5 I.T.C. 363. 58 I.A. 239.
(2) [1939] I.T.R. 101.
426 18-6-1937 and 28-1-1947 was allowable
under sec. 10 of the Income-tax Act?" By its judgment dated August 20,
1963, the High Court held that the payment of the aforesaid amount constituted
capital expenditure and was not allowable under s.10(2)(xv)of the Income Tax
Act. In this view the High Court felt it unnecessary to go into the merits of
the 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 Kerala dated August 20, 1963.
On behalf of the appellant Mr. Asoke Sen
submitted that the payment of Rs. 42,480/was not capital expenditure but was
expenditure of revenue nature which was allowable under s.
10(2) (xv) of the Act. It was pointed out
that the annual payments under cl. 7 were not part of the purchase price of the
assets. Reference was made to cls. 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
Government Tincture Factory. In addition to selling these asssets the
Government undertook obligations enumerated in cls. 4(b) and (c) and 5(b)
already referred to. It was :contended that the appellant agreed to make annual
payments to Government in consideration of these obligations. On behalf of the
respondent the opposite view-point was presented and it was said that 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 portion of the preamble
of the agreement dated January, 28, 1947.
"WHEREAS on 18th June 1937 an agreement
(hereinafter called 'the principal agreement) was entered into between M. R.
Ry. Rao Bahadur Rajyasevanirata N. Kunjan Pillai Avl., Chief Secretary to
Government acting for and on behalf of the said Government of His Highness -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, whereby the said Government
should sell and the company should purchase the assets including the lands of
the Travancore Sugars Ltd., with the buildings, out-houses, machinery and other
things attached thereto and more particularly described in the Schedule 'A'
annexed to the said principal agreement, the factory known as the Government
Distilleries situate at Nagercoil in South Travancore with lands, buildings,
machinery and other things attached thereto and more particularly described 427
in the Schedule 'B' annexed to the principal agreement, and all the assets of
the factory known as the Government Tincture Factory situated at Trivandrum and
more particularly described in the Schedule 'C' annexed to the principal
agreement for the cash consideration in the said principal agreement mentioned
and also in consideration inter alia that the Government should be entitled to
20 Y. (twenty per cent) 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
purposes of the said agreement to be ascertained after the deductions set out
in clause 7 of the said agreement." It is often difficult, in any
particular case, to decide and determine whether a particular expenditure is in
the nature of capital expenditure or in the nature of revenue expenditure. It
is net easy to distinguish whether an agreement is for the payment of price
stipulated in installments or for making annual payments in the nature of
income. The court has to look not only into the documents but also at the
surrounding circumstances so as to arrive at a decision as to what was the real
nature of the transaction from the commercial point of view. No single test of
universal application can be discovered for a solution of the question. The
name which the parties may give to the transaction which is the source of the
receipt and the characterization of the receipt by them are of little
consequence. The court has to ascertain the true nature and character of the
transaction from the covenants of the agreement tested in the light of
surrounding circumstances.
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., cls. 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 consideration there are
three 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 undertakings. There is
no reference, to any capital sum in this part of the agreement. On the
contrary, the very nature of the payments excludes the idea that any connection
SupCI/66-19 428 with the capital sum was intended by the parties. It is true
that the purchaser may buy a running concern and fix a certain price and the
price may be payable in a lump sum or may be payable by installments. The mere
fact that the capital sum is payable by installments spread over a certain,
length of time, will not convert the nature of that payment from the capital
expenditure into a revenue expenditure, but the payment of installments in such
a case would always have some relationship to the actual price fixed for the
sale of the particular undertaking. As we have already mentioned, there is
nonspecific sum fixed in the present case as an additional amount of price
payable in addition to the cash consideration and payable by installments or by
any particular method. In view of these facts we are of opinion that the
payment of the annual 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 overruled.
The view that we have expressed is borne out
by the decision of the Court of Appeal in Commissioners of Inland Revenue v.
36/49 Holdings. Ltd. (In Liquidation)(1). In
that case, an undertaking was sold and the price consisted of fixed amount and
a certain commission payable for an indefinite period.
The consideration in the particular agreement
which the Court of Appeal had to consider, which was in addition to the fixed
amount payable by the purchaser to the vendor, was I shilling for each bicycle
not being mechanically propelled bicycle without deduction and pound for each
mechanically propelled bicycle without deduction, and this was to be paid on
the turnover by the purchasing company. This sum of 1 shilling and pound was to
be paid without any limitation of time, and this sum was not related to any
special sum as being part of the price to be paid by the purchaser to the
vendor. In the course of his judgment, Lord Greene, Master of the Rolls observed
as follows at page 182 of the, report.
"The true nature of a sum payable to a
recipient for purposes such as the present is to be ascertained from all the
circumstances relevant to that matter-. The true nature of the sum is not
necessarily its nature in law, but its nature in business or in accountancy
whichever way one likes to put it, because from the legal point of view there
may be no difference whatsoever as between the parties between a capital and an
income sum. It may be totally irrelevant to the legal relationships into which
they are proposing to enter. When, however, the tertius gaudens, in the shape
of the Revenue, appears on the scene, that matter which as between the parties
may have been a matter of not the slightest importance becomes immediately a
matter of very great importance, and it is necessary to examine the
circumstances (1) [1943] 25 T.C. 173.
429 .lm15 of each individual case, including
any documents which require to be construed, in order to ascertain what is the
character to be attributed to the payment." The same view was taken by the
Bombay High Court in Commissioner of Income-tax, Bombay City v. Kolhia,
Hirdagarh Co. Ltd. Bombay(1). In that case, there was an agreement between the
proprietor of a colliery and C by which it was agreed to promote the assessee
company for the purpose of acquiring and carrying on the colliery. The purchase
price was fixed at rupees one lac which was to be discharged by the payment of
a sum of Rs. 75,000/in cash and the allotment of fully paid shares of the face
value of Rs.
25,000/to the vendor. It was also agreed that
the vendor should be paid the Minimum annual dividend of four annas for every
ton of coal raised from the colliery and if there was any deficit in any year
the company would make up such deficit, Under the draft Articles of Association
of the company the vendor was to get, in respect of the consideration for
shares, 500 preference shares or Rs. 50/each and a fixed cumulative
preferential dividend equivalent to four annas per ton of coal raised and
railed in each year. The vendor approved the draft articles and in a letter
stated that he should get four annas per ton permanently on all coals
despatched from the colliery every year, without any hindrance whatsoever. irrespective
of any loss or gain to the company. The assessee-company was incorporated and
the formal agreement of sale was entered into between it and the vendor.
Subsequently it was found impossible to pay to the vendor a fixed dividend and
therefore a fresh agreement was executed tinder which the vendor agreed to give
up all the dividends to which he was entitled and to permit the company to
convert the preference shares into ordinary shares. In consideration of this,
the company agreed to pay a commissioner to the vendor at the rate of four
annas per ton of steam and rubble coal and three annas per ton of slack coal
raised from the colliery and sold and rented by the company from the colliery.
The question arose whether the sum representing the commission paid by the
assessee company to the vendor under the terms of the agreement was a revenue
expenditure. It was held by the Bombay High Court that as the payment made by
the assessee company was a payment made for an indefinite period, a payment
made in relation to the turnover of the company and not in relation to its
profits, and as the payment had no bearing to any specific sum fixed as part of
the price for the purchase of the Undertaking, it was in the nature of a
revenue payment and not a capital payment.
On behalf of the respondent Mr. S. T. Desai
referred to the decision of the Judicial Committee in Minister of National
Revenue (1) 17 I.T.R. 545.
430 V. Catherine Spooner(1), In that case,
the assessee had sold all her right, title and interest in some land which she
owned in freehold to a company in consideration of a certain sum in cash, of
certain shares in the company and an agreement to deliver to her 10 per cent of
oil produced from the land. The transferee company, after it had commenced
operations, struck oil and raised some of it in the year of account, but did
not deliver to the assessee any part of the oil produced. The transferee
company sold the whole of it and paid over 10 per cent of the gross proceeds to
the assessee which she accepted in satisfaction of the royalties reserved to
her under the agreements The question arose whether the amount which the lady
received in lieu of the oil was 'annual profit or gain from any other source',
and the Appellate Court in Canada held that it was not so, but was a capital
receipt. On appeal the Judicial Committee agreed with the Appellate Court in
Canada that the case was not without its difficulties, but in the end they said
that they were not prepared to differ from the view of the transaction which an
eminent Judge like New combe, J. had taken and with which all his colleagues
had agreed. The decision of the Judicial Committee turned on special facts of
that case, viz., that the lady had bargained to receive her share in oil and
that there could be no profit or gain out of the transaction of that kind. The
case was an exceptional one and the ratio of that decision cannot be applied to
the present case where the facts are manifestly different. We may, however,
refer to the decision in Jones v. Commissioners of Inland Revenue(") where
property was conveyed in consideration of periodical payments, the payment
being a share of the profits of the business. In that case, a person sold his
interest in certain inventions and letters-patent for pound 750 in cash and a
percentage, called a royalty, payable for ten years on the sale of all machines
constructed under the patent. Of the sum of pound 750, pound 300 was paid in
cash, but the payment of the balance was secured by providing that it would
have to be paid by way of 5 per cent on the sale of the machines. It was
conceded by the Revenue that this 5 per cent was not to be included in
computing the total income of the transferor.
A question having arisen with regard to the
further 10 per cent. Rowlatt , J. observed as follows:
"The property was sold for a certain
sum, and in addition the vendor took an annual sum which was dependent upon the
volume of business done; that is to say, he took something which arose or fell
with the chances of the business. When a man does that he takes an income-it is
in the nature of income." The principle of this case applies to the present
case where the facts are closely parallel.
(1) [1933] A.C. 6 4.
(2) [1920] 1 K.13. 711.
431 It is not, however, possible for us to
finally determine this appeal because the High Court has not dealt with the
other questions arising in this reference. Even if the payment of the
commission to the Government by the assessee is not capital but revenue
payment, certain other questions arise for consideration in this case. In the
first place, it has to be determined whether the appellant is right in his
argument that the payment of the commission is tantamount to diversion of
profits by a paramount title. In this connection reliance was placed on behalf
of the appellant upon the decision in Raja Bajoy Singh Dudhuria v. Commissioner
of Income Tax Bengal(1) in which the assessee succeeded to the family ancestral
estate on the death of his father. Subsequently his step-mother brought a suit
for maintenance against him in which a consent decree was made directing the
assessee to make a monthly payment of a fixed sum to his step-mother and
declaring that the maintenance was a charge on the ancestral estate in the
hands of the assessee. In computing his income, the assessee claimed that the
amounts paid by him to the step-mother under the decree should be excluded. It
was held by the Judicial Committee that the sums paid by the assessee to his
stepmother were not 'income' of the assessee at all and that the decree of the
court by charging the appellant's whole resources with a specific payment to
his step-mother had to that extent diverted his income from him and had
directed it to his step-mother, and to that extent what he received for her was
not his income. It was not a case of the application by the appellant of part
of his income in a particular way; it was rather the allocation of a sum out of
his revenue before it became income in his hands. Reliance was also placed on
the decision of this Court in Poona Electric Supply Co. Ltd. v. Commissioner of
Income Tax.
Bombay City(2) in which a distinction was drawn between
real profits ascertained on commercial principles and profits fixed by statute
for a specified purpose. In the second place, the respondent has contended that
the transaction should be treated as a joint venture with an agreement to share
profits between the appellant ,and the Government. In the third place, the High
Court has to ,examine whether the requirements of s. 10(2)(xv) have been satisfied
in this case. On behalf of the respondent the argument was presented that the
payment of commission was a payment out of the profits of the appellant on
condition of profits being earned and that it was not a payment made to earn
profits. Reference was made to the decision of the Judicial Committee in
Pondicherry Railway Co. Ltd. v. Commissioner of Income-tax.(3) The opposite
view-point was presented on behalf of the appellant and it was argued that the
payment of the commission was a payment wholly and exclusively laid out for the
purpose of business and reference was made to the decision of the Judicial
Committee in Indian Radio (1) [1933] I.T.R. 135. (2) 57 I.T.R. 521.
(3) 5 I.T.C. 363.
432 and Cable Communication Co. Ltd. v.
Commissioner of Income tax(1) and to the decision of the Court of Appeal in
British Sugar Manufacturers Ltd. v. Harris (Inspector of Taxes).(2) It is
necessary that the High Court should consider all these aspects of the case
before furnishing an answer to the question of law referred to it.
For these reasons we allow this appeal, set
aside the judgment of the High Court of Kerala dated August 20, 1963 and remand
the case for being reheard and dealt with in accordance with the directions
given in this judgment. The parties will bear their own costs up to this page
G.C Appeal allowed.
(1) [1937] 5 I.T.R. 270.
(2) [1939] I.T.R. 101.
Back
