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PETITIONER: M.   K. BROTHERS (P) LTD.

       Vs.

RESPONDENT: C.I.T. KANPUR

DATE OF JUDGMENT29/08/1972

BENCH: KHANNA, HANS RAJ BENCH: KHANNA, HANS RAJ HEGDE, K.S. REDDY, P. JAGANMOHAN

CITATION:  1973 AIR  524            1973 SCR  (1)1077  1973 SCC  (3)  30  CITATOR INFO :  RF         1975 SC1945  (19)

ACT: Income-tax  Act (11 of 1922)-Amount due to company from  its sole selling agent-Liability undertaken by appellant to  pay amount  in consideration of its appointment as sole  selling agent-If Capital or revenue expenditure.

HEADNOTE: In 1955, a large amount was due to a corporation from a firm which  was then its sole selling agent., As a result  of  an agreement  between the. appellant, the corporation, and  the firm, the appellant undertook to discharge the liability  of the  firm in consideration of its being appointed  the  sole selling  agent in place of the firm.  In 1956, an  indenture was  executed by the corporation and the appellant  relating to  the appointment of the appellant as sole selling  agent, and  in this indenture, it was agreed that  the  corporation should  be authorised to retain an amount equal to  1/7  ,of the  trade discount due to the. sole selling agents  with  a minimum of Rs. 50,000 a year, for discharging the liability, so that, the amount payable to the sole selling agents would be the amount payable as trade discount minus the  aforesaid amount  retained  by  the corporation.   Clause  13  of  the indenture  provided that, the selling agents shall  have  no claim  whatsoever  to any such amounts retained out  of  the normal  trade  discount and adjusted in the account  of  the firm as ’if the amount so retained was not payable to  "hem. For  the assessment year 1956-57, out  of  the  commission payable  to the appellant as selling agents the  corporation retained a sum under the contract for adjustment against the outstanding  dues  of  the  firm.   The  appellant,  in  its statement  of  account,  credited the  full  an-.,-)Lint  of commission  to  its  profit and loss account,  and  the  sum retained  by  the  corporation  was  shown  as  a  deduction therefrom.   The Department, the Appellate Tribunal and  the High  Court  on reference, disallowed the deduction  on  the ground that it was a capital expenditure and not a  revenue expenditure and held that the amount was liable to tax. Dismissing the appeal to this Court. HELD : (1) The answer to the question whether the money paid

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was  a revenue expenditure or capital expenditure  does  not depend  upon  whether the amount paid is large or  small  or whether  it  was paid in a lumpsum or  by  instalments.   It depends upon the purpose for which the payment had been made and  the expenditure incurred.  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 not made in a lumpsum but by instalments over a period of time.   If  any  such asset or advantage  for  the  enduring benefit  of the business ’is thus acquired or  brought  into existence  it would be immaterial whether the source of  the payment was capital or the income of the concern or  whether the payment was made once for all or was made periodically. On  the contrary, payment made in the course of and for  the purpose of carrying on business or trading activity would be revenue  expenditure even though the payment is of  a  large amount  and was not to be made periodically.  The  aim  and. object 20-L172SupCI/73 1078 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. [1082 C-H] Assam Bengal Cement Co. Ltd. v. Commissioner of Income  Tax, West Bengal [1955] 27 I.T.R. (34 on p. 45) and P. B. Divecha (Deceased)  and  After  Him His  Legal  Representatives  and Another v. Commissioner of Income Tax, Bombay City 1  [1963] 48 I.T.R. 222, followed., (2)  In the present case, the appellant got the sole selling agency  in consideration of its agreeing to pay  the  amount which was then due from the firm to the corporation.  If the appellant paid the amount in a lump sum in consideration  of its being appointed the sole selling agent the payment would have  constituted  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 a lump sum but was paid in instalments through deductions out of the commission  due to the appellant would not make any difference. [1082A-C] (3)  Even  if  under cl. 13 of the indenture  the  appellant could  not  make  any claim to the  amount  which  had  been retained  by  the  corporation it  would  make  no  material difference  so  far as the true nature of  that  amount  was concerned.   The amount was deducted by the corporation  ’in pursuance  of  the agreement entered into by  the  appellant with  the corporation and the firm, according to which,  the appellant  had to pay that amount in the form of  deductions out  of its commission in consideration of  being  appointed the  sole  selling agent.  It was not a case of  the  appli- cation  of income to discharge a liability incurred  in  the course  of running the business but a  liability  undertaken for  the purpose of acquiring the sole selling agency  right which was an asset of a capital nature. [1083 D-F]

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.

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The Judgment of the Court was delivered by Khanna, J. This appeal on certificate granted by the Allah&, bad  High  Court is directed against the  judgment  of  that court 1079 whereby it answered the following two questions referred  to it  under section 66(1) of the Indian Income Tax  Act,  1922 (hereinafter  referred to as the Act) against the  appellant 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,  the               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 assessment  year  1956-57.   The appellant  is  a private limited company  and  Kailash  Nath Agarwal  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 yarn 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  of  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 Sharma  &  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 following 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  same  to  our  firm’s  account  with  the               Corporation."               1080 On  the same day, i.e. March 23, 1955 Kailash  Nath  Agarwal addressed a letter to the Managing Director of BIC informing him  ,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

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             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. 50,0001-  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 1, 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 effect  to the said agreement generally and in particular to retain  an amount equal to one-seventh of the trade discount of  1-3/4% due to the sole selling agents with a minimum of Rs. 50,0001 per  annum  so that the amount payable to the  sole  selling agents shall be the amount payable at the rate of II%  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               1081               the  trade  discount  of 1  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 successor, or assigns  only  so               long  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  amounts               retained  out of their normal  trade  discount               and  adjusted in the account of M/s  Sharma  &               Co.  as  if  the amount so  retained  was  not               payable to them." During the year under reference, the commission as per terms of  the  indenture  dated  July  31,  1956  payable  to  the appellant amounted to Rs. 2,06,283.  Out of this amount, Rs.

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43,333   were  retained  by  BIC  under  the  contract   for adjustment  against the outstanding dues of Sharma & Co.  in accordance  with  the  terms  of  the  indenture.   In   its statement of account the appellant credited 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 as by  the Income Tax Appellate Tribunal in second appeal.   On application  filed by the appellant, the, Tribunal  referred the  questions  reproduced earlier to the High  Court.   The High  Court, as stated.. above, answered the  two  questions against the appellants. 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 was in error in deciding  this matter against the appellant-.  There is, in our opinion, no force in this contention and we agree with Mr. Ram Chandran, learned counsel for the respondent, that the judgment of the High  Court should be, ,upheld.  It would appear  from  the resume of facts given above that in March 1955 an amount  of Rs. 8,39,350/15/6 was due to BIC from the firm Sharma &  Co. who was the previous sole selling agent of the Kanpur Cotton Mills.  As a result of agreement between the appellant, BIC and  Sharma & Co. the appellant undertook to  discharge  the liability  of  Sharma & Co. in lieu of being  appointed  the sole  selling agent of the Kanpur Cotton Mills, in place  of Sharma & Co. It can, therefore, be said that 1082 the  appellant  got the sole selling agency  of  the  Kanpur Cotton  Mills  in consideration of its agreeing to  pay  Rs. 8,39,350-15-6 which was the amount due from Sharma & Co.  to BIC.   It  is  not disputed by Mr. Maheshwari  that  if  the amount of Rs. 8,39,350/ 1516 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  constituted  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 instalments through deductions out 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 revenue-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 instalments, as it does upon the purpose for which the  payment has been made and expenditure incurred.  It  is the  real  nature and quality of the payment  and  not  *the quantum  or  the  manner of the payment  which  would  prove decisive.  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 lump  sum but by instalments over a period of time.  On the contrary, payment  made  in  the  course of and  for  the  purpose  of carrying  on business or trading activity would  be  revenue expenditure even though the payment is of a large amount and has not to be made periodically.  As observed by this Court, in the case of Assam Bengal Cement Co. Ltd. v. Commissioner of  Income Tax, West Bengal(1), if the expenditure  is  made for  acquiring  or  bringing  into  existence  an  asset  or advantage  for  the enduring benefit of the business  it  is properly  attributable  to capital and is of the  nature  of

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capital  expenditure.  If on the other hand it is  made  not for the purpose of bringing into existence any such asset of 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 enduring benefit  of the business is thus acquired or brought into existence,  it would  be immaterial whether the source of the  payment  was the  capital  or the income of the concern  or  whether  the payment was made once and for all or was made  periodically. The  aim and object 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  connection  refer  to  the   following observations  of  this Court .in the case of P.  H.  Divecha (Deceased)  and  After  Him His  Legal  Representatives  and Another v. Commissioner of Income Tax, Bombay City 1(2). (1)  [1955] 27 I.T.R. 34 (on p. 45). (2) [1963] 48 I.T.R. 222. 1083               "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 described as "pay" "remuneration",               etc., but that does not determine its quality,               though  the name by which it has  been  called               may  be  relevant  in  determining  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 produ ctive  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 has referred to clause 13 of  the  indenture reproduced above and has contended that the appellant  could make  no claim to the amount of Rs. 43,3.33 which  had  been retained  by BIC, This fact.. in our opinion would  make  no material difference so far as the true nature of that amount was  concerned, The amount was deducted by BIC in  pursuance of  the  agreement entered into by the appellant  with  BIC and  Sharma & Co., according to which the appellant  had  to pay  that  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 appeal consequently fails and is dismissed with costs. V.P.S.                           Appeal dismissed. 1084