1972-VIL-308-AP-DT

Equivalent Citation: [1973] 87 ITR 650

ANDHRA PRADESH HIGH COURT

Date: 14.06.1972

COMMISSIONER OF INCOME-TAX, AP

Vs

BOWRISANKARA STEAM FERRY CO.

BENCH

Judge(s)  : SRIRAMULU., ALLADI KUPPUSWAMI.

JUDGMENT

The judgment of the court was delivered by

ALLADI KUPPUSWAMI J.- The assessee is a registered firm carrying on business as ferry contractors plying launches across the river, Godavari. The right to ferry was auctioned for a year and the petitioners were the highest bidders. The assessee paid sums totalling Rs. 21,600 to sixteen individuals who were prospective bidders at the auction in order to prevent them from competing with the petitioners at the auction. In their return for the assessment year 1964-65 (accounting period April 1, 1963, to March 31, 1964) the assessee claimed the sum of Rs. 21,600 referred to above as a deduction on the ground that the amount was paid for shutting out the other bidders. The Income-tax Officer held that this deduction was not admissible. This view was confirmed by the Appellate Assistant Commissioner on appeal. On further appeal the Tribunal held that a sum of Rs. 2,000 was paid on May 8, 1964, beyond the accounting year and, therefore, the assessee cannot claim allowance of that payment. In regard to the balance of Rs. 21,600 they differed from the view of the income-tax authorities and held that the said sum could be deducted in computing the assessee's income as it was a revenue expenditure.

At the request of the Commissioner of Income-tax, the Tribunal has referred to this court for decision the question:

" Whether, on the facts and in the circumstances of the case, the assessee was entitled to deduct as revenue expenditure the said sum of Rs. 21,600."

Under section 37 of the Income-tax Act " any expenditure (not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head 'Profits and gains of business or profession' ". The expenditure with which we are concerned is not of the nature described in sections 30 to 36. Therefore, the question for consideration is:

(a) Whether the expenditure is not in the nature of capital expenditure?

(b) Whether it was laid out or expended wholly and exclusively for the purposes of the business?

The distinction between capital expenditure and revenue expenditure has been the subject-matter of several decisions. A number of tests have been laid down from time to time which would help the court in coming to a conclusion whether an expenditure is business expenditure or a capital expenditure. One test propounded is that capital expenditure is a thing that is going to be spent once and for all and revenue expenditure is a thing which is going to recur every year : Vide Vallambrosa Rubber Company v. Farmer. Another test which has been laid down in Atherton v. British Insulated and Helsby Cables Ltd. and followed in a number of decisions is " 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, 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."

The third test which has been applied is based upon the distinction between fixed and circulating capital : Vide John Smith and Son v. Moore. It is also noted in some cases that the court has to find out whether the expenditure incurred is to acquire the concern or to carry on the concern. In the former, it would be capital expenditure and in the latter it would be business expenditure. But, it has throughout been recognised that each of these tests is not conclusive, the question whether a particular expenditure is a capital expenditure or a revenue expenditure has to be decided on the facts of each case and it is not desirable to formulate any fixed set of principles. This court in a recent decision in R.C. 48/69 dated 29-11-71 has elaborately considered ten principles bearing upon this question. It enumerated ten principles bearing upon this question. This court, however, observed that these principles are neither exhaustive nor intended to be. They serve as guidelines to solve the problem that is before the court.

In this case the most important circumstance that has to be borne in mind is that the ferry contract is only for a period of one year. The amounts paid by the assessee to buy off competition were paid only for the purpose of securing that advantage during that year. It cannot, therefore, be said that these amounts were paid for securing an enduring advantage. They were paid in order to enable the assessee to derive more profits in the business by reducing the lease amount payable to the Government for operating the ferry. It was thus an amount paid for the purpose of the business. It cannot be said as contended by the learned counsel for the income-tax department that it was paid for the purpose of acquiring the business and not for the purpose of running it.

A number of decisions were cited before us, especially those relating to lump sum amounts paid for the purpose of buying off competition and it was argued on the strength of those decisions that the expenditure incurred is in the nature of capital expenditure. In particular, reference was made to the decision of the Supreme Court in Assam Bengal Cement Co. Ltd. v. Commissioner of Income-tax. There, a lease of certain limestone quarries was granted for a period of twenty years. A sum of Rs. 40,000 consisting of two items, Rs. 5,000 and Rs. 35,000, was paid as protection fee. It was held that this amount was in the nature of capital expenditure. It is to be noted that this sum was paid to secure an advantage of having the sole monopoly for the entire period of the lease, namely, 20 years, and, thus the assessee had secured an enduring advantage. We do not think that this case and other cases relied upon by the learned counsel for the income-tax department where lump sums were paid for buying off competition or protection, and where the assessee secured an advantage for a long term, are of any help or assistance in deciding this case where we are concerned only with a right to ferry for a period of one year.

In M. A. Jabbar v. Commissioner of Income-tax an individual took lease for a term of 11 months. The lease amount of Rs. 82,500 was paid by the appellant in two sums. The Supreme Court held that this amount was in the nature of revenue expenditure. In addition to the other circumstances relied upon by the Supreme Court, they laid stress on the fact that the lease was for a very short period of 11 months. They, therefore, held that the expenditure incurred was not related to the acquisition of an asset or a right of permanent character. It was for the specific object of enabling the assessee to remove sand lying loose on the surface which was stock-in-trade of the business of the assessee, so that the expenditure has to be regarded as revenue expenditure.

It was not contended and it cannot be contended in view of the decisions that the lease amount paid for obtaining the right to operate the ferry is not in the nature of a revenue expenditure and was not deductible. We do not see any difference in the present case between the lease amount and the amount paid to the other intended bidders in order to prevent them from competing and thus reduce the lease amount so that ultimately the assessee may derive more profits.

A case very near in point is that of Commissioner of Taxes v. Nchanga Consolidated Copper Mines Ltd. The assessee-company which was carrying on the business of copper mining together with two other companies entered into an agreement with one of them that it should cease production for one year for which certain compensation should be paid. It was held that the compensation paid was an allowable deduction. The tests laid down in the various decisions in order to see whether an expenditure is a capital expenditure or a business expenditure were discussed in extenso. Their Lordships of the Privy Council then observed that in regard to the challenged expenditure the company had bought only the right to have the second company out of production for 12 months. They observed:

" 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 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 income-earning structure of the business."

The compensation paid to the company resembled, in their Lordships' view, the outlay of business, " in order to carry it on and to earn profits out of this expense as an expense of carrying it on. "

The facts of this case are almost similar to the facts in the above case.

In V. Damodaran v. Commissioner of Income-tax the Kerala High Court had to consider a case where a forest contractor paid sums to rival forest contractors in order to persuade them not to compete in an auction of a coupe held by the forest department. It was held that the amount paid was allowable.

As pointed out by the Supreme Court in Bombay Steam Navigation Co. (1953) Private Ltd. v. Commissioner of Income-tax, the question whether a particular expenditure is revenue expenditure incurred for the purposes of business must be determined on a consideration of all the facts and circumstances, and by the application of principles of commercial trading. The question must be viewed in the larger context of business necessity or expediency.

Viewing the expenditure incurred in this case in such a context we are of the view that the expenditure was in the nature of a revenue expenditure and we answer the question referred to us accordingly.

The Commissioner of Income-tax will pay the costs of this reference to the assessee. Advocate's fee Rs. 250.

 

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