# C.I.T. WEST BENGAL II, CALCUTTA v. COAL SHIPMENT (P) LTD - **Citation:** [1972] 1 S.C.R. 1089 - **Court:** Supreme Court of India - **Decided:** 1971-10-14 - **Bench:** 1<. S. Hegde, A. N. Grover, H. R. Khanna - **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/c-i-t-west-bengal-ii-calcutta-v-coal-shipment-p-ltd-5330 - **Pages:** 12 ## Headnote Income-tax Act, (II of 1922)." 10(2)(xv)-Payments made to rival trader to ward off cofnpetition-When constitutes revenue or capital expen•diture. 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 supp1ied various quantities of coal to the respondent and tm respondent made .payments as per the agreement. The respondent claimed the payments as admisstuk expenditure under s. 10(2) (xv) of thi> Income-tax Act. 1922, duting the relevant assessment years. The Department held that they were payments. to secure a monopoly and were therefore not allowable as reve11ue •x· penditure. 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 mannel', 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 therefot e. the· expenditure was attributable to revenue and not to capital. and held in favour of the assessec. The High Court, on reference, agre~ing with the· findings of the Tribunal and holding that the consideration was not ouid once for all but was related to uncertain shipments to be mad~, decided io· favour of the assessee. In appeal to tnts Court it was contended tb.at though the payment for assistance to the respondent i11 procuring coal was an item of revenueexpenditure, that part of the payment which was made because of L agreeing,, not to export coal during the subsistence of the agreement constituted a L:apital expenditure and not a revenue expenditure. F 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 the·re 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 G 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, beso transitory and ephemeral that it can be terminated at any time at the· volition of any of the parties. [1096 B; 1097 B-'C] H Further, the payments were relaied to the. actual shipments of coal in tbe course' of the trading activities of the respondent and had no relation to the capital value of the assets. The payments were not related t Income-tax Act. 1922, duting the relevant assessment years. The Department held that they were payments. to secure a monopoly and were therefore not allowable as reve11ue •x· penditure. 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 mannel', 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 therefot e. the· expenditure was attributable to revenue and not to capital. and held in favour of the assessec. The High Court, on reference, agre~ing with the· findings of the Tribunal and holding that the consideration was not ouid once for all but was related to uncertain shipments to be mad~, decided io· favour of the assessee. In appeal to tnts Court it was contended tb.at though the payment for assistance to the respondent i11 procuring coal was an item of revenueexpenditure, that part of the payment which was made because of L agreeing,, not to export coal during the subsistence of the agreement constituted a L:apital expenditure and not a revenue expenditure. F 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 the·re 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 G 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, beso transitory and ephemeral that it can be terminated at any time at the· volition of any of the parties. [1096 B; 1097 B-'C] H Further, the payments were relaied to the. actual shipments of coal in tbe course' of the trading activities of the respondent and had no relation to the capital value of the assets. The payments were not related t~ 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 D E F G H ; A B c D E F G H • C.J.T. v. COAL SHIPMENT (P) LTD. (Khanna, J.) 1091 of the said association. When Ml s. H. V. Low & Co. learnt of th~ resumption of coal export to Burma by the respondent in 1946, they also expressed intention to export coal to Burma. Thereupon the rtwo companies came to an und·~rstanding and arrived at a mutual arrangement or agreement on: the following lines :- ( i) Mis. H. V. Low & Co. Ltd. would not export coal to Burma durinp; the subsistence of the· agreement. (ii) Mis. H. V. Low & Co. Ltd. would assist the respondent in procuring coal for shipment ito Burma. (iii) The respondent would carry on the coal shipping business and pay Mis. H. V. Low & Co. Ud. @Rs. -151. per ton (subsequently raised to ;Rs. l-5- per \on) of coal shipped to Burma. According to the respondent, the last shipment of coal under the above arrangement was made in June, 1954 a~ter 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:ts. H. V. Low & Co. Ltd. or their nominees in pursuance 9f the aforesaid agreement during the period of five accounting years from 1st April, 1950 to March 31, 1955 :- Rs. 1951-52 . 91,149 1952-53 . 1,77.898 19'53-54 . 3,03,631 1954-55 . 2,32,355 1955-56 . 79,917 The amounts mentioned above were taxed-in the hands of Mis. 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 Mis. 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 I.ncome-tax Officer. When the matter came up in second appeal before the Incometax Appellate Tribunal, the Tribunal found that there was some !092 SUPREME COURT REPORTS [1972] l S.C.R. discrepancy in the facts stated on behalf of the assessee and the Revenue. The Tribunal thereupon required the respondent company to swear an affidavit in support of the facts relied upon by it. In pursuance thereof, Sir Walter Michelmore, Director o[ Managing Agents of the respondent compa.ny filed an affidavit. Sir Walter was also examined orally before the Tribunal. The case was thereupon remanded 'to the Income-tax Officer to ver1fy the facts as stated in the affidavit of Sir Walter and re_port 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 affirm~ tive, 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 o& the alleged agreement in the i.nterest of the respondent's trade. The version of the respondent about its agreement with Mis. 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 sub.sistence of the arrangement. The agreement was found to have been acted upo.n and it was held that M/s. H. V. Low & Co. Ltd. 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 o,n Burma trade ~nd 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, attribuwble to revenue and not to capital. As such, they were held to be pem1issible expe,nditures 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 payme.nts 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 ?" A B c D E F G H • A 8 c D E F G H· c.r.T. V. COAL SHIPMENT ( P) LTD. (Khanna, J.) 1093 It was not disputed before the High Court that there wa3 &n agreement between the respondent and M/s. H. V. Low & Co. Ltd. on terms stated by the respondent and that the payment; in question were made under that agreement. The High Court hdd that the arrangement entered into by the respondent with Mis. H. V. Low & Co. Ltd. was not such as was likely to have an enduring beneficial effect. ln the opinion of the High C Jurt, there was no certainty of duration and the arrangement could b.~ 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. Th·~ arrangement, it was further held, did not create any monopoly or bring about any capital advantage to the assessee. The respondent was held en- , titled 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 ass~sscc. 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. Ltd. 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 agreement. 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. ".· Low & C?. Ltd. having agreed riot to export coal to Burma durmg 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. T'· ~ 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 ierminated at any time, according to the learn~d counsel, 1094 SUPREME COURT REPORTS [ 1972] l 5.C.R. 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. Palkhiwala's submission. 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 ~n the context of the circumstances of an individual case. ~onsiderable difficulty is experienced in border line cases. It was in this connection that Hidayatullah, J. (as he then was) observed in Abdul Kayoom v. Commissioner 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.('), 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 A B c [} E F G down in the above case, whether it was an expenditure forming H t "part of the cost of the income-earning machine or structure" as (!) 441.T.J. 689. (2) 10 T.C. 155. A B c D E F G • H C.I.T. v. COAL SHIPMENT (P) LTD. (Khanna,!.) I 095 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 0f a capital nature. fo the caoe 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(') and it was observed that the expression was used to denote art 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 instalments. 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