# COMMI~SIONER OF INCOME-TAX, KERALA, ERNAKULAM v. TRAVANCORE SUGAR & CHEMICALS LTD

- **Citation:** [1973] 2 S.C.R. 738
- **Court:** Supreme Court of India
- **Decided:** 1972-10-27
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/commi-sioner-of-income-tax-kerala-ernakulam-v-travancore-sugar-chemicals-ltd-5895
- **Pages:** 14

## Headnote

738
COMMI~SIONER OF INCOME-TAX, KERALA,
ERNAKULAM
v.
TRAVANCORE SUGAR & CHEMICALS LTD.
October 27, 1972
[P. JAGANMOHAN REDDY AND I. 0. DUA, JJJ
Indian Income· Tax Act 1922, Section 10(2) (xv)-Payment of fixed
percentage of the profits annually, apart from the carh consideration, for
:aking over of the undtrtaklng, whether deductible,
The appellant Company was floated with a ~iew to take over the assets
of the three Government concerns, nllllllely, Sugar Factory, a distillery and·
tincture factory and to run them.
Clause 3 of the agreement provided
that the cash consideration !for the sale of assets shall be Rs. 3.25 lakhs.
Clause 4(b) a.nd (c) provided for the continuation of the distillery licence
in favour of the appellant. The Government wa.s to purchase the pharmaceutical products from the company under clause S(b). The Government had a right to nominate a Director on the Board of llirectors.
Clause 7 of the agreement read "Government shall be entitled to 20%
of the net profits earned by the CompBllly in every year subject, however,
to the maximum of Rs. 40,000/- per annum.
Such net profits for the
purpose of this clause to be ascertained by ded\lctions of expenditure from
gross income and also after (i) provision has been made for depreciation
at net loss than the rates of allowance provided for in the Income Ta«
Act for the time being in force, and (ii) payment of the Secretaries and
Treasmer's remuneration".. By subsequent agreement, the percentage was
reduced to 10%. For the assessment yeac 1958-59, the amount payable
10 the Government under the aforesaid clause 7 came to Rs. 42,480/ -.
The appellant claimed that the payment of the said amount
was
an
expenditure of the revenue nature
and
was
allowable
under
section 10(2)(xv) of the Act.
The claim was disallowed by the Income
Tax Officer and the Appellafe A5'istant Commissioner, but was allowed
by the Tribunal holding that the paymClr>t was an expenditure made in
order to earn profits of the business
and not an expenditure paid out
of the earned profits. At the instance of tbe respondent, the Tribunal
referred the following question of law to the High Court of Kerala.
"Whether on 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 June 18, 1937 and January 28, 1947 was allowable u/s
10 of the Income-tax Act." The Kerala High Court held that the payment constituted capital expenditure and was not allowable under section
10(2) (xv) of the Income-tax Act. On appeal by the appellant to Supreme
Court, the Supreme Court reversed the High Court judgment and ;·emanded
the matter to the High Court. On remand, the High Court held that the
said expenditure was deductible.
Rejecting the appeal,
HELD : (i) Once the crucial question is decided that the expenditure
is a revenue expenditure and not of capital nature, the answer to the
reference should be in the affirmat;ve.. Whether the expenditure is to be
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C.I.T. v. TAAVANCORE SUGAR (Jaganmohan Reddy, !.)
739
further considered as expenditure incurred at the very inception deductib:e
as an over-riding charge on the whole of the profit making apparatus
fruling under section 10(1) or whether it is an expenditure which apart
from it being a revenue expenditure is also wholly and exclusively laid
out for the purpose of trade, would not make any difference to the answer.
[7460]
(ii) Held further, the ::,ssessee had no choice at the time of the inception as a condition of its coming into existence to agree to the several
terms stipulated by the Government for transferring the profit-earning assets.
There are obUgations in th<> contract which are inter-linked with the
transf\!r of assets notwithstanding the fact that the Company paid a pricl!
fixed for the transfer of assets.
Under the contract, the comp2.,y had t<>
engage Qr,Jy the Travancore labour and staff, that it had to take apprcn·
tices recommended by the Governm

## Text

738
COMMI~SIONER OF INCOME-TAX, KERALA,
ERNAKULAM
v.
TRAVANCORE SUGAR & CHEMICALS LTD.
October 27, 1972
[P. JAGANMOHAN REDDY AND I. 0. DUA, JJJ
Indian Income· Tax Act 1922, Section 10(2) (xv)-Payment of fixed
percentage of the profits annually, apart from the carh consideration, for
:aking over of the undtrtaklng, whether deductible,
The appellant Company was floated with a ~iew to take over the assets
of the three Government concerns, nllllllely, Sugar Factory, a distillery and·
tincture factory and to run them.
Clause 3 of the agreement provided
that the cash consideration !for the sale of assets shall be Rs. 3.25 lakhs.
Clause 4(b) a.nd (c) provided for the continuation of the distillery licence
in favour of the appellant. The Government wa.s to purchase the pharmaceutical products from the company under clause S(b). The Government had a right to nominate a Director on the Board of llirectors.
Clause 7 of the agreement read "Government shall be entitled to 20%
of the net profits earned by the CompBllly in every year subject, however,
to the maximum of Rs. 40,000/- per annum.
Such net profits for the
purpose of this clause to be ascertained by ded\lctions of expenditure from
gross income and also after (i) provision has been made for depreciation
at net loss than the rates of allowance provided for in the Income Ta«
Act for the time being in force, and (ii) payment of the Secretaries and
Treasmer's remuneration".. By subsequent agreement, the percentage was
reduced to 10%. For the assessment yeac 1958-59, the amount payable
10 the Government under the aforesaid clause 7 came to Rs. 42,480/ -.
The appellant claimed that the payment of the said amount
was
an
expenditure of the revenue nature
and
was
allowable
under
section 10(2)(xv) of the Act.
The claim was disallowed by the Income
Tax Officer and the Appellafe A5'istant Commissioner, but was allowed
by the Tribunal holding that the paymClr>t was an expenditure made in
order to earn profits of the business
and not an expenditure paid out
of the earned profits. At the instance of tbe respondent, the Tribunal
referred the following question of law to the High Court of Kerala.
"Whether on 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 June 18, 1937 and January 28, 1947 was allowable u/s
10 of the Income-tax Act." The Kerala High Court held that the payment constituted capital expenditure and was not allowable under section
10(2) (xv) of the Income-tax Act. On appeal by the appellant to Supreme
Court, the Supreme Court reversed the High Court judgment and ;·emanded
the matter to the High Court. On remand, the High Court held that the
said expenditure was deductible.
Rejecting the appeal,
HELD : (i) Once the crucial question is decided that the expenditure
is a revenue expenditure and not of capital nature, the answer to the
reference should be in the affirmat;ve.. Whether the expenditure is to be
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C.I.T. v. TAAVANCORE SUGAR (Jaganmohan Reddy, !.)
739
further considered as expenditure incurred at the very inception deductib:e
as an over-riding charge on the whole of the profit making apparatus
fruling under section 10(1) or whether it is an expenditure which apart
from it being a revenue expenditure is also wholly and exclusively laid
out for the purpose of trade, would not make any difference to the answer.
[7460]
(ii) Held further, the ::,ssessee had no choice at the time of the inception as a condition of its coming into existence to agree to the several
terms stipulated by the Government for transferring the profit-earning assets.
There are obUgations in th<> contract which are inter-linked with the
transf\!r of assets notwithstanding the fact that the Company paid a pricl!
fixed for the transfer of assets.
Under the contract, the comp2.,y had t<>
engage Qr,Jy the Travancore labour and staff, that it had to take apprcn·
tices recommended by the Government and train them and that there \\'06
no limitation as to the period the company had to pay the annual sum
out of the net profits, notionally computed for that purpose a'fter deduction
of certain items mentioned in clause 7.
All this appears to he stipulation
for payment of an amount for a concession granted to it and is thcrcf('lr\!
deductible at its inception. [751A}
(iii) Held further, that clause (xv) of Sub-section 2 of &c. IO is confined to tl1e payments wholly "'"d exclusively laid out for the purpose of
business in which expenditure of a revenue nature would also be include<l
along with the expenditure of various other categories.
The contention
that the said clause covers expenditure of both the capiml and revenue
nature and also payments wholly ''"d exclusively laid out for the purpo5'
of business, was rejected.
Pondicherry Rly. Co. v. /nC()HU'·tax Con11nissio11£•r, 58 I.A. :!39, The
Union Cold Storage Co. Ltd. v. Adamson (H.M. Inspector of Taxes).
16 T.C. 292 at 331. Indian Radio Ere. Co. Ltd. v. Commissioner of
Income-tax, Bombay. 5 J. T. R. 270 and British S11gar Ma1111fact11rer., Ltd,
v. Harris, 7 I.T.R. 101=11938) 2 KB 2W. referred to.
CIVIL APPELLATE Jur1so1CTION :
Civil Appeal No. 2161
of 1969.
p
.
Appeal by certificate from the judgment and order
dated
April 5, 1968 of the Kerala High Court at Ernakulam in Incometax Referred Case No. 16 of 1962.
N. D. Karkhanis, B. D. Sharma and R. N. Sachthey, for the
appellant.
G
Sukumar Mitra and T. A. Ramachandran, for ~he respondent.
H
The Judgment of the Court was delivered by
JAGANMOHAN REDDY J.-This is a second round of litigation
because on the first occasion this Court allowed Appeal No. 324
of J 965 on September 20, 1966 and remanded the case for being re-heard and dealt with in accordance with the directions
given in that judgment. After the matter went back a Division
Bench of the Kerala High Court, Raghavan, J. (as he then was)
and Issac, J. heard the matter but as there was difference of opinion
740
SUPREME COURT REPORTS
(1973] 2 S.C.R.
between the learned Judges the case was placed before Mathew,
J. (as he then was) who agreed with the judgment of Raghavan,
J. This is an appeal against Iha~ judgment by certificate.
Inasmuch as this Court had earlier considered the case we may take
1he facts as stated in the following passage in that judgment:
"The appellant is a limited company incorporated under the
T ravancore Companies Regulation and is carrying on business,
in ~he State of Kerala of manufacturing sugar, running a distillery
and also a tincture factory. The appellant-company was floate<!
with a view to taking over the business assets of a company called
·Travancore Sugars Ltd." (which was being would up and in
-.,hich the State Government held the largest number of shares),
1he Government Distillery at Nagercoil and the business assets of
:he Government Tincture Factory at Trivandrum. For this purpose
:ill 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
:<greed to be sold by the Government of Travancore to the appeliant-company. Clause 3 of the agreement provided that the cash
consideration for the sale of asseffi of the Travancore Sugars Ltd.
hall be 3.25 lakh rupees. Clause 4(a) provided that the -:ash
consideration for the sale of the Government DLtillery shall be
Jrrived at as a result of joint valuation by the engineers to be
:ippointed by the parties. Clam;e 5(a) stated that the cash consideration for the
sale of assets of the
Government Tincture
F:1ctory shall be the value according to the books. Under clause
.'.(b) and (c) of the agreement the Government undertook to recog-
:;ise the transfer of the licence from the licensees of the distillery
:o the appellant and to secure to it the continuance of the lice11ce
ior a continuous ucriod of five years after the termination of the
ihen nisting licence. Under clause 5(b) of the
agreement the
Gowrnmcnt agreed to
purchase the
pharmaceutical products
,,ianufocturcd by the appellant in the tincture
factory, for its
medical requirements. Under clause 6 of the agreement all books
r f account and connected documents are to be open to inspection
t.y the authorised officers ·of the Government. Under clause 10 the
Govenm1ent was entitled to nominate a director on the board of
directors of the appellant-company who would not be entitled to
:my voting power or 1.o interfere with the normal mamu:,ement of
!he r.ompany. Apart from the cash consideration referred to in the
:igreemcnt, clause 7 of the said agreement provided for
further
payments as follows :
" ( 7) The Government shall be entitled to twenty
per cent of the net profiffi earned by the company in every
year subject however to a maximum of rupees forty
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C.J.T, v. TRAVANCORE SUGAR (Jaganmohan Reddy, J.)
741
\hous~nd 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 ha3 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 and treasurers' remuneration."
By another agreement dated January 28, 1947, the following clause was substituted for the above caluse 7 of the original
agreement:
"The Government shall be entitled to ten per centum
of the net profits of the company in every year. For the
purpose of this clause net profits means the amounb 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 ~he Government under the aforesaid clause 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 Pondicherry Railway Co. Ltd., v. Commissioner of
Income-tax [(1931) 5 lT.C. 363; 58 I.A. 239] indisallowin~ this
item of expenditure. The appellant preferred an appeal against the
order of the Appellate AssistaJllt Commissioner to the Income Tax
Appellate Tribunal which held that the case came within the
pri'llciple of the decision in British Sugar Manufacturers Ltd. v.
Harris (Inspector of Taxes) (1939) 7 I.T.R. 101 (C.A.), 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 :he appeal by
the company. At the instance of the respondent the Tribunal
referred the following question of law to the High ·courb· 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 June 18, 1937, and January
28, 1947, was allowable under section 10 of the Income-tax
Act?".
. 7 42
SUPREME COURT REPORTS
[1973] 2 S.C.R •
.
By its judgment dated August 20, 1963, the High Court held
that the payment of the aforesaid amount
constituted
capit.al
. expenditure and was not allowable under sec~iQn 10(2)(xv) of the
Income·tax Act. In this view the High Court felt it unnecessary to
go into. the merits of t~e 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 Kcrala dated August 20, 1963.
On behalf of t:he appellant in that case who is the respondent
before us it was submitted that the payment of Rs. 42,480 was
not capital '!Xpenditure but was expenditure of revenue nature
which was allowable under s. 10(2)(xv) of the Act. It was pointed
out th?.~ the annual payments under cl. 7 were not part of the
purchase price of the assets. Reference was mtl.de to els. 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 assels, the
Government undertook obligations enumerated in els. 4(b), 4(c)
and 5(b) already referred to. It was contended that the appellant
agreed to make annual payments to the Government in consideration of these obligations. On behalf of the respondent the opposite
viewpoint was pres~nted and it was said tha~ 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
por~ion of the preamble of the agreement dated Januarv
28,
194·7:
"Whereas on 18th June 1937, an agreement (hereinafter caJled the principal agreement) was entered into
between M. R. Ry. Rao· Bahadure Rajyasevanirata N.
Kunjan Pillai Ayl., Chief Secretary to the Government
actin.~ for and on behalf of the said Government of His
Higlmess 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, where·
by the said Government should sell and the company
should purchase the assets including the lands of the
Travanc.ore Sugars Ltd. with the buildings, out-houses.
machinery and other things attached thereto and more
fully 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 in the
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C,I.T, v. TRAVANCORE SUGAR (Jaganmohan Reddy, J.)
743
schedule 'B' annexed to the principal agreement, and all
the assets of thei factory known as the Go\1ernment
Tincture Factory situated at Trivandrum and more particularly described in he Schedule
'C' annexed to 1he
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% 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 the purposes of the said agreement to be ascertained after the
deductions set out in clause 7 of the said agreement."
This Cour_t while recognising that it is dif!icult.-as indeed all
Judges have found it difficult-to determine whether a particular
expenditure is in the nature of capital expenditure or in the nature
of revenue expenditure and that it was not easy to distinguish
whether an agreement is for the payment of price stipulated in
instalments or for making annual payments in the
nature of
income, observed that not only the documents but the surrounding circumstances have to be looked into to ascertain what was the
real nature of the twnsaction from the commercial point of view.
It examined the transaction and was of the view that the consideration for the sale of the three undertakings in favour of the
appellants 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 20 per cent of
the net profits earned by the appellant in every year sub.iect to a
maximum of Rs. 40,000 per annum.
With regard to the second part of the consideration there are
three important points to be ,noticed.
In the firs1 place, the payment of commission of 203 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 commissio.n 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 paymen1 of 20% ·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;
It was also noticed that there is no reference to any capital sum
in this part of the agreement but on the contrary, the very nature
of the payments excludes the idea that anv connection with the
capital sum was intended by the parties. Having considered the
several aspects of the transaction and having observed that the
mere fact that the capital sum is payable by instalments spread
over a certain length of time will not convert the nature of that
144
SUPREME COURT REPORTS
[1973] 2 S.C.R.
payment from the capital expenditure into a revenue account but
the payment of instalments in such a case would have always some
relationship to the actual price fixed for the sale of the particular
undertaking, this Court rejected the contention of the Revenue
that the amount paid to the Govemment by the assessee' was an
expenditure of a capital nature in these words :
"In view of these facts we are of opinion tha~ the
payment of the 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."
After this finding for which this Court found support from the
decision in Commissioner of Inland Revenue v. 36/ 49 Holdings
Ltd. (In Liquidation) (1), Commissioner of I.T. v. Kolhia Hirdagarh Co. Ltd., (2 ) and the decision of the Judicial Committee
·n Jones v. Commissioner of Inland Revenue(') is nonetheless
obserVed that it is not possible for it to finally determine this
apperif and that even if the payment of commission to the Government by the assessee is not capital but revenue payment certain
questioos would arise for consideration in this case which the
High Court has not dealt with in the reference. These questions
as stated in that decision were : Firstly, it has to be determined
whether the appellant is right in his argumen~ that the payment
of commission is 1antamount to diversion of profits by a para•
mount citle; secondly, the contention of the respondent that the
transaction should be treated as a joint venture with an agreement
to share profits between the appellant and the Government, and
thirdly, it has to be considered whether the requirements of s.
10(2)(xv) have been satisfied in this case. It was pointed out on
behalf of the appellants in that case who are respondents before us
that the payment of commission was a payment wholly or exclusively laid out for purposes of business. In the ciicumstances set out
above the matter was remanded to the High Court of Kerala;
Before that High Court the second contention whether the
transaction should be treated as a joint vent.ore with an agreement
to share profits was not pressed and therefore tha~ matter was not
considered. Mathew, J. (as he then was) noted that the Supreme
Court had held that the payment was not in the nature of capital
payment but was in the nature of revenue payment because the
unpai<l purchase price was neither a fixed sum nor an amount
which could be ascertained by any method. In this view he considered only the ,first and third contentions which called for
(I) 25 T.C. 173.
(2) 17 I.T.R. 545.
(3) [1921] K.B. 711.
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C.I.T. v. TRAVANCORE SUGAR (Jaganmohan Reddy, J.)
745
determination by that Court. The learned advocate for
the
Revenue however at the outset tried to assail the statement of
Mathew, J. that the SuQreme Court had held that the amount paid
to the Government was not a capital expenditure but a revenue
expenditure because he realised that if that finding be assailed.
then it would be immaterial whether the
amoun~ paid to the
Government amounted to diversion of the profits
before they
reached the assessee by an over-riding title or whether it was
otherwise an allowable deduction under s.
10(2)(xv) of the·
Income-tax Act, 1922. In support of the stand taken by him, he
submits that a decision of this Court cannot be otiose and if that
is so then it must be assumed that the question whether the
amount is of a capital expenditure or revenue expenditure is sti11
open not only for the Kerala High Court to determine but also for
this Court to go into. We cannot accept this contention in the
light of the finding given by this Court where not only did it hold
that the amount of Rs. 42,480 was not capital exJll<nditure but
that it was al<o a revenue expenditure. Having so held this Court
went further and said that the judgment of the Kerala High Court
on th<1t point must be over-rul\!(I. Can there be anything more
categorical than this finding? We think not. Raghavan, J. did hint
at this incongruity when after pointing out that this Court
had held that the payment was not in the nature .of a capital
payment but was in the nature of revenue payment he said :
"Still the Supreme Court observed since the other
questions ........ were not decided by this Court the
Supreme Court could not give an answer to the question
referred.~'
The learned advocate for the Revenue findipg himself in this
difficulty attempted to create a dichotomy under which according·
to him both the capital and revenue nature of the expenditure
as well as the payment being wholly and exclusively laid out for
the purpose of the business are included in the aforesaid clause
(xv) of sub-s. (2) of s. 10. But we are unable to understand the
sequitur. Even supposing that these two kinds of expenditure are
included. if the expenditure is of one or the other it be,·omes
deductible.
We find no justification for this contention because a cursory
reading of that provision would show that it is merely confined to
the payments ':"holly and exclusively laid out for the purpose of
the business in which expenditure of a revenue nature would also
be included along with the expenditure of various other
cate-·
H
~ ories.
Section 10 (I ) and 2 (xv) are as follows :-
"(I) The tax shall be payable by an assessee under
the head "Profits and gains of business, profession or
746
SUPREME COURT REPORTS
[1973] 2 S.C.R.
vocation" in rrspect of the profits and gains of any
business, profession or vocation carried on by him.
(2) Such profits or gains shall be computed after
makin_g the following allowances, namely :-
(i) to (xiv)
(xv) any expenditure not being ·an allowance of the
nature described in any of the clauses (i)
to
(xiv) inclusive, and not being in the nature of
capital expenditure or personal expenses of the
assessee laid out or expended wholly and exclusively for the purpose of such business, profession or vocation."
•Clause J of the section deals with the payment of tax by the
.assessee in respect of the profits and gains of business, prnfes>ion
·Or vocation. It is contended that in constituting the profits of the
business any payment made as a diversion from profits by paramount title has to be deducted before computing profits. In so far
.as s. l 0(2)(xv) is concerned it take> note of the fact that there may
be deductions of the nature described in els. (i) to (xiv) of sub-s.
(2) and that such expenditure is not of a capital nature or personal expenses of the assessee. The expenditure of a capital natiire
is certainly not an expenditure which is deductible for computing
profits though it may be an expenditure wholly and
exclusively
laid out for the purposes of the business etc. If this expe,:iditure is
not of a capital nature but of a revenue nature it is certainly
deductible under this clause. All other expenditure which is not
included in (i) to (xiv) or which is not at the very inception deductible as an overriding charge on the whole of the profit-making
apparatus will be deductible if it is laid out or expended wholly
and exclusively for purpo;es of such business. The disallowance of
personal expenses is because that has been dealt with under s. 7
which deals with expenses wholly and necessarily incurred in the
performance of duties and therefore are not included
in
this
clause.
Once the crucial question is decided by this (.ourt that the
expenditure is not of a capital nature but is a revenue expendi·
ture, we should have thought that the matter ended there and that
the answer to 1he reference was
certainly in the affirmative.
Whether the ·expenditure is to be further considered as expenditure
incurred at the very ·inception deductible as an over-riding charge
on the whole of the profit-making apparatus falling under s. 10( I)
or whether it is an expenditure, which apart from it b~ing a
·revenue expenditure, is also wholly and exclusively laid out fat
purposes of trade determined upon the principle of ordinary commercial trading would not make any difference to the answer
A
B
c
D
E
F
{JI;'
H
A
B
c
'
D
E
F
G
H
C.I.T, v. TRAVANCORE SUGAR (Jaganmohan Reddy, J.)
147
which could be given on the basis . of the expenditure being
revenue expenditure and not capital expenditure.
Even so, Mathew, J. after referring to the several decisions,
posed the question, namely, when a trader makes a payment which
is computed in relation to the profits, the question that arises is,
does the payment represent a mere division of profits with any
party or is it an item of expenditure the amount of which
i&
ascertained by reference to profits, to which his ariswer was "the
payment would be allowable in the second case but not in the
first." Even on the other question whether the payment is an
expenditure wholly and exclusively laid out for purposes of trade
and ascertained with reference to profits, an examination of the
several cases to which a reference has been made by tlte learned
Judge led him to the conclusion that the payment in question was ·
such an expenditure deductible under s. 10(2)(xv).
In considering the nature of the expenditure incurred in the
discharge of an obligation under a contract or a statute or a
decree or some similar binding covenant, one must avoid being
caught in the maze of .iudicial decisions rendered on different facts
and which always present distinguishing features for a compari·
son with the facts and circumstances of the case in hand. Nor would
it be conducive for clarity or for reaching a logical result if we
were to concentrate on the facts of the decided cases with a view
to match the colour of that case with that of the case which
requires determination. The surer way of arriving at a just con·
clusion would be to first ascertain by reference to the document
under which !he obligation for incurring the expenditure is created
and thereafter to apply the principle embalmed in the decisions of
those facts. Judicial statements on the facts of a particular case
can never assist courts in the construction of an· agreement or a
statute wh!ch was not considered in those judgments or to ascertain
what the intention of the legislature was. What we must look at
is the contract or the statute or the decree, in relation to its
terms, the obligation imposed and the purpose for which the transaction \Vas entered into. The tenns of the contract have already
been set out. Under those terms, a new company bas to be fom1ed
and when it is formed the Government undertook to transfer the
assets of all its three undertakings at a certain valuation in order to
enable it to earn profits subject to the further stipulation that it
should be paid 203 profits for an unlimited duration i.e. as long
as the company is working, that under cl. 4(b) the company must
further get the present licence of the distillery transferred to it and
the Government. is required to recognise such transfer and also
grant a fresh licence as soon as the present licence is terminated.
By cl 4(d) it is incumbent upon the company to sell its products
of the distillery to the Government at prices to be fixed by it and
the duty payable by the Government should be at the rate fixed by
7 48
SUPREME COURT REPORTS
[1973] 2 S.C.R.
the Madras Government. Under cl. S(b) the Government shall buy
medical pruducts at prices not exceeding cost plus 153. Under
cl. 7 the Government shall be entitled to 203 of the net profits
computed on the gross income less expenditure, depreciation and
remuneration to the Secretaries and treasurers and under cl. l 0 the
Government is to have a director nominated who would not interfere with the normal management.
It is contended thai the assessee company was created for the
specific purpose o~ taking over the assets burciened with the obligations set out above, that it had no volition in the matter and had
to take over the assets subject to the aforesaid enforceable obligations before it came into existence. It is therefore submitted that it
was an enforceable obligation at source by which part of the
revenues of the businesi. activities of the company were diverted
with the result that the part so diverted did not become its income
at all. The case of Pondicherry Rly. Co. v. Income-tax Commissioner(') was sought to be distinguished because it is said in that
case the company was already in existence, that the venture was a
joint venture between the English company and the French
company, that the French company merely contributed to some
share of the capital by the grant of a subsidy and land free of
charge and that the work in fact was done by the South Indian
Railway which was to pay gross receipts less working expenses to
the Pondicherry company which divided the nei profils after
deduction of rates ·and taxes etc. half and half between it and the
Pondicherry company. On these facts
Lord Macmillan who
delivered the judgment observed at p. 251 :-
"A payment out of profits and conditional on profits
being earned cannoi accurately be described as a payment made to earn profits. It assumes that profits have
first come into existence. But profits on their coming
into existence attract tax ai that point, and the revenue
is not concerned with the subsequent application of the
profits.''
These observations were subsequenily explained by the same
learned Law Lord in The Union Cold Storage Co. Ltd. v. Ad11mson (H.M. lmpector of Taxes)("} when they were sought to be
made applicable to the facts in that case. Lord Macmillan said :
"The obligation was conceived in language entirely
different from the language which your Lordships have
been consideriiii! in the present appeal, where there is a
common form obligation in the lease to pay rent. When,
( .-) 58 I. A. 239.
(2) 16 TC. 292 at 331
A
B
c
D
E
F
G
H
B
c
D
E
F
G
H
C.I.T. v. TRAVANCORE SUGAR (Jaganmohan Reddy, J.)
749
therefore, in the 11.assage referred to by the AttorneyGeneral in the Pondicherry case I said that "a payment
out of profits and conditional on profits being earned
cannot accurately be described as a payment made to
earn profits", I was dealing with a case in which the
obligation was, first of all, to ascertain the profits in a
pres~ribed manner, after providing for all outlays incurred in earning them, and then to divide them. Here the
question is whether 'or not a deduction for rent has to
be made in ascertaining the profits, and the question is
not oue of the distribution of profits at all."
In Indian Radio Etc. Co. Ltd. v, Commissioner of Income-tax
Bombay(') Lord Maugham delivering the opinion of their Lordships of the Privy Council observed at p. 278 :-.
"The sum is in truth made payable .as parh of the
consideration in respect of a number of different advantages which the appellants derive from the agreement
and not all of them can be shown to be of a purely
temporary character. The agreement as a whole is muyh
more like one for a joint adventure for a term of years
be:ween the appellant company and the Communict1tions Company than one for a lease for that period."
In that view it was held that the deduction was not allowable. The
Privy Council in order to avoid any misconception was careful
enough wliile arriving at that conclusfon to say•that they have not
taken the view that the case is governed by the decision in Pondicherry case though that case no doubt throws light on the natur~
of the problem which has to be solved in the case before them,
and they further added that a sentence in the judgment in that case
has b~en explained, if explanation
was
necessary,
by
Lord
~vfacmillan in the subsequent case of W.H.E. Adamwn v. Union
Cold Storage Company (see pages 278-279). The Indian Radio
case was under s. 10(2,,)(ix). In British Sugar Ma1111fact11rers Ltd.
v. Harris( 2 ) which the Tribunal said on the facts was nearest to the
case before us, the company was carrying on.business as manufacturers of beat sugar, had agreed to pay to two bodies in each of
four years for division between them as they mutually agreed
upon 203 of the ne! profits of the company in consideration of
their giving to the company the full benefit of their technical and
financial knowledge and experience, and giving to the company
and its directors advice to the best of their ability respectively on
all questions of or relating to manufacture and finance and disposal of the company's products. It was held, reversing the decision of Finalay J., that in ascertaining the profits or gains of the
(I) S I.T.R. 270.
(2) 7 1.T.R. 101-(1938]2 K.B. 220.
750
SUPREME COURT REPORTS
,[1973) 2 S.C.R.
company for any year assessable to income-tax the sum payable
to the two bodies under this agreement out of the earnings of the
company should be allowed as a deduction as being money wholly
or exclusively laid out or expended for the purposes of the trade.
Sir Wilfrid Green M.R. sa.id at pp. 233-234 :-
"Now bearing all those things in mind, the question
arises : On which side of the line does tlle case fall-? I
quite accept the prc-position that there is a line between
a contract for payment of a share of profits simplic:,·~r
and a payment of remuneration which is deductible in
A
B
truth before the pr9fits divisible are ascertained, and that
c
line in some cases may be very difficulu to draw."
lt appears to us that the amount to be paid by reference to profits
can either be that it is paid after the profits become divisible or
distributable or ~hat the amount is payable prior to such distribution or division to be computed by a reference to notional or
as in some decisions what is termed as apparent net profits. In
the fonner instance it will certainly be a distribution of profits
and not deductible as an expenditure incurred in running the
business but in the latter it may, on the facts and circumstances
of the case, and the agreement or the nature of the obligation
under the particular instrument, which governs the obligation be
an expenditure incurred as a contribution to the profit earning
apparatus or, as it is said, incurred at the inception and deduciible as an over-riding charge of the profit-making apparatus or is
one laid out and expended wholly and exclusively for purposes of
such business .. It is true that sub-section(!) of Section 10 of the
Indian Income-tax Act, 1922 imposes a charge on the profits and
gains of a business which accrue to the assessee while sub-section
(2) of the said Section enumerates various items which are a<lmis
sible as deduction. Where income which accrues to the assessee
is not his income the question of admissibl~ deductions would not
arise. Therefore, where income is diverted at source so that when
it accrues it is really not his income but is somebody else's income
the question as to whether that income falls under sub-section {2)
of Section I 0 does not arise. Again, income can be said to be
diverted only when it is diverted at source so that when it accrues
it is really not the income of the assessee but is somebody else's
:ncome. It is thus clear that where by the obligation income is
· diverted before it reaches the assessee, it is deductible.
But
where the income is required to be applied to discharge an obligation after such income reaches the assessee i9is merely a case
of application of income to satisfy an obligation of payment and
is therefore not deductible.
D
E
F
G
H
•
A
II
c
u
E
F
C,l.T. v. TRAVANOOJ.U! SUGAR (/aganmohlln Reddy, /.)
7 51
On a construction of the terms of the contract in this case and
the Qbligations axising therefrom we cannot say that the conclusions of the Kerala High Court are unsustainable. The assessee
had no choice at the time of inception, as a condition of its coming into existence to agree to the several terms stipulated by the
Government for transferring the profit earning assets. No dou~
as the learned advocate for the Revenue said, the company paid
the Government in full for the value of the assets and the company had therefore no obligation to the Government on that
account. This may be true to some extent but tl!en there are the
other obligations which are interlinked with the transfer of assets
notwithstanding the fact that the company paid a price fixed for
the transfer of the assets which may not in all cases, as in this
case it is not, be the true value of the assets which are subject matter
of the transaction. The Government has established businesses and
they were willing to part with them at a certain price plus certain
stipulation to which we have referred which form the c-inditions
of transfer. It may be mentioned that under the contract the company had to engage only the Travancore labour and staff, that
it had to take apprentices recommended by the Government and
train them and that there was no limitation as to the period the
company had to pay 203 or as the later agreement revised it to
103 of the net profits, notionally computed for that purpose
after deduction of certain items mentioned in cl. 7. All this
appears to us to be a stipulation for payment of an amount for
a concession granted to it and is therefore deductible at its inception. Viewing it from any point of view, whether as a revenue
expenditure or as an overriding charge of the profit-making apparatus or a.s laid out and expended wholly and exclusively for purpose of trade, the answer must be in the affirmative and against
the Revenue. The appeal is accordingly dismissed with costs both
here and in the High Court.
S.B.W.
Appeql dismissed.
13-IA99Sup.C. I .173