PETITIONER:
C.I.T. CENTRAL BOMBAY
Vs.
RESPONDENT:
JALAN TRADING CO. (P) LTD.
DATE OF JUDGMENT09/08/1985
BENCH:
MISRA RANGNATH
TULZAPURKAR, V.D.
MUKHARJI, SABYASACHI (J)
CITATION:
1985 AIR 1656 1985 SCR Supl. (2) 517
1985 SCC (4) 59 1985 SCALE (2)225
ACT
Indian Income Tax Act 1922 - Section 10(1)(xv) - Firm obtaining sole selling agency - Benefit of agreement assigned to assessee, a newly incorporated company - 75% of annual profits to be paid to firm - Sum paid - Whether deductible under section 10(1) (xv).
HEADNOTE
A firm (JTC) obtained the sole selling agency for the products of a manufacturer for two years with a right of renewal. A few months later, under a deed of assignment, the firm assigned the benefits of the agreement to the assessee company under which the assessee carried on the business as sole selling agents for the products of the manufacturer. Under the deed of assignment the assessee company should take over not the whole of the business of the firm but only the benefit of the contract with the manufacturers in consideration whereof the assessee was to pay to the firm as and by way of royalty, an amount equal to 75% of their profits and commission, remuneration and other moneys received from the manufacturers. The assessee had the option to renew the agreement.
In its income tax return the assessee claimed under section 10 (1) (sv) of the Act deduction of a sum of Rs. 7.93 lacs, which under the deed of assignment lt was required to pay to the firm, but the authorities below rejected the claim. On appeal the Appellate Tribunal held that although no ascertained sum was mentioned for acquiring the right or the enduring benefit, the amount was spent by the assessee for acquiring an asset of enduring benefit, and therefore, the expenditure was capital expenditure. On reference although the High Court held that the asset acquired by the assessee was of an enduring nature, purporting to follow the decision of this Court in Travancore Sugars Chemicals Ltd. v. Commissioner of Income Tax, Kerala 62 ITR 566 lt held that the annual payment by the assessee of 75% of its profits was not in the nature of capital expenditure.
It was contended on, behalf of the Revenue that if the amount had been spent for obtaining a capital asset the assessee would not be entitled to claim it as a deduction. 518
On behalf of the assessee it was contended that once the assessee had paid 75% of its profits to the firm, the amount was no more in its hands as income and since 8. 10(1) envisage the levy of tax on real income in the assessee’s hands this was / t income within the meaning of S.10(1) and was not taxable. Allowing the appeal, ^
HELD: On the finding of the High Court that the expenditure related to acquisition of a capital asset, it was not admissible as a deduction under section 10(2) (xv) of the Indian Income Tax Act 1922. [528 G].
It is well settled that if an expenditure is made for acquiring or bringing into existence of an asset for the enduring benefit of the business, it is properly attributable to capital and is of the nature of capital expenditure. The aim and object of the expenditure would determine, whether it is capital expenditure or revenue expenditure. The source or the manner of the payment would be of no consequence. Where a company had acquired an asset in consideration of recurring payment of certain sum per year which was a right to carry on its business unfettered by any competition from outsiders within the area it was held to be in the nature of a capital asset and the payment was not deductible under section 10(2) (xv) of the Act. [524 A,C,G]
Assam Bengal Cement Co. Ltd. v. Commissioner of Income Tax 27 ITR 34 = [1955] S.C.B. 1972 applied.
In Travancore Sugars and Chemicals Ltd. which the High Court purported to follow there was a substantial aud definite amount of outright cash payment over and above which an indefinite annual payment had been stipulated. The tests laid down in this case were not intended to be of general application but were given to bring into bold relief the special aspects of the case. The Court itself has pointed this out. Therefore, the High Court erred in importing this reasoning as a test of general application to be applied to the facts of the prevent case. [528 D,E]
In the instant case, the High Court has categorically found that a capital asset had been acquired under the agreement. The assessee was a new company and had no other business. Under the contract lt acquired the right to carry on the business on a long ter basis subject to renewal of the agreement. Therefore, 519 the first of the broad tests l it down in Assam Bengal cases that A the expenditure was made for initial outlay applied and on the finding that a capital asset had been acquired, the expenditure is not liable as a deduction. [528 F-G]
2. There is no merit in the assessee’s submission. If the amount had been spent for obtaining a capital asset, the assessee would not be entitled to claim it as a deduction under section 10(1) (xv). [531 C]
JUDGMENT
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 1733 of 1973.
From the Judgment and Order dated 26.7.1971 of the Bombay High Court in Income Tax Reference No. 112 of 1963.
G.C. Sharma, K.C. Dua and Miss A. Subhashini for the Appellant.
S.T. Desai, D.N. Misra and Mrs. A.K. Verma for the Respondent.
The Judgment of the Court was delivered by
RANGANATH MISRA, J. This appeal by special leave at the instance of the Revenue assails the decision of the Bombay High Court upon a reference under section 66 of the Income Tax Act, 1922 (hereinafter referred to as ’the Act’). In respect of the assessment year 1954-55, the respondentassessee claimed deduction of a sum of Rs. 7,93,837, under s. 10(1) or alternatively under 8. 10(2) (xv) of the Act in determining its business profits which the Income Tax Officer and the two appellate authorities in due course rejected. On the application of the assessee the dispute regarding admissibility of the claim w referred to the High Court. It agreed with the Tribunal that ’the assessee had acquired an asset of an enduring nature in lieu of the payment of the amount in dispute; yet, the High Court held that the payment represented business expenditure and the claim of deduction was tenable under 8. 10(2) (xv) of the Act. On reaching this conclusion the Court was of the view that consideration as to whether the payment made by the assessee did not form part of its real income was unnecessary and answered the reference in favour of the assessee. The Commissioner of Income Tax, on obtaining special leave, is in appeal before this Court.
The short facts relevant for appreciating the question for consideration are these: 520 M/s. Bharat Barrel & Drum Manufacturing Co. Ltd., (’Bharat Barrel’ for short) gave its sole selling agency to a firm - Jalan Trading Co. - by an agreement dated May 1, 1951, for two years with a right of renewal. Assessee - respondent is a private company incorporated on October 16, 1952. & der a deed of assignment dated December 30, 1952, the benefits of the agreement dated May 1, 1951, were assigned to the assessee and from January 1, 1953, under the assignment the respondent carried on the business as selling agents of Bharat Barrel. From May 1, 1953, on the basis of the option for renewal exercised by the assessee an agreement was entered into between Bharat Barrel and the assessee in respect of the sole selling agency and with a renewal clause.
The deed of assignment incorporated the following relevant terms:
"WHEREAS after the incorporation of the said Company (assessee) lt was however agreed that the assignee company should take over not the whole of the business of the Assignors but only the benefit of the aforesaid contract dated the 1st May 1951 with the Said manufacturers on the terms and conditions mutually agreed to and as hereinafter appearing:
1. In consideration of the premises and of the
covenant on the part of the assignees hereinafter
contain ed the Assignors as beneficial owners
hereby assigns to the assignees:
(i) The said agreement of the 1st day of May 1951
and made between the said Bharat Barrel & Drum
Manufacturing Co. Ltd. Of the one part and the
assignors of the other part and the full benefit
thereof as and from the 1st day of January 1953
and all commission and other moneys payable or to
be payable by the manufacturers;
(ii) the full benefit of all pending contracts and
orders entered into or given by the assignors in
connection with the said agreement
2. In consideration aforesaid the assignees hereby
covenant with the assignors to pay to the
assignors as and by way of Royalty an amount
equivalent to 75% of their profits and commission
remuneration and other 521
moneys received from the manufacturers under the
said agreement or any further agreement that may
be entered into by the Manufacturers with the
Assignees in pursuance of the option to renew the
agreement contained in cl. 5 of the said agreement
dated 1st May 1951."
Assessee claimed to have paid Rs. 7,93,887 being 75% of its net profits in the assessment year 1954-55 and claimed it as a business deduction but the same was rejected by the Assessing Officer as also the appellate authorities. In dealing with the question raised, the Tribunal held:
"The narrow question, therefore, that we have to
decide in this case is whether the payment of Rs.
7,93,837 is made by the assessee for acquisition
of an asset or benefit of an enduring character
and, therefore, is of a capital nature. In this
the only relevant document to be considered, is
the deed of assignment dated 30.12.1952. Examining
the said deed and particularly clause 2 therein
which is already stated above, we think there is
no doubt that the payment in question was made by
the assessee to acquire the right to carry on the
sole selling agency of Bharat Ltd. Or in any case
to acquire a benefit of an enduring nature. It is
true that in this case no ascertained sum is
mentioned for acquiring the right or the enduring
benefit. But in our opinion, this factor alone is
not a decisive factor in every case. The facts and
the circumstances of every case have to be looked
into and if on the whole it appears that what was
acquired was an asset or an enduring benefit by
expending a certain sum, the expenditure can well
be held to be a capital expenditure and not a
revenue expenditure. In certain cases, it may well
be that in conjunction with other facts, the fact
that there is no ascertained sum mentioned in
order to acquire the asset or the enduring
benefit, would lead to the inference that the
expenditure is not a capital expenditure. But in
this case, we have no doubt that the amount in
question was spent for acquiring an asset of
enduring benefit and, therefore, we have to hold
that the expenditure in question was a capital
expenditure..... " 522
The High Court also negatived the assessee’s stand that no enduring asset was acquired and held:
We cannot accept the assessee’s submission that
the asset acquired by it when lt obtained
assignment of the sole selling agency agreement,
is not of an enduring nature. Counsel for the
assessee says that the assessee only acquired the
right to use the rights under the sole selling
agency agreement and that is not an asset of a
capital nature. There is no warrant for the
submission, because clause 1 of the deed of
assignment provides in terms that the firm as a
beneficial owner assigned to the assessee ’the
said agreement of the 1st day of May
1951.......... and the full benefit thereof as and
from the 1st day of January 1953 and all
commission and other moneys payable or to be
payable....... by the manufacturers. Secondly, the
right which the assessee acquired under the deed
of assignment was a right to act as the sole
selling agents till the 1st day of May 1953 in the
first instance, coupled with the right to have the
sole selling agency agreement renewed for an
indefinite period, though for two years at a
stretch. mere was some faint argument before us as
to the true meaning and scope of the option of
renewal, but we see no doubt that under the
agreement of the 1st day of May 1951, the firm had
the option to stipulate for a renewal on the same
terms and conditions as were contained in that
agreement, which must include the term regarding
the option for a further renewal for an indefinite
period. m us, the assessee obtained an assignment
of the agreement between the Company and the firm.
That agreement contained the right to have the
sole selling agency agreement renewed for an
indefinite period. It must follow that the
assessee acquired an asset of an enduring nature.
Ordinarily, out of this finding the conclusion would have followed that the claim of deduction was not admissible as the expenditure was for acquisition of a capital asset. The High Court, however, referred to this Court’s decision in Travancore Sugars & Chemicals Ltd. v. Commissioner of Income Tax, Kerala, 62 I.T.R. 566 = [1967] 1 S.C.R. 423 and adopting the reasonings relied upon in that case to which we shall presently refer, came to hold: 523
In view of these circumstances, the Supreme Court
held that the payment of the annual sum was not in
the nature of capital expenditure but was in the
nature of revenue expenditure. Each one of the
three features adverted to by the Supreme Court is
present in the instant case. and proceeded to conclude the matter by saying:
We take the view that the case before us is in
material respects similar to the Travancore Sugar
case."
The High Court did not examine the aspect relating to whether the payment made by the assessee did not form part of its real income by saying: ’It is enough for our purpose that the payment is deductible under s. 10(2) of the Act.
A four Judge Bench of this Court in Assam Bengal Co. Ltd. v. Commissioner of Income Tax, West Bengal, 27 I.T.R. 34=[1955] 1 S.C.R. 972, indicated that the line of demarcation between capital expenditure and revenue expenditure is very thin. Several English decisions were referred to and the Court approved the opinion of the Full Bench of the Lahore High Court in Benarsidas Jagannath, In re. 15 I.T.R. 185, where Mahajan, J. (as he then was), speaking for the Court, had successfully attempted a synthesis. This Court observed:
The synthesis attempted by the Full Bench of the
Lahore High Court truly enunciates the principles
which emerge from the authorities. In cases where
the expenditure is made for the initial outlay or
for extension of a business or a substantial
replacement of the equipment, there is no doubt
that it is capital expenditure. A capital asset of
the business is either acquired or extended or
substantially replaced and that outlay whatever be
its source whether it is drawn from the capital or
the income of the concern is certainly in the
nature of capital expenditure. The question
however arises for consideration where expenditure
is incurred while the business is going on and is
not incurred either for extension of the business
or for the substantial replacement of its
equipment. Such expenditure can be looked at
either from the point of view what is acquired or
from the point of view of what is the 524
source from which the expenditure is incurred. 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
capital expenditure. If on the other hand it is
made not for the purpose of bringing into
existence any such asset or 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. It is
only in those cases where this test is of no avail
that one may go to the test of fixed or
circulating capital and consider whether of the
business or part of its circulating capital. If it
was part of the fixed capital of the business it
would be of the nature of capital expenditure and
if it was part of its circulating capital it would
be the nature of revenue expenditure. These tests
are thus mutually exclusive and have to be applied
to the facts of each particular case in the manner
above indicated. It has been rightly observed that
in the great diversity of human affairs and the
complicated nature of business operations it is
difficult to lay down a test which would apply to
all situations. One has therefore got to apply
these criteria one after the other from the
business point of view and come to the conclusion
whether on a fair appreciation of the whole
situation the expenditure incurred in a particular
case is of the nature of capital expenditure or
revenue expenditure in which latter event only it
would be a deductible allowance under section
10(2) (xv) of the Income-tax Act. The question has
all along been considered to be a question of fact
to be determined by the Income-tax authorities on
an application of the broad principles laid down
above and the Courts of law would not ordinarily
interfere with such finding of fact if they have
been arrived at on a proper application of these
principles. (emphasis ours) 525
In that case before this Court, a lease was obtained with certain stipulations including the payment of a sum of Rs. 5,000 per year. The Court found that it was an enduring benefit for the benefit of the whole business of the company. The fact that it was a recurring payment was immaterial because one had got to look to the nature of the payment which in its turn was determined by the nature of the asset which the company had acquired. The asset which the Company had acquired in consideration of this recurring payment the right to carry on its business unfettered by any competition from outsiders within the area was in the nature of a capital asset and, therefore, the payment was not deductible under s. 10(2) (xv) of the Act. The broad tests laid down by this Court in Assam Bengal Cement Co. Ltd.’s case have been accepted in several subsequent decisions of this Court as also by the High Courts in India.
The facts in Travancore Sugars & Chemical’s case were peculiar. The assessee in that case purchased Travancore Sugar Ltd., a Government distillery at Negercoil and the business assets of a Government Tincture Factory at Trivandrum under an agreement dated June 18, 1937, entered into between the Government of Travancore and the promoters of the assessee company. Under the agreement, cash consideration of Rs. 3,25,000 was to be paid for buying the assets of Travancore Sugars Ltd. In regard to the distillery, the sale price had to be arrived at on the basis of joint valuation by the Engineers to be appointed by the parties. As regards the Tincture Factory, the book valuation was to be adopted for fixing the consideration. The existing distillery licence was agreed to stand recognised in the hands of the assessee for a period of five years after its termination. Government also undertook to purchase pharmaceutical products manufactured by the assessee at the Tincture Factory. Government reserved the right to nominate a director on the Board of Directors of the assessee company without voting powers. The agreement further stipulated payment to Government of 20% of the net profits earned by the company every year subject to a limit of Rs. 40,000 per annum and certain other payments were also undertaken. The 20% stipulation was reduced to 10% by a subsequent agreement. The question that fell for consideration was whether payment of Rs. 42,480 by the assessee company to the Travancore Government in terms of the agreement referred to above as modified, was allowable expenditure under s. 10 of the Act in the year under consideration. This Court stated:
It is often difficult, in any particular case, to
decide and determine whether a particular
expenditure 526
is in the nature of capital expenditure or in the
nature of revenue expenditure. It is 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.
The Court has to look not only into the documents
but also at the surrounding circumstances so as to
arrive at a decision as to what was the real
nature of the transaction from the commercial
point of view. No single test of universal
application can be discovered for a solution of
the question. The name which the parties may give
to the transaction which is the source of the
receipt and the characterization of the receipt by
them are of little consequence. The Court has to
ascertain the true nature and character of the
transaction from the convenants of the agreement
tested on the light of surrounding circumstances.
So far as these observations formulating the tests are concerned, they are not different from those laid down by this Court in Assam Bengal Cement Co.’s case. The Court then proceeded to apply these tests to the facts of the case and observed:
Examining the transaction from this point of view,
it is clear in the present case that the
consideration for the sale of the three
undertakings in favour of the appellant was: (1)
the cash consideration mention ed in the principal
agreement, viz., clauses 3, 4(a) and 5(a); and (2)
the consideration that Government shall be
entitled to twenty per cent of the net profits
earned by the appellant in every year subject to a
maximum of Rs. 40,000 per annum. With regard to
the second part of the consideration there are
three important points to be noticed. In the first
place, the payment of commission of twenty per
cent on the net profits by the appellant in favour
of the Government is for an indefinite period and
has no limitation of time attached to it. In the
second place, the payment of the commission is
related to the annual profits which flow from the
trading activities of the appellant-company and
the payment has no relation to the capital value
of the assets. In the third place, the annual
payment of 20 per cent commission every year is
not related to or tied up, in any way, to any
fixed sum agreed between the undertakings. There
is not 527
reference to any capital sum in this part of the
agreement. On the contrary, the very nature of the
payments excludes the idea that any connection
with the capital sum was intended by the parties.
It is true that the purchaser may buy a running
concern and fix a certain price and the price may
be payable in a lump sum or may be payable by
instalments. 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
payment from the capital expenditure into a
revenue expenditure, but the payment of
instalments in such a case would always have some
relationship to the actual price fixed for the
sale of the particular undertaking. As we have
already mentioned, there is no specific sum fixed
in the present case as an additional amount of
price payable in addition to the cash
consideration and payable by instalments or by any
particular method. In view of these facts we are
of opinion that the payment of the annual sum of
Rs. 42,480 in the present 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.
As we have already observed, the facts in this case were peculiar. There was a substantial amount of outright cash payment over and above which the indefinite annual payment had been stipulated.
It is interesting to note that this Court by its judgment in Travancore Sugars & Chemicals Ltd. had sent down the matter to the High Court for a re-disposal and the very matter again came before this Court, this time at the instance of the Revenue and the judgment is reported in Commissioner of Income Tax, Kerala v. Travancore Sugars & Chemicals Ltd. 88 I.T.R. 1 = [1977] 2 S.C.R. 738. At page 10 of the Reports, this Court observed:
"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 judicial decisions rendered on
different facts anc which always present
distinguishing features for a comparison with the
facts and circumstances of the case in hand. Nor
would it be conducive for clarity or 528
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 the case with that
of the case which requires determination. The
surer way of arriving at a just conclusion would
be to first ascertain by reference to the
expenditure is created and thereafter to apply the
principle emblamed 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 which
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 was entered into.
We agree with these observations. The tests indicated by this Court in Travancore Sugars & Chemicals were not intended to be of general application but were given to bring into bold relief the special aspects of the case as the learned Judges themselves stated. The High Court committed a mistake In importing these reasonings as tests of general application to be applied to the facts of the present case though the facts were indeed quite different. As already pointed out, there was a definite sum of cash consideration in Travancore Sugars Chemicals’ case and the special features were taken into account. In the dispute before us the High Court was categorically found that a capital asset had been acquired under the arrangement. Admittedly, the assessee was a new company and it had no other business. It acquired under the contract stipulating to pay 75% of its annual net profits, the right to carry on the business on a long term basis subject to the renewal of the agreement. The first of the broad tests laid down in Assam Bengal Cement Co.’s case that the expenditure was made for the initial outlay squarely applies and on the finding that a capital asset had been acquired (a finding which has not been disputed before us) we must hold that the expenditure related to acquisition of a capital asset and was not admissible as a deduction under s. 10(2) (xv) of the Act.
With this conclusion of ours and no more, the appeal deserved to be allowed. Mr. S.T. Desai for the assessee respondent thereupon sought to raise the contention that once the assessee had paid 75% of its profits of the year, the 529 amount claimed as a deduction was no more in its hands as income and on the principle of real income in the hands of the assessee, we should hold the same was not income within the meaning of s.10(1) of the Act. Initially, objection was raised to this move of Mr. Desai by learned counsel for the Revenue on the ground that such a plea had not been canvassed in the earlier stages of the matter. The question referred to the High Court did raise the issue and the High Court in the penultimate paragraph of its judgment had declined to go into this question by saying that it was sufficient for the disposal of the reference once it took the view that the payment was deductible under s. 10(2) (xv) of the Act. Mr. Desai wanted this aspect of the matter to be sent back to the High Court, but we were not inclined to do so in consideration of the fact that the assessment is for the year 1954-55 - a period three decades away. Thereupon, counsel for both sides agreed to advance their arguments in regard to this aspect to enable this Court to finally deal with this question avoiding remand. Section 10(1) of the Act provides:
The tax shall be payable by an assessee under the
head ’Profits & gains of business, profession or
vocation’ in respect of the profits and gains of
any business, profession or vocation carried on by
him. Tax, therefore, under the provision is payable on income and if income is not earned by the assessee no tax is payable. It follows that tax is leviable on the real income in the hands of the assessee. Mr. Desai for the assessee has maintained that when 75% of the net profits have been paid to the partnership firm, the real income in the hands of the assessee was reduced to 25% of the net profits and that amount alone was assessable to tax. F
M/s. Jalan Trading Co., the partnership had initially been appointed as the sole selling agent. On October, 16, 1952, the assessee company came to be incorporated and soon after incorporation by agreement the rights of the firm were assigned to the assessee company. Neither the Income Tax Officer nor the two appellate authorities and nor even the High Court went into the question as to whether the assessee was in fact separate from, and independent, of the partnership firm. It is true that the tenability of the claim of deductibility as a business expenditure of the amount was examined by taking it for granted that the payment had been made by the assessee to the firm. But the exact position having not been investigated no finding has been recorded at any stage. The fact that the partnership and the 530 assessee company bear the same name and soon after incorporation the agreement assigning the firm’s rights in favour of the company had been entered, had obviously led the Income Tax Officer to doubt the bona fides. That is why in his order of assessment the Income Tax Officer had observed:
"The payment is also not allowable as it is only
an apportionment of profits as pointed out above,
as it is nothing but 75% of the net profits of the
assessee company and although it has been written
to the profit and loss account actually it is
nothing but an apportionment of profits and as
such the amount is not allowable.
The Appellate Assistant Commissioner took note of the position that the assessment of Jalan Trading Co., the firm, was not before him and observed:
"The amount claimed cannot also be regarded as
deduction in the trading account itself because
the royalty is ascertained ultimately on the
profits and does not go to add to the cost of the
drums that are purchased from the manufacturers.
Therefore, there can be no question of giving any
deduction under s. 10(1) of the Act. The concept
of ’real income’ apparently based on the decision
of the Bombay High Court in the case of 31 I.T.R.
735 has also no relevance because there is no
question. Of any deviation of profits of the
appellant company by any overriding title.
The Appellate Tribunal in answer to the reiteration of the point raised, said:
"Shri Mistry next submitted that the amount in
question is also deductible under s. 10(1) as a
trading item and in any event what is to be
determined is the assessee’s real income and that
can only be determined after deducting from the
assessee’s total income the amount paid to M/s.
Jalan Trading Co. It was also stated that in the
hands of the recipient the said amount of Rs.
7,93,000 and odd was assessed as revenue receipts
and assessing the same in the hands of the
assessee would amount to double taxation. In our
opinion, this later submission of Shri Mistry can
easily be disposed of because even though the real 531
income of the assessee is to be taxed, it is not
that each and every outgoing is to be taken into
consideration in arriving at the real income of
the assessee and if the outgoing is in fact of a
capital nature, the same can never be considered
as an allowable deduction under the Act.
We are impressed by the argument advanced on behalf of the Revenue that if the amount had been spent for obtaining a capital asset, the assessee would not be entitled to claim it as a deduction under s.10(1) of the Act and on the principle of taxation that income tax is to be levied on the real income, the amount paid for obtaining capital asset would not be deductible. In such circumstances, we are inclined to agree with the appellant’s submission that there is no merit in this aspect of the matter and no relief is admissible to the assessee on that score.
We allow the appeal and vacate the Judgment of the High Court and direct that the Tribunal’s decision shall be given effect to. Parties are directed to bear their own costs both before the High Court as also this Court. P.B.R. Appeal allowed. 532