J. K. Cotton Manufacturers Ltd. v. Commissioner of Income Tax, Lucknow

648 J. K. COTTON MANUFACTURERS LTD. _v_ THE COMMlSSlONER OF INCOME TAX, LUCKNOW _Septemher_ 4, 1975 (H. R. KHANNA, V. R. KRISHNA lYER, A. C. GUPTA ANDS. M. FAZAL Au, JJ.] . lnccrne~tax _Act_ (11 of 1922) _s._ 10(2) _(Xl')-Scdpe_ _of-Payn1ent_ _to._ _nianag-_ _1ng_ _agent_ _of_ _co1npe11sation_ _fo'r_ _tcr111i11ati11g_ _n1anogi11g_ _agency-Whether_ _capital_ _or revenue expenditure._ An: analysis of s. 10(2){xv). of tM Income-tax Act, 1922, shows that in order to be a deductible expenditure the· amount ha-Y to fulfil two conditions, (i) that it must be laid out wholly and exclusivel:Y for the purpose of the· business, profession or vocation; and (ii) that i_t should not b~ an expenditure of a capitnl nature. Both these conditions have to be complied with before an· ass&see can claim deduction under the section. [660 G] Sorr.e: of the tests that have been evolved. by courls for determining v.i·hen, on the facts and circumstances of a particular case, the expenses disbursed by an ~sses~ee amount to a capital expenditure or revenue r\::ceipt are : (a) Bringing into an asset or advantage of enduring nature would lead to the ir.Jerence that the expenditure is of a capital nature. The terms 'asset' or 'advantage of enduring nature' :ire dc~criptive ;fnd the question will depenJ upon the facts of each case. (b) An item of disbursement may be regarded as of a capital nature when _it_ is re1atable to a fixed asset or capital, whereas circulating capital or stock-in-trade would be revenue receipt. _Joh:i_ _S111ith_ _&_ _Sons_ v. _Moore_ 12 T.C. 266, 282, referred to. A B c D ) _(_ ·- ~ ## _r_ \ J( #### • ~ { _}--_ ... (c). E.xpenditure relatinl! to frame work of the business is generally or a capital nature. E (d) \Vhen a managing agency is tern1inatcd. if 1he tern1ination is i11 _terraren1,_ that is, if commercial expediency requires that the agency should be terminated as it had becon1e onerous, or it was creating difficulties or the agents \\i:re guilty of negli'gencc, etc., or if any payments. were n1ade as retrenchment compensation, or confirn1cnt of benefits on employees or for termination of other disadvantage~ or onerous relationship, it would be a capital expenditure, but if it is purely voluntary i'or obtaining substantial benefits, it would be revenue· e\pen<liturc. [659 1E-660Dl ~ Tn the. p;·csent cnse, the appel!anL agreed to employ a firni. as its managing agent! for 20 years and to pay them comn1i~sion at 2.! % . But after two years, the appellant terminated the agreement. Th~ managing agents received Rs. 2,50,000 as compensation and '?Xecuted a release deed. The appellant thereafter employed another managing agent at _2o/o_ con1mission. There was nothing to show that the out-going managing agents were guilty of any faches, negligence, or that they had caused any loss or disadvantage to the;..pppoellant so. a.;; to justify the sudden termination of their agency, or that they did not agree t<.l reduce the commission. On the other hand, the Board of Director~ paid high con1pliments to the 011tgoing: managing agents. By employing the new managing agents. at the lesser con1mission, a net profit of Rs. 30,000 was made by the appellant per annum. The members of the outgoing and incoming agents, belonged to the same family a<; the appellants, showing, that the appellants were interested in both of them. The appellant contended that the 1;:xpenses of Rs. 2,50,000 was in.curred by the appellant wholly and exclusively for carrying on tlie business of the company and would therefore be an allowable deduction under s. 10(2)(xv); but the department and the Tribunal negatived the contention. On· reference. the High c·ourt held that the expenditure· was incurred wholly and exclusively for the purpose of' appellant's business. but. as the amount 'Y"~s in the nature of a capital expenditure, it was not deduwtible under the provision. F G H J. ~. COTTON I.TD. _V._ C.I. T· 649 Dismissing the appeal to this Court. HELD·: The High Court wa_s right in holding that the disbursement of compensation of Rs. 2,50,000 was of a capital natlire and was therefore not a deductible expenditure under s. 10(2) (xv). [661 G] ( J) Merely because the expenditure is incurred in the course of the business it could not be said that it would never be a capital expenditure. Section 37 of the 1961 Act corresponding to s. 10(2)(xv) of the 1922 Act, itself contemplates a contingency where, even though the expenditure 1s incurred wholly and exclusiVely for. the purpose of the business, it mary; still be Of a capital nat_ure. But the High Court wns in error in this casi . _._ _in_ holding that the expenditure was wholly and exclusively for the purpose: cif the business, because. the findinu is not borne out by the facts and circumstances of the case. [660 H-661 A, G-H] ###### • ##### ' A B D E F G H (2) The question whether compensation paid to· the outgoing managing agents is capital or revenue expenditure· depends on the facts and circumstances. C of each case. [662 A-BJ (3) 1be present case is covered by the decision of this Court in _'Godrej-_ _(ompany_ v. _C.l.T._ _Bombay_ _City_ (47 J.T.R. 381). That case has considered all the previous ch!cisions and has laid down that in circumstances such as _in the instant case the expenditure would be a capital expenditure in the_ hal)ds of the payer and a capital receipt in the ·hands of the payee-company within th~ meaning of s. 10(2)(xv). The contention that the case was concerned only with the nature of the payment in. the hands of the payee-con1pany and that the o;bservations regarding the nature of tbe payment in the hands ()f the. payer-company would be _abiter,_ is without substance. [654C, G-Hl (4)(a) The appella.nt has brought int.a existence an advantage of an:Cnduring nature by the change in managing agency, because, the amount of' Rs. 30,000 which the appellant got by way of recurring benefit per annum must l>e_1egard'ed_ _as an advantage_ _of an_ endurin~ _nature_ so as _t9_ fall \Vithin its definition in _A;herton_ v. _Briti3,h_ _Insulated and Helsby Cables Ltd._ ( 10 T.C. 671 ), leading to the inference that the expenditure is of a capital nature. [661 F] , (tJ.) It was not the case of the appellant reducing its expenditure by getting: rid of the managing agency and taking over the management itself to save !he middleman's profit. [653 BJ (c) In the present case. the only inference that could be dra'iP- froni the circumstances of the case is that the termination of the managing-' agency by the appellant was with the oblique motive of benefiting both the managing agents-, in whom the appellant was interested, and not because of any commercial expediency. [661 DJ _C.l.T._ _West_ _Bengal,_ _II, Calcutta_ v. _CJal_ _Shipment_ (P) _Ltd._ [1971) 3 S.C.C . 736, 740-41. _The Comn1issioner_ _of_ _Jncome .. tax_ _Madrt.)5_ v. _M/s._ _Ashok_ _Leyland_ Ltd. rI9731 3 S.C.C. 201. 204 and-M. _K. Brothers_ (P) _Ltd._ v. _Con1rnissioner_ _of_ _Income-tax Kanpur_ [1973] 3 S.C.C. 30, 34 followed. _Anglo Persian Oil Co. (India) Ltd. v. Commissioner_ _of lncon1e-tax_ I J.T.R. 129, 133,; _Cornmi.ssioner_ _of_ _Income-tax_ v. _Shaw Wallace and Company_ \L.R. _59_ I.A. 206, 211; Kc~"ani _Chand.Thopar and Bros._ (P) _Ltd._ v. _Commission.er_ _of_ _lncorne-tCJX_ _(Central) Calcutta_ 80- I.T.R. 167, 171; _Commissioner_ _of_ _lnconie-tax_ _Calcutta_ v. _Turner Mor.risolt_ _&_ _Company Private Ltd._ 68 _l.T.R._ 147, 156 and _Greaves Cotton_ & _Co. Ltd._ _v._ _Comniissioner_ _of_ _Income-tax, Bornbay City_ 4SI.T.R. 111. 134, explained. CIVIL APPELLATE JURISDICT!i : Civil Appeal No. 2203 of 1"170. Appeal bv Special Leave from the Judgment and Order dated .the 26th September, 1969 of the Allahabad High Court in Income Tax Ref. No. 420 of 1963. II~L925SupCI/7S 1 650 SUPREME COURT REPORTS [1976] 1 S.C.R. _A._ _K._ _Sen_ and _M._ _M,_ _Kshatriya,_ for the appellant. _B. B. Ahuja_ and S. _P._ _Nayar,_ for the respondent. The Judgment of the Court was delivered. by A FAZAL ALI, J.-This is an appeal by special leave against the order of the High Court of Allahabad dated September 26, 1969 on a B reference made to it by the Income-tax Appe!Jate Tribunal, Allahabad. Bench. The facts giving rise to the present appeal may be brieR.y summarised as follows : The appellant assessee is a public limited company known as 'J;K. Cotton Maunfacturers Ltd' and the matter in dispute relates to the. assessment year 1944-45. The appellant entered into an agreement with the firm called Juggila! Kamlapat and employed the said lirm as the Managing Agents of the Company. The agreement was· executed on August 8, 19411 and the Managing Agents were to work for. Jhe Company for a period of 20 years and were to charge commission at the rnte of 22%. About two years later the appellant decided to terminate the agreemel)t executed in favour of Juggilal Kamlapat and the said Managing Agents readily accepted the offer made' by the appellant as a result of which a deed of release was· _(_ ##### .. .. ### • # jil exeeu.ted by the Managing Agents Juggilal Kamlapat on September 28, 1943. Under the release the appellant agreed to pay a sum of Rs. 2,50,000 to the outgoing Managing Agents by way of cqni-. pensation for terminating the agreement much earlier than stipulated bnder the original contract., The appellant, however, employed another firm. namelv. J .K. Commercial Corporation as their new Managing Agents and executed an agreement in their favour on. September 30, 1943. The action of the Company was approved. by th~ Board of Directors. The dispute in the instant case centres round the question as to whether the compensation of Rs. 2,50,000 paid to the outgoing Managing Agents was a capital or a revenue expenditure incurred by the appellant. The stand taken by the assessee before the revenue was that as the expenses were incurred wholly and exclusively for the purpose of carrying on the ):lusincss of the Company it would fall under s. 10(2}(xv) of the Income-tax Act, 1922, which is the same as s. 37(1) of the Income-tax Act, 1961, and therefore an allowable deduction under the aforesaid provision. The appellant's case was negatived by the Income-tax Officer, the Appellate Assistant Com c D E F .G H mis~i<:mer and also by the Tribunal. 'The Tribunal also refused to make a reference to the High Court as in i_ts opinion no point of law arose. The appellant then aplJ:roaciied the High Court of Allahabad which directed the Tribunal to nlike a reference on the following luur points and accordingly the Tribunal made a reference to the High Court on those points : "l. Whether there was any material on the basis of which the Appellate Tribunal could hold that the goodwill of A B .. c D E F - G H Mr. Asoke Sen learned counsel for the appellant has submitted two points before us in support of his case. In the first place it was contended that the High Court having held that the expeinditure - incurred was wholly and exclu&ively for the purpose of the business should have held that s. 10( 2) (xv) . applied in terms and. therefore. the expenditure was a revenue e;penditure which would be deductible utider s. 10(2) (xv)· of the Income.-tax Act; and secondly, it was submitted that the High Court was in error in not correctly applying the decision of this Court in _Godrej_ _&_ _Co._ v. _Commissioner_ _of_ _Income-tax Bombay City(_ _[1]_ _)._ The learned counsel for the appellant has adumbrated four propositions before us for consideration : ( 1) Where a payment is made by the payer Company to the payee Company in lieu of termination of its agency, it does not follow that the said payment which was made for the purpose of business mu~t _ipso_ _facto_ be considered to be capital expenditure in the hands of the payer Company. (2) So far as the paye_e Company is concerned. the law is that penerallv anv comoen<ation received by it must he considered as capital receint (I) 37 I.T.R. 38 L. J. K. COTTON LTD. _v._ c.1.T. _(Fazal_ _Ali,_ J.) 651 Juggilal Kamlapat Cotton Manufacturers Ltd. was transferred to the J.K. Cotton Manufacturers Ltd. 2 .. Whether there was any material on the record for a finding that the said transfer had l)ee.n for a sum of Rs. 1,00,000 or for any other sum, and 3. Whether there was any material on the record from which it could be held that the land had appreciated in value from Rs. 49,526!J3/6 to Rs. 1,00,000. 4. Whether a sum of Rs. 2,50,000 paid by the assessee to the Managing Agents for the termination o_f their Manai: ing Agency is an expenditure admissible under Section 10(2) (xv) of the Income-Tax. Act." When the matter was heard by. the High Court, the assessee did not press any other point cx9eptiµg point No. 4 which related to the question whether a sum of Rs. 2,50,000 paid by the assessec to the outgoing Managing Agents was an admissible expenditure under s .. 10(2) (xv) of the Income-tax Aq, 1922. The High Court by its. judgment dated September 26, 1969, .held that the expenditure in question was incurred wholly and exclusively, for the purpose of assessee's business, but as tne amount was in the nature of a capital expenditure it was not deductible under the provisions of the Incometax Act and hence this appeal before us by special leave. 652 (3) (4) SUPREME COURT REPORTS [1976] I s.c.R. So far as the payer Company. is concerned, if payment is for the purpose of business, the mere fact that it has, by virtue of the payment, increased its profits and r~uced its expenses, should not be regarded as expenditure ~f capital nature but would be one in the course of basiness unless some obltque or gratuitous purpose is involved. The principles laid down in _·Godrej_ _&_ _Co.'s case_ (supra) would have to be read as laying down only a proposition that the payer company, namely, the managed company, wa_s makin.i: a payment . to the payee company 11.'.l a capital contribution to the payee company and in the hands of the payee company the amount bec(}mes a recajpt of compensation for incurring losses. In other words the High Court did not correctly apply the decision of this Court in _Godrej_ _&_ _Company's case_ (supra). So far as propositions Nos. (1) to (3) are concerned their correctness cannot be disputed, because these propositions are covered by abundant authorities. As regards proposition No. ( 4) it seems to us that on a close and careful reading of the judgment of this Court in _Godrej_ _&_ _Company case_ (supra) the contention of the learned counsel for the appellant on this point appears to be without any sub stance. We shall show that the facts of the. present case appear to be on all fours with the ratio laid down by this Court in _Godrej_ _&_ _Co.'s case_ (supra), Mr. Ahuja appearing for the revenue, however, submitted that the termination of the managing agency by the appellant was made for extra-commercial reasons, the main intention being to benefit both the outgoing Managing Agents Juggilal Kam!apat and the incoming Managing Agents J .K. Commercial Corporation which belonaecJ to the same family of Singhanias and, therefore, as the compensation paid to the outgoing Managing Agents led to a profit to the Company it would amount to acauisition of a new asset arid would, therefore, be a capital expenditure. Before dealing with the contentions raised before us by the learned counsel for the appellant, it may be necessary to mention a few facts which have been found by the Trib.unal and whose c!orreetness has not been disputed before us. ( 1) That there was no suggestion nor any iota of evidence to show that the outgoing Managing Agents were in any way,guilty of !aches, negligence or that they J.!ad caused any loss or disadvantage to the appellant so as to justify a sudden termination of their agency after two years although it was stipulated to continue for 20 years. On the other hand the annexures filed alonJ! with the statement of the case sent by the Tribunal to the High Court clearlv show that the Board of Direcors pakl high compliments to the outgoing Managing Agents Juggilal Kamlapat. · B c D E F G H **A** **B** **c** _{_ **D** **E** **F** ' , ' **H** J. K. COTTON LTD. _v._ C.I.T. _(Fazal Ali,_ _J.)_ 653 (2) That although the incoming Managing A.gents J.K. Commercial Corporation were prepared to serve the appellant on **a** commiss10n of 2% only, there is nothing to suggest that the outgoing Managing Agents had refused to reduce their commission if that was the c'nly ground for changing hands of the managing agency . ( 3) Thi~ is not a case wher~ the appellant reduced its expenditure by doing away with the middleman's profit, e.g. to get rid of the managing agency and taking the managing agency itself. It is only a question of substituting one Managing Agent for another. ( 4) That although a compens_ation of R.§. 2,50,000 was paid by the· appellant to the outgoing _Managing Agents yet by employing the new Manal!ing Agents a net profit of Rs. 30,000 was made by the Company which was in the nature of a recurring benefit, apart from other facilities . (5) That constitution of the two Managing Agents, namely, outgoing and the incoming Managing Agents shows that Singhania family (ti]e appellant) had major interest in both of them. These facts have been clearly proved by the additional documents filed in this Court which were the annexures ftled by the Tribunal in the statement of the case sent to the High Court along with .the reference. Annexure 'G' at p. 69 of -the. Paper Book shows that at the time of terminating the agency of Juggilal Kamlapat high compliments were paid to the said Managing Agents as would appear from the minutes of the meeting held on August 24, 1943. The following observations were made in that meeting : "There was a frank discussion among the Directors and it was unanimously agreed that even though the present Managing Agents have been rendering very good senices to the Company, anki have been carrying on its affairs in a creditable manner, there was no denying of the truth that the appointment of Managing Agents of the constitution and composition of the **J.K.** Commercial Corporation Ltd. would give to the Company unique advantages which the present Managing Agents may perhaps be not able to impart, being a partnership firm. and further as the J .K. Commercial Corporation Ltd., has offered its services on lower terms, the company would be b~nefitted by a saving of above Rs. 30,000/- per annum." The minutes quoted above would clearlv show two things-( 1) that very high compliments were !>!lid to the outgoing Agents for their very good services : and (2) that bv the terms offered to the new Agents, namely. J.K. Commercial Corporatioh .there was to be **a** saving of Rs, 3G,GOO/· per annum. Similarly the Tribunal iu its order of reference to the High Court and the statement of case has (ound as follows : ( p. 65 of the Paper Bookl iUPREME COURT REPORTS [1976] l S.C.R. 654 "The constitution of the two managini: agents do show that the Sini:hania family has major interest in both of them:· The Tribunal on the basis of these facts came to the conclusion that the compensation was paid due to extra-commercial reasons and could not be regarded as expenditure incurred whoJiy and exclusively for th~ purpose of the business. The High Comt differed from the reasons given by the Tnbunal but affirmed its view on the ground that the expenditure incurred by the assessee Company being of a capital nature it was not deductible. Having regard to the facts and circumstances of the present case ·we have no doubt that this case is wholly covered by the decision of this Court in _Godrej_ & _Company's case_ (supra). In this case, while it is true that this Court was dealing _with the case of compensation in the hands of the payee Company ;yho were the Agents, yet in view of the clear observations mat!e by the Court there can be no manner of doubt that the expenses incurred in the present case by way of payment of compe.nsation to the outgoing Agents would be of a capital nature. This Court in the aforesaid case observed as foJiows : "In the light of those decisions the sum of Rs. 7,50,000 was paid and received not to make up the difference between the higher remuneration and the retluced remuneration but was in reality paid and received as compensation for releasing the company from the onerous terms as to remuneration as it was in terms expressed to be. In other words, so far as the managetl company was concerned, it was paid for securing immunity from the liability to pay higher remuneration to the assessee firm for the rest of the term of the managing agency and, th_erefore, a capital expenditure and so far as the assessee firm was concerned, it was received as compensation for the deterioration c>r injury to the managing agency by reason of the release of its rights to get higher remuneration and, therefore, a capital receipt within the decisions of this Court in the earlier cases referred to above." Mr. Asoke Sen tried,to distinguish this case on the ground that the Court was concerned in the _Godrej_ & _Company's_ case (supra) only with the nature of the payment in the hands of the payee compao:y and any observations made as to what would be the nature of the payment in the hands of the payer company would be _obiter,_ and, therefore. not binding on this Court. We are, however, unable to agree with this view. _Godrej_ & _Company's case_ (supra) has considered all the previous decisions and has clearly laid down that in the circumstances, such as the present, the expenditure incurred would be a capital expenditure in the hands of the payer company and a capital receipt in the hands of the payee company within the meaning of s. 10(2} (xv) of the Income-tax Act. The l:listinction soui;it to be made by the learned A n c D E F G H ' B c D E F - G H J. K, COTTON LTD. _v._ C [0] I.T. _(Fazal Ali,_ _!.)_ '655 counsel for the appellant is extr~mely subtle and it is a distinction without any difference. Moreover, there are a number of other circumstances which clearly show that the expenditure concerned cannot, but be treated as a capital expenditure., Mr. Asoke Sen then submitted that if the _Godrej and Company'3_ case (supra) is held to be an authority for the proposition that the amount of compensation in the hands of the payer company also would be of a capital nature, then that case was wrongly decided and should be re-considered by us. We are, however, unable to agree with this argument, because apart from the principle of _stare decisis,_ on the tacts and circumstances of the present case, we do not find any special reasons to reconsider the decision in _Godrej_ _&_ _Company's_ case (supra) particularly when in view of the facts and circumstances of this case we are really of the opinion .that the amount in question is undoubtedly a capital expenditure. Reliance was placel:i by the learned counsel for the appellant on a decision of the Calcutta High Court in _Anglo-Persian Oil_ _Co,_ _(India)_ _Ltd._ v. _Commissioner_ _of Income-tax(!)._ It is true that some observations in the aforesaid case are presumably in favour of the appellant but the Calcutta High Court was careful to guard itself against its decision being treated as a general principle to apply to all cases and in this connection it observed as follows : "The case of payer and payee must be considered upon an independent statement of the relevant facts prond in his presence, there being no over-riding principle of law that the Income Tax authorities are entitled to tax once at least on every payment." Ia that case the Court proceel:!ed on the admitted finding of fact that the expenditure incurred was wholly and exclusively for the purpose of the business. This, however, is not the case in the present case. In these circumstances, the decision in _Anglo-Persian Oil Co, (India)_ _Ltd's case(')_ does not appear to be of any assistance to the assessee. Reliance was also placed on a decision in _Commissioner of lncome-_ _tax_ v. _Shaw Wallace and Company(')_ in which case the Judicial Committee of the Privy Council merely affirmed the finding of the High Court that the sums received by the respondents were not income, profits or gains within the meaning of the Act though they gave different reasons for that conclusion. It may be noticed that _Shaw_ _Wallace and Company case(_ _[2 ]_ _)_ turned upon the facts and circumstances of the case and the nature of the payment made to the Company. While affirming the finding of the High Court their Lordships observed as follows : "The question wa&, however, re-stated by the learned Chief Justice in more precise terms-namefy, 'whether these sums are income profits or gains within the meaning of the (I) 80 I !.T.R. 129, 133. (2) L.R. 591.A. 206, 211. 656 SUPREME COURT REPORTS [1976) I S.C.R. Act at all,' and for the reasons stated in his judgment he came to the conclusion that they were not. Their Lordships think that his conclusion was right though they arrive at this result by a slightly different road." Reliance was also placed on a. decision of this Court in _Karam_ _Chand Thapar and Bros. P. Ltd._ v. _Commissioner_ _of_ _Income-tax_ _(Central),_ _Calcutta(_ [1] ), where this Court observed as follows : "As held by this court in _Commissioner_ _of Income-tax_ v. _Chari and Chari Ltd._ (57 l.T.R. 400), that ordinarily compensation for loss of office or agency is regarded as a capital receipt, but this rule is subfecf to an exception that payment received even for termination of an agency agreement would be revenue and not capital in the case where the agency wa< one of the many which the assessee held and its termination did not impair the profit-making structure of the assessee, but was within the framework _of the business, it being a necessary incident of the business that existing agencies may be terminated and fresh agencies may be taken." This was, however, a case where their Lordships were dealing with the question as to whether or not the amount of compensation in the bands of the payee company for loss of office or agency would be regarded as a capital receipt. _Karam Chand Thapar_ _and_ _Bros._ _l'._ _Ltd's case_ (supra) does not throw any light on the point with which we are concerned in the instant case. Great. reliance was sought to be placed on the decision of the Calcutta High Court in _Commissioner_ _of_ _Income-tax,_ _Calcutta_ v. _Turner Morrison_ _&_ _Company Private Ltd.(2)_ where the High Court observed as follows : "It is now well settled that the expression 'expenditure laid out or expended wholly and exclusively for the purpose of such business' in~ludes expenditure voluntarily incurred for commercial expediency and in order indirectly _to_ facilitate business. It is immaterial if a third party also benefits thereby. It is further well settled that an expenditure incurred in maintaining the _efficiency of the manpower from time to time utilised in a business is also expenditure wholly or exclusively laid out for the purpose of such business. It is also well settled that the employment of, say a director, at a reasonable extra remuneration _to_ supervise a particular business of the company, regard being had to his expert knowledge in that particular line of business, is expenditure within the meaning of section 10'(2) (xv) a·nd the revenue authorities are not justified in reducing such remuneration. 'fhe expression 'commercial expediency' .is an expression of wide import and expenditure in commercial expediency includes such expenditure as a prudent man may incur for (l) 80 I.T.R. 167, 171. (2) 68 I.T.R. 147. 156. A B c D E _I_ F G H A B c J. K. COTTON LTD. _v._ C.J.T. _(Fazal_ _Ali,_ J.) 657 the purposes of business. AJl expenditure which is entirely gratmtous and has no connecnon with the business does not come within the meaning of section 10(2l(xv) of the Act." This case also is )listinguishable from the facts of the present case, inasmuch as in _Turner Morriron_ _&_ _Company's case_ (supra) there was no question of tennination ofi any managing agency but what had happened was that two ~irectors had 1etired and. in their place an cxgert director was appornted to manage the affam of the company. On the facts of that case this Court held that the exponditure was incurred for commercial expediency in order to facilitate business. In the instant case, as we have already pointed out, termination of the managing agency of the outgoing Agents was a voluntary act not caused by a_ny negligence, inefficiency by the outgoing managing agents. Jn these circumstances on the facts and circumstances we would not consider whether it was commercially expedient in order to facilitate business that the managing agency of th.e outgoing Agents should have been terminated. Learned counsel for th~ appellant also referred us to the decision of the Bombay High Court in _Greaves Cotton_ _&_ _Co._ _Ltd._ v. _Commis-_ _sioner_ _of Income-tax, Bombay_ City( [1] ) where the Bombay High Court observed as follows : _-I_ "We have already said that the inference drawn on the material on record is that the managing agency agreement had been terminated with the object of taking over its management by the board of directors and there is no E evidence which will leatl to an inference that it was done with the oblique motive or oblique purpose of securing the pavment of the said amount of Rs. 17 lakhs to the managing agents. For reasons stated abQve, our aruwer to the question is in the affirmative, _i.e._ in favour of the assessee." F This was obviously a case where the Managing Agents had not changed hands at ~11 but what happened that the managing agency was ter minateid and the managing agen(:y was taken over by the Board of Directors themselves. Thus this case also does not appear to be of any assistance to the appellant. G H In _C.l.T. West Bengal_ II:, _Calcutta_ v. _Coal_ _Shipment_ _(P)_ _Ltd.(2)_ this Court indicated the various coruiderations which would govern the Court in decitling whether a particular amount is of a capital nature. Relying on a decision in the case of _Atherton_ v. _British_ _Insulated and He/sby Cables_ Ltd.( [3 ] ) this Court observed as follows: "The character of the paymentcan be determined it was added, by looking at what is the true nature of th~ asset _'Vhi~~-~~s-~':'.11__acquired and not by the fact whether it is a (1) 48 J.T.R. lll,"134. (2) [1971]3 S.C.C. 736, 740, 741. (3) JO T.C. 671. _658_ SUPREME COURT REPORTS [1976] I S.C.R. payment in a lump-sum or by instalments. It is also an accepted proposition that the words 'permanent' and 'enduring' are only relative terms anli not synonymous with perpetual or ever-lasting. There are some other tests like those of fixed capital and circulating capital for determining the nature of the expenditure. An item of disbursement can be regarded as capital expenditure when it is referable to fixed capital. It is revenue when it can be attributed to circulating capital." Similarly in _The Commisoioner of Income Tax, Madras_ v. _M/s._ _Ashok_ _Leyland Ltd._ CJ this Court observed as follows : "A long line of decisions have laid down that when an expenditure is made with. a view to bringing into existence an asset or an advantage for the enduring benefit of a trade, there is good reason (in the absence of special circumstances leading to the opposite conclusion) for treating such an expenditure as properly attributable not to revenue but to capital. From the facts found, it is clear that the managing agency was terminated on business considerations and as a matter of commercial expe)iiency. There is no basis for holding that by terminating the managing agency, the company not only saved the expense that it would have had to mcur in the relevant previous year but also for few more years to come. It will not be correct to say that by avoiding certain business expenditure, the company can be said to have acquired enduring benefits or acquired any income yielding asset." 1t may be seen that in that case there was a finding of fact that the termination of the managing agency was purely on business considera· tions and as a matter of comJ!ls:J:cial expediency and that no enduring benefits were acquired by the company. . Similarly in _M._ _K. Brothers_ (P) _Ltd._ v. _Commissioner of Income-_ _tax,_ _Kanpur(')_ my brother Khanna, J., speaking for the Court indi cated the real tests to determine whether an amount is of a capital nature. In this connection the Court observed as follows : "The answer to the question as to whether the money paid is a revenue expenditure or capital expenditure depends not so much upon the fact as to whether the amount paid is large or small or whether it· has been paid in lump-sum or by instalments, as it does upon the purpose for which the payment has been made and expenditure incurred. It is the real nature and quality of the pa:yment and not the quantum or the manner of the payment which would prove decisive. If the object of making the payment is to acquire a capital (1) [1973] S.C.C. 201, 204. (2) [1973] S. C.C. JO, 34. i'.A _)....._ ###### ' B ~ _x_ c D E F G A J. K. COTTON LTD. _v._ c.1.T. _(Fazal Ali,_ _J.)_ 6 5 9 asset, the payment would partake of the character of a capital payment even thougli. it is made not in a lump sum but by instalments over a period of time." It would thus appear that n)!Jllerous cases have laid down various tests to determine as to when on the facts and circumstances of a parB ticular case the expenses disbursed by an assessee amount to a capital expenditure or a revenue receipt. The classic test laid down is by Viscount Cave, L.C., in _Atherton's case_ (supra) where he observed at pp. 192-193 as follows: 'But when an expenditure is made, not only once and for all, but with a view to bringing into existence an asset C or an advantage for the enduring benefit of a trade, I think that there is very good reason (in the absence of special circumstances leading to· an opposite conclusion) for treating such an expenditure as properly attributable not to revenue but to capital." _Atherton's_ case (supra) has been followed by this Court in a large -/ **D** number of decisions such as in _M/s._ _Ashok Leyland Ltd. case_ (supra) and _Coal Shipmelli/_ (P) _Ltd's case_ (supra) and lot of other cases. Several tests that have been evolved over the years by this Court as also the other High Courts may be briefly formulated as follows : E F **G** H (1) Bringing into an asset or advantage of endnring nature would lead to the inference that the expenditure disbursed is of a capital nature. **These** **terms,** **such** **as** **"asset"** **or** **"advantage of enduring** **nature"** **are,.** however, purely descriptive rather than definitive and no rule ·of universal application can be laid down. Ultimately the question will have to depend on tht! facts and circumstances of each case, namely, quality and quantum of the amount, the position of the parties, the object of the transaction which has impact on the business, the natnre of trade for which the expenditure is incurred and the purpose thereof etc. (2) An item of disbursement may be regarded ns of a capital natnre when it is re!atable to a fixed asset or capital, whereas the circulating capital or stock-in trade wou!U be treated as revenue receipt. Lord Haldane in _John Smith_ _&_ _Sons_ v. _Moore(!)_ has aptly and adroitly explained the terms 'fixed capital' and 'circulating capital' thus: "Fixed capital is what the assessee turns into profit by keeping it in his own possession and circulating capital is what he makes profit of by parting with it and letting it change masters. --------(!) 12 T.C. 255, 282 660 SUPREME COURT REPORTS (1976) 1 S.C.R. ( 3) Expenditure relating to framework of business is generally capital ex~enditure. ( **4)** Another important a_nd safe test that may be laid down particularly in cases where the managing agency is terminated would be to find out whether the termination of the agency is _in terrorem_ or purely voluntary for obtaining sub~tantial benefits. In other words, the decisive test to determine whether or not termination of the agency is _in_ _terrorem_ would be to find out if in such case commercial expediency requires that the agency should be terminated as it had bec0me onerons or it was creating difficulties or the Agents were guilty of negligence etc. It will also include payments for retrenchment compensation or conferment of benefits on employees or termination of other disadvantages or onerous relationships. , **A** ;..._ ~ **B** ... _)(_ j c These are some of the instances which I have given but they are bv no means exhaustive. The present case, however, falls within ~ condition No. _(_ 4) pointed out by us above, and the termination of the **D** agency cannot be said to be _in terrorem_ but was voluntary so as to obtain an enduri:ig or recurring benefit. Before applying these tests to the facts of the present case, I would like to stress the important ingredients of s. 10(2)(xv) of the Income-tax Act, 1922 itself. Section 10(2)(xv) runs thus: "10. (2) Such profits or gains shall be computed after making the following allowances, namely : (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 assesse.;_ laid ont or expended wholly and exclusively for the purpose of such business, profession or **vocation.''** An analysis of this section woi,ld clearly show that in order to be deductible expense the amount in question must fulfil two essential conditions: (i) that expense must be laid out wholly and exclusively for the purpose of the business, profession or vocation; and (ii) that it should not be expense of a capital nature. Both these conditions have to be complied with before an a_ssessee can claim deduction under s. 10(2)(xv). The High Court in this case has found that while the assessee had complied with the first condition that the expenditure was incurred for the purpose of the business, yet it has held that in the circumstances the expenditure is of a capital nature. It cannot be argued as was suggested by Mr. Asoke Sen at one time that whenever an expenditure is incurred in the course of the business it would never be a capital expenditure because s. 3 7 of the Income-tax Act, 1961. **E** **F** G H _f_ **A** **B** c _I_ _D_ E F G **H** J. K. COTTON LTD. _v._ c.1.T. _(Fazal_ _Ali,_ _J.)_ 661 itself contemplates contingency where even !]i.gugh the expenditure may be incurred wholly and exclusively for the purpose of the business j'et it may be of a capital nature. ' Let us now apply the tests laid down by the Courts as specified by us to the facts of the present case. We have already given the facts found by the Tribunal which have not been disputed before us. In this connection there are two circumstances which clearly indicate that the expenses incurred by tlie assessee were not dictated by com mercial expediency but were inspired by a profit-hunting motive : ( 1) That there was absolutely no necessity to terminate the managing agency of Juggilal Kamlapat only two years after the appellant entered into agreement with them. There was no complaint that the Agents had in any way caused any loss or }.:lamage to the appellant or to their reputation, nor was there anything to show that the outgoing agents were guilty of rn~ligence, iaches, fraud or ineihc1ency. In these circumstances, therefore, the only irresistible inference that could be drawl). is that the assessee wanted to benefit both the firms, namely, incoming agents and the outgoing agents, which belonged to the Singhania family as found by the Tribunal and not disputed before us: The outgoing agents were benefited because an amount of Rs. 2,50,000 was paid to them and the incoming agents were benefited because they were given the managing agency of the Company and as found by the Tribunal the appellant had pledged their goods in lieu of advancr,. (2) That it is the admitted case of the appellant that by virtue of the fact that the incoming agents had agreed **to** charge onlv 2% commission, the appellant got a benefit ot Rs. 30,000 per annum. This amount is a recurring benefit to the appellant and can safely be regarded as an advantage of an enduring nature so as to fall within the definition laid down by Viscount Cave, **L.C.** In these circumstances. therefore, the present case is fully covered by the Uecision of this Court in _Godre_ _j_ & _Company's· case_ (supra). For these reasons we are satisfied that the High Court was right in holding that the disbursement of compensation of Rs. 2,50,000 was of a capital nature and was, therefore, not deductible expenditure under s. 10(2) (xv) of the Income-tax Act. 1922. We, however, feel that the High Court was in error in giving a cryptic finding that the expenditure in question was incurred wholly and exclusively for· the purpose of the business. This finding has been arrived at without considering the facts mentioned by us above and is not borne out from the facts and circumstances proved in this case. Nevertheless we uphold the order of the High Court on re~sc:>ns different from those ~Ven by the High Court. 662 SUPRE1fE COURT REPORTS (1976) l S.C.R. We would, however, like to make it clear that we have held that A the compensation paid to the outgoing Ageµts in the peculiar facts of the present case amounts to capital expenditure. But we should not be understood _as laying down a general rule that in all cases where compensation is paid to the Managing Agents whose agency is terminated it wou!ll amount to capital expenditure. We have already pointed out the various tests to be applied which are by no means exhaustive, nor are they 1of universal application. Each case has to B be examined in the light of the circumstances of that case. The appeal accordingly fails and is dismissed with costs. V.P.S. _Appeal dismissed._ _I_