JUDGMENT
Dr. B.P. Saraf J.
1. By this reference made under section 256(1) of the Income-tax Act, 1961, at the instance of the assessee, the following question has been referred by the Income-tax Appellate Tribunal to this court for the opinion :
“Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the payment of Rs. 1,07,767 was a capital expenditure?”
2. The assessee and his brother one E. F. Mehta were carrying on business at Bombay in partnership under the firm name of F. D. Mehta and Co., each having an equal share. This partnership was entered into on December 22, 1966. The business of the firm, F. D. Mehta and Co., comprised two concerns – one, a departmental store in the name of “Great Western Stores” and the other, a unit engaged in the manufacture of chocolates, etc., in the name of “Dr. Writers”. Both these concerns were situated in the same premises. In or around the year 1968, certain disputes arose between the two partners which were referred to arbitration. As per the arbitration award, Mr. E. F. Mehta retired from the partnership with effect from December 31, 1971, on settlement of his claim at Rs. 10,01,101. This amount included a sum of Rs. 1,07,767 which was described in the cash book as payment to preserve and maintain the business and to prevent disruption which would otherwise result in protracted litigation. The assessee claimed deduction of this amount from his share of income from the firm of F. D. Mehta and Co. on the ground that being made for preserving and maintaining the business and preventing its disruption, it was an allowable deduction under section 37 of the Act. The Income-tax Officer did not allow the above claim of the assessee as, according to him, it was not an expenditure related to the business of the assessee. The assessee appealed to the Appellate Assistant Commissioner of Income-tax. The Appellate Assistant Commissioner was of the opinion that the entire sum of Rs. 1,07,767 could not be said to have been for preserving the business, a portion thereof was attributable to giving generous and liberal aware and as such bifurcation of the said amount was required. He, therefore, held that 50 per cent. of the above amount was paid for preserving the business from disruption and the other 50 per cent. was for making a generous award. Accordingly, he directed the Income-tax Officer to allow deduction of a sum of Rs. 53,884. Aggrieved by the above order of the Appellate Assistant Commissioner, the Revenue appealed to the Tribunal. The assessee also filed cross-objections before the Tribunal. The Tribunal held that the expenditure, though incurred for the purpose of business was in the nature of capital expenditure and, as such, no part of it was allowable as a deduction under the provisions of section 37(1) of the Act. The Tribunal, therefore, set aside the order of the Appellate Assistant Commissioner and upheld the order of the Income-tax Officer. Hence, this reference at the instance of the assessee.
3. Mr. F. B. Andhyarujina, learned counsel for the assessee, submitted before us that the payment of the sum of Rs. 1,07,767 was made to Mr. E. F. Mehta, for preserving and maintaining the business and preventing its disruption and hence, it was in the nature of revenue expenditure. He further submitted that as a result of the disputes between Mr. E. F. Mehta and the assessee, the business of the firm and the profitability thereof were adversely affected in the years 1969, 1970 and 1971. It was in such circumstances that the disputes were referred to arbitration and settled in terms of the award of the arbitrators. Counsel further submitted that it was in terms of the award that Mr. E. F. Mehta retired from the firm on settlement of his claim at Rs. 10,01,001. The amount of Rs. 1,07,767 which was included in the above amount was paid to Mr. E. F. Mehta to avoid litigation and earn income from the business, which the assessee carried on after the retirement of Mr. E. F. Mehta as a sole proprietor. According to learned counsel, on the facts and in the circumstances of this case, the sum of Rs. 1,07,767 paid to Mr. E. F. Mehta, should be regarded as revenue expenditure, which is allowable as a deduction under section 37(1) of the Act. Dr. V. Balasubramaniam, learned counsel appearing for the Revenue, while supporting the order of the Tribunal, submitted that the expenditure of Rs. 1,07,767 was in the nature of capital expenditure.
4. We have carefully considered the rival submissions. Under section 37(1) of the Act any expenditure incurred wholly and exclusively for the purpose of the business or profession is allowed in computing the income chargeable under the head “Profits and gains of business or profession”, provided it is not in the nature of capital expenditure or personal expenses of the assessee. The line that divides revenue expenditure from capital expenditure is often very thin and hazy. None of the test evolved from time to time to determine what is attributable to capital and what to revenue is either exhaustive or of universal application. Each case depends on its own facts. To decide, therefore, on which side of the line the expenditure falls, it is necessary to look at the nature of the business, the nature of the expenditure and the nature of the right acquired. If it is incurred by the assessee for the purpose of creating, curing or completing his title to capital, it must be regarded as capital expenditure. But, if it is for the purpose of protecting his business, it would be considered as revenue expenditure. Moreover, it is the true nature of the expenditure that is relevant and not the description given to it by the assessee in his books of account or other documents.
5. In the present case, the payment of Rs. 1,07,767, which formed part of the sum of Rs. 10,01,001 was required to be made by the assessee for acquisition of the interest of Mr. E. F. Mehta in the partnership to enable the assessee to become the sole owner of the business hitherto run in partnership with him. It was not a payment made for the purpose of protecting the business as contended by the assessee and described in the cash book of the assessee. Such payment, in our view, cannot be regarded as a revenue expenditure incurred wholly and exclusively for the purpose of running the business. In truth and substance, it is in the nature of capital expenditure, because the real purpose of this payment was to acquire the interest of the said Mr. E. F. Mehta in the business of the said firm, which was a profit-yielding asset. The said payment was, therefore, a payment for acquiring a profit-yielding asset and consequently in the nature of capital expenditure which is not allowable as a deduction under section 37 of the Act.
6. Hence, we answer the question referred to us in the affirmative and in favour of the Revenue.
7. Under the facts and circumstances of the case, we make no order as to costs.