ORDER
S.S. Mehra, Judicial Member
1. Appellant-assessee by these two appeals challenges a consolidated order dated 25-7-1985, of the learned Commissioner of Income-tax (Appeals), New Delhi, for the asstt. years 1980-81 and 1981-82, passed on appeals against the assessment orders dated 6-3-1983 and 25-8-1983 framed under Section 143(3) of the Income-tax Act, 1961. Since parties, facts and issues are common, for the sake of convenience both the matters are being disposed of by single order as was also done by the learned first appellate authority.
2. To start with we take up assessee’s 1TA No. 5058 (Delhi) 198 for the assessment year 1980-81. First ground raised is against the confirmation of the addition of Rs. 8,387 as commission paid to M/s. M.L. Verma and Sons. By status the assessee in this case is a private limited company, engaged in the business of retreading of old tyres. Its accounting period was the year ending 30-6-1979. Earlier this very business was being carried on by M/s. M.L. Verma and Sons, HUF. Subsequently the said HUF converted itself into a private limited company and continued the same business. Thus the assessee acquired the status of private limited company on getting business from the said HUF. The company was incorporated on 12-5-1976. Thereafter there was an agreement on 10-9-1976 between the karta of the said HUF and the assessee-company. According to the said agreement the assessee got transferred from the HUF their goodwill, rights, benefits and privileges for the registration with the Government as approved contractor and the benefit of the rate contract for retreading of tyres from the Director General of Supplies and Disposals, New Delhi as they were carrying on business in the name of the firm HUP firm M/s. M.L. Verma and Sons. The assesses held thereafter the sole rights on the registration with the Government, earlier held by the HUF. The assessee was fully authorised and entitled to carry on the business with the Government on the basis of the said registration from time to time and for all times to come. In consideration of the transfer of their rights on the transfer with the Government, the assessee was obligated to pay the said HUF at 1 per cent of their total business from the Government against the rate contract with DGS&D, New Delhi on the retreading proceeds of the Defence and other Government departments. It was also agreed that the HUF shall not be entitled for such commission on sale of other than the Government Departments. During the assessment proceedings the assessee claimed that it had paid commission of Rs. 8,387 to M/s. M.L. Verma and Sons at 1 per cent of the retreading proceeds under the DGS&D rate contract. The learned Income-tax Officer considered that the payment was made by the assessee for acquiring the business of the HUF and that the payment being of capital nature, did not qualify for deduction as a revenue expenditure. Thus the assessee’s claim was denied by the learned Income-tax Officer with the following observation:
The assessee had paid commission of Rs. 8,387 to Shri M.L. Verma and Sons @ 1 per cent of the retreading proceeds under DGS&D. The assessee was requested that the nature of the payment be stated. In its letter dated 14-2-1983, the assessee stated that earlier the business of the company was being ran by M/s. M.L. Verma and Sons (HUF) and the company took over this business with all its assets and liabilities and an agreement was entered into between the Directors of the Company and Mr. M.L. Verma on behalf of M/s. M.L. Verma and Sons and the consideration for the transfer was agreed upon which included the payment to be made @ 1 per cent of all retreading receipts under DGS&D agreements. A copy of the said agreement was also filed. According to it, M/s. M.L. Verma and Sons had transferred all assets and liabli-ties, plant, machinery, stock, furniture, security deposits, etc., goodwill, rights, benefits, privileges and so on. As per Clause (3) of the said agreement that in consideration of the transfer of their rights on registration with the Government, the assessee would pay to M/s. M.L. Verma and Sons a commission @ 1 per cent on their total business from the Government against the rate contract with DGS&D, New Delhi on retreading proceeds of Defence and other Government departments. That the assessee acquired was the capital asset and the payment though referable to the sale proceeds @ 1 per cent represented the consideration thereof. It is immaterial whether the payment is tied up with the production or it is taken in lumpsum, it would be capital in nature if it represents the consideration for acquiring the capital asset. Payment made for acquiring an asset or a right to conduct business is of capital nature. Addl. CIT v. Rohit Mills Ltd. [1976] 104 ITR 132 (Guj.). According to the Madras Hight Court in CJT v. Belpahar Refractories Ltd. [1977] 109 1TR 667 (Ori.) if the link between the payments and the acquisition of asset is direct and the capital asset is the outcome of these payments, such payments would bear the characteristic of capital expenditure. Thus the payment of Rs. 8,387 which was referable to the cost of acquisition of the asset cannot be allowed as a revenue expenditure.
3. The disallowance was subsequently contested by the assessee. Before the learned Commissioner of Income-tax (Appeals) Shri K.D. Chandna, the learned advocate argued that the learned Income-tax Officer had some confusion about the acquisition of the business by the assessee-company from the HUP and the agreement regarding the commission payment. It was stated that two major members of the HUE1 rendered service to the company in securing the business under the rate contract from various intenders It was also pointed out that they also helped in other matters such as inspection and delivery of stores. It was also disclosed that during earlier years such payments were allowed in full.
4. The learned Commissioner of Income-tax (Appeals) after discussing the facts, circumstances and the submissions in details and in fact agreeing with the reasons of the learned Income-tax Officer refused to interfere. Thus the assessee’s contention was rejected.
4a. Hence the present ground before us. Shri Chandna, the learned advocate on behalf of the assessee once again repeated the submissions earlier made before the lower authorities and invited our attention to page 18 of the paper book being a copy of agreement dated 10-9-1976 between the HUF and the assessee whereby the business was said to have been acquired and the right to use the registration obtained. In consideration of the transfer the commission at 1 per cent on total business with the Government was required to be paid to the HUF by the assessee. He also invited our attention to page 23 of the paper book being some sort of confirmation regarding rendering liaison services with DGS&D, New Delhi rate contract from 1-7-1978 to 30-6-1979. The said confirmation is dated 4-7-1978. Reliance by Shri Chandna was also placed on the ratio in the case of CIT v. British India Corpn. Ltd. [1987] 165 ITR 51 (SC) for the proposition that where there was an agreement for the use of trade marks and obtaining know-how of specialised tanning processes for 7 years, fixed amount to be paid to distributor for establishing distributors was revenue expenditure. Page 12 of the paper book being a copy of indenture dated 10-8-1976 was also highlighted being a document between the HUF, the assessee and the Govt. of India, i.e., DGS&D Department. According to the learned counsel the payment was made by the assessee to the HUF not in connection with the acquisition of the HUP business of tyre retreading but for rendering services to the assessee by the two major members of the HUP. According to the learned advocate the learned Income-tax Officer was not justified to make the disallowance and that the learned Commissioner of Income-tax (Appeals) at least should have not confirmed a wrong action.
5. On behalf of the revenue the learned departmental representative Shri N.D. Lama supported the finding under challenge.
6. Rival submissions have been heard and record carefully perused. A copy of the agreement dated 10-9-1976 between the HUP and the assessee is placed at pages 18 to 20 of the paper book. The assessee acquired the business of the HUF in all respects and all the rights and privileges which earlier wer eenjoyed by the HUF were thereafter to be enjoyed by the assessee-company on the basis of transfer of registration. In consideration of the transfer of the HUF rights on the registration with the Government the assessee was to pay to the HUF commission @ 1 per cent on the total business from the Government against the rate contract with the DGS&D, New Delhi on the retreading proceeds of the Defence and Government Departments. The careful perusal of the language of the agreement does not leave any samblance of ambiguity or doubt that 1 per cent commission was to be paid in consideration of transfer of their right of registration. Any other inference is simply not possible. The payment in this case of Rs. 8,367 is made by the assessee to the HUP in terms of Clause (3) of the agreement dated 10-9-1976. The said payment was definitely on account of consideration for acquiring the business of retreading the tyres earlier carried on by the HUP. There is no ambiguity about these facts.
7. Before us the learned counsel on behalf of the assessee made mention that two members of the HUP worked with the assessee in connection with the execution of the agreement and thus the payment was made on account of the rendition of the service to the assessee. No doubt at page 23 of the paper book being some sort of a copy of confirmation regarding rendering licence service some mention is made but there is no averment therein that on account of that service something was required to be paid by the assessee. In fact the relevant Clause (3) at page 23 reads as under:
That in consideration, as aleady agreed, a commission of 1 per cent will be paid to M/s. M.L. Verma and Sons on orders supplied under the rate contract.
Excepting this clause there is no mention about the payment or about the connection between the payment or any service said to have been rendered by the HUF to the assessee. Thus even page 23 does not indicate that the payment was of the nature as understood by the assessee.
8. In view of the preceding discussion we are satisfied that the payment was not for rendering any service and in fact it was some sort of consideration for acquiring the HUF registration with the DGS&D and carrying on the business. The receipt was definitely of capital nature. The agreement dated 10-9-1976 was for some time and for all times to come as is clear from page 19 of the paper book being a copy of the agreement. Thus the ratio in the case of British India Corpn. Ltd. (supra) does not help the assessee as the facts there were altogether different where the transfer was for a period of 7 years only. Thus agreeing with the reasons of the lower authorities we see no reason to interfere. The assessee’s contention that such payment in past was allowed could also have no effect on our finding as every year, under the Income-tax Act, is independent and the principle of res judicata is inapplicable. We are satisfied that for the year under consideration and in the peculiar circumstances of the assessee’s case the claim was rightly denied and such denial was correctly confirmed.
9. Another ground raised by the assessee is that depreciation on machinery was wrongly short allowed by reducting WDV by Rs. 26,630 being subsidy received by M/s. M.L. Verma and Sons. During the accounting period the assessee is said to have received Rs. 13,375 as subsidy in respect of generator installed by it. Similar amount wa,s also received in the earlier year. Thus total receipt by way of subsidy was of Rs. 26,630. The assessee’s claim of depreciation on machinery was short allowed by that amount with the following observation:
During this year, the assessee had received Rs. 13,375 as a subsidy in respect of the generator installed by the assessee. Another similar amount was received in the earlier year. Total receipt by way of subsidy was Rs. 26,603. The assessee was required to give reasons why the cost of generator for the purpose of the depreciation, etc., be not taken what the assessee had, in fact, paid for it minus Rs. 26,602. In its letter dated 8-3-1983, the assessee stated that although the Government had given subsidy, it is entitled to depreciation on the full value of the generating set which was installed. According to the definition of actual cost as given in Section 43 of the Income-tax Act, it means the cost of the asset to the assessee reduced by that portion of the cost, if any, as has been not directly or indirectly by any other person or authority. The depreciation, therefore, on the electric generator is worked out on the basis of its actual cost being reduced by Rs. 26,603.
10. This issue was also contested by the assessee. The learned Commissioner of Income-tax (Appeals) confirmed the learned Income-tax Officer’s action on the point noting that in the language of Section 43(7) of the Act the amount of subsidy was required to be reduced while processing the assessee’s claim for depreciation. According to him the acquisition cost of asset stood reduced by the amount of expenditure as met by some other person or authority. He thought that actual cost under Section 43(6)(b) had to be determined with reference to the provisions of Section 43(7). It was also noted that the subsidy had been appropriated by the assessee no doubt received by M/s. M.L. Verma and Sons. The learned Commissioner of Income-tax (Appeals) also took note of the fact that the assessee-company had entered the business of HUF as going concern and the generator set was taken at the WDV. He also observed that no doubt the subsidy was received in the name of the HUF but the same belonged to the assessee.
11. Assessee’s present ground before us is against that finding. On behalf of the assessee the learned counsel contended that the learned Commissioner of Income-tax (Appeals) was not justified to confirm a wrong action of the learned Income-tax Officer in short allowing depreciation. Page 29 of the paper book was mentioned regarding the acquisition cost of the generator set. At page 32 of the paper book is placed a copy of the agreement between the HUF in whose name the subsidy was granted and the State Government. Pages 10 & 11 of the paper book were mentioned for the purpose that the machinery by the HUF had been transferred to the assessee. The learned counsel also contended that earlier assessee’s such claim was allowed. Shri Chandna also contended that the subsidy was not actually received by the assessee and that the same was received by M/s. M.L. Verma and Sons, HUF and thus the said receipt in the hands of the HUF could not reduced the acquisition cost of the generator sets received by the assessee on transfer.
12. On behalf of the respondent the learned departmental representative supported the finding under challenge.
13. Rival submissions have been heard and considered. The facts by and large are not in dispute in this case on this issue. The machinery earlier belonged to the HUF and was subsequently transferred to the assessee-company. Naturally the subsidy was sanctioned by the State Government in the name of the HUF but it is not clear from the perusal of record that the said subsidy received by the HUF was subsequently received by the assessee. Keeping all these things in view we direct the CIT(A) to verify the position of actual receipt of subsidy, the assessee-company and then decide the question in accordance with law.
14. Third ground is against the confirmation of the addition of Rs. 2,000 out of car expenses at Delhi, The disallowance was made of Rs. 2,000 out of the assessee’s claim for car expenses on account of the personal use of the vehicle by the Managing Director. The disallowance was confirmed for the same reasons. Before us it was not shown that there was no such non-business use of the assessee’s vehicle. It was also not shown that the disallowance was excessive either. Thus in view thereto was see no justification to interfere.
15. Ground No. 4 is against the disallowance of proportionate depreciation on car. For the reasons we have discussed in respect of ground No. 3 we see no error in this finding also of the learned Commissioner of Income-tax (Appeals).
16. Ground No. 5 is against the confirmation of the disallowance of investmeat allowance. The assessee claimed investment allowance in respect of machinery purchased this year. Keeping in view the nature of the assessee’s business the learned Income-tax Officer disallowed the assessee’s claim for investment allowance in the following manner:
The assessee also claimed investment allowance in respect of the machinery purchased this year under Section 22A of the Income-tax Act. The nature of the business of the assessee is retreading of tyre. According to the provision of Section 32A, allowance is given only if the assessee is engaged in the manufacture or production of goods, the retreading of tyre is neither of production nor manufacture of goods though it may be processing of goods. In view of this, investment allowance is not admissible.
17. This action was also contested by the assessee. The learned Commissioner of Income-tax (Appeals) refused to interfere after noting the ratio in the case of Addl. CIT v. Ralsi Tyre (P.) Ltd. [1981] 131 ITR 636 (Delhi) on which reliance was placed by the assessee and also observing that processing was not there in the assessee’s case. The assessee’s present ground before us is against that finding. On behalf of the assessee the learned counsel Shri Chandna found fault with the finding under challenge and placed reliance on the ratio in the case supra. On behalf of the revenue the orders of the authorities below were supported.
18. Submissions have been heard and considered. As noted earlier the assessee is engaged in the business of retreading old tyres. In terms of the ratio in the case of Kalsi Tyres (P.) Ltd. (supra) the assessee was an industrial company as in the circumstances of the assessee’s case the company in that case was found to be as such by the Hon’ble Delhi High Court after discussing in details the various stages involving the assessee’s business. It was also held that the activity of retreading of tyres amounting to processing of goods. It was also observed that no doubt what was produced was not equivalent to the manufacturing of a new tyre but it stopped very little short of manufacturing. It was also observed that the nature of activity of retreading tyres was akin to an industrial or manufacturing activity. On the basis of the ratio in the said case it is quite safe to infer that the assessee was an industrial company engaged in the process of goods and so also in retreading the tyres which process stopped a little short of manufacturing. The assessee utilises machinery for doing its business. Thus under Section 32A of the IT Act, 1961 the assessee appears to be entitled to investment allowance. In any case there is nothing against the assessee in the language of the said section. The reasons employed by the learned Commissioner of Income-tax (Appeals) for denying the assessee’s claim are simply not there. Thus relying upon the ratio in the case supra and the language of Section 32A we hold that the assessee was entitled to investment allowance.
19. Next we take up assessee’s ITA No. 5059 (Delhi) of 1985 for the asstt. year 1981-82. First ground raised by the assessee is against the confirmation of the disallowance of Rs. 14,177 as commission paid to M/s. M.L. Verma and Sons. The facts, circumstances and the submissions on behalf of the parties on this issue were the same as were in respect of ground No. 1 for the asstt. year 1980-81. For the detailed reasons mentioned therein we confirm the learned Commissioner’s action on this point for this year also. This ground gets rejected therefore.
20. Another ground is against the short allowance of depreciation account of reduction due to written down value of machinery by Rs. 26,603. For the reasons we have discussed in respect of ground No. 2 for the asstt. year 1981-82 we confirm the learned Commissioner’s action on this point.
21. Ground Nos. 3 and 4 are in respect of 1/4th of disallowance out of car insurance expenses and depreciation. Following our finding in ground Nos. 3 & 4 for the asstt. year 1980-81 we decline to interfere here also.
22. Ground No. 5 is against the denial of assessee’s claim for investment allowance. Following our detailed reasons in respect of ground No. 5 or the asstt. year 1980-81, we vacate the learned Commissioner of Income-tax (Appeals)’s finding on the point and hold that the assessee was entitled to investment allowance.
23. Assessee’s ground No. 6 is that under Section 80(1) relief on net profit earned by the assessee had wrongly been disallowed. It is seen that at the time of hearing before the learned Commissioner of Income-tax (Appeals) a ground was taken against the denial of relief under Section 80(1) of the Act. The learned Commissioner of Income-tax (Appeals) rejected it observing that this ground was not taken by the assessee initially and that provisions of Section 80(1) were applicable to new industrial undertaking and that the business had not been started by the assessee and finally such relief was admissible only in respect of those industries/undertakings which were engaged in the production or manufacture of articles or goods and not one which merely processed tyres by way of retreading. The assessee’s present ground before us is against that finding.
24. Rival submissions have been heard and considered. The facts are not in dispute. Thus following the ratio in the case of Kalsi Tyre (P.) Ltd. (supra) we hold that the assessee was entitled to the relief claimed.
25. No other ground was either raised or pressed before us. The paper books have been perused.
26. In the result the appeals are allowed in part.
K.C. Srivastava, Accountant Member
27. Having perused the order of the learned Judicial Member I am not inclined to agree with his conclusions only on one ground, which relates to the claim of commission paid to M/s M.L. Verma and Sons, HUF. It was this HUF which was carrying on the business of tyre retreading earlier. The members of the family decided to in~ corporate a limited company for similar business on a more extensive basis. The HUF had transferred all the assets of business to the assessee and in respect of those assets certain shares were issued in the name of the assessee. Besides, this M/s. M.L. Verma and Sons, HUF was registered as an approved contractor with Director General of Supplies and Disposals for the works relating to retreading of tyres of the Defence Services. There was an agreement between the HUF and the limited company as a result of which this registration, goodwill rights and benefits were surrendered by the HUF and these were assumed by the assessee and this was recognized by the Defence Department by entering into a tripartite agreement. The registration entitles a person to carry on the contract work with the Defence Department. In consideration of the surrender of these rights in the registration with the Govt., it was agreed that the limited company will pay to the HUF 1 per cent of their total business from the Government against the rate contract with the Defence Ministry, in respect of this work. It was clarified that the HUF was not entitled to any commission on any other work done by the family. The commission in dispute has been paid from year to year and the question for consideration is whether this was an allowable claim. The Income-tax Officer held that it was an expenditure of capital nature. This has been upheld by the Commissioner of Income-tax (Appeals). Before the Commissioner of Income-tax (Appeals), it was contended that besides, the transfer of registration the HUF and its members were rendering services to the company without any consideration and the payment of commission was for that consideration as ‘nil’. The Commissioner of Income-tax (Appeals) held that there was no evidence that any services were rendered on behalf of the HUF. The Commissioner of Income-tax (Appeals) was of the view that the company itself could have obtained registration in its name. He, therefore, upheld the order of the Income-tax Officer.
28. On perusal of the agreements, it appears that but for this surrender of registration with the Defence Department it would not have been possible for the assessee-company to get all that work, which the erstwhile HUF was getting. In respect of rendering of services also, there was a separate agreement between the HUF and Directors of the Company. The nature of services was called to be liaison work and it was clarified that the payment of commission will be in consideration of what had been surrendered as well as for the rendering of services by the members of the HUF.
29. The case of the Income-tax Officer is that the commission paid was for the surrender of registration, which was an enduring benefit. The same view has been taken by the Commissioner of Income-tax (Appeals). However, it appears that as far as the limited company was concerned, it could not have taken the benefit of the registration without agreeing to pay some commission to the earlier contractor. It is true that the members of the HUF and the persons controlling the company are the same. Even then it cannot be denied that the registration was in the name of the HUF and the Govt. agreed to recognize the assessee as a contractor for this purpose because the two parties had agreed for this purpose. As already stated the commission was payable with reference to the turnover, vis a vis, the Defence Department. In my view, such a payment cannot be considered to be a capital expenditure as it was to be paid from year to year till the advantage remained with the assessee-company and in a way it was a rent or fees for the use of the advantage. In the case of British India Corpn. Ltd. (supra), it was held that the payment, which enabled an assessee to get the benefits of the user of the registered trade mark was a part of the consideration for the receipt of the benefits and had to be considered as a revenue expenditure. In this case, it was pointed out with reference to the earlier decisions of the Supreme Court that what was material to consider was the nature and the advantage in obtaining the assets in a commercial sense. Besides, referring to a case of Empire Jute Co. Ltd. v. CIT [1980] 124 ITR, 1 (SO), their Lordships referred to the decision in the case of Travancore Sugars & Chemicals Ltd. v. CIT [1966] 62 ITR 566 (SO). In this case, promoters of a company which had taken over the assets of the certain undertakings run by the Govt. of Travancore entered into an agreement with the Govt. whereunder the assets of a sugar manufacturing concern were agreed to be sold by the Govt. to the appellant Co. Apart from the cash consideration, it was also provided that the Govt. shall be further entitled to the 20 per cent of the annual net profit. Later on, the agreement was amended to make it 10 per cent of the annual net profit. The question for consideration was whether this payment was an allowable deduction. The High Court had held that it was a capital expenditure but the Supreme Court held that it was in the nature of revenue expenditure and it was related to annual profits which flowed from trading activities of the assessee. This payment was not related to or tied up in any way to any fixed sum agreed between the parties as part of the puachase price of the undertakings. The Supreme Court, however, had remanded the matter to the High Court and after that decision of the High Court was available, the matter was again considered by the Supreme Court in CIT v. Travancore Sugars & Chemicals Ltd. [1973] 88 ITR 1. The Supreme Court affirmed the High Court’s finding that it was a revenue expenditure and in any case it was a overriding charge of the profit-making apparatus and the payment made wholly and exclusively for the purpose of trading and was, therefore, allowable.
30. In the present case, the payment is related to the quantum of business with the Defence Department and it was to be paid year to year. As a result of the contract it became a liability of the company and such payment became necessary for carrying on the business of the company. Such a payment, in my view, could not be considered to be a capital expenditure only on the ground that the advantage of registration was an enduring advantage. Courts have made it clear that in all cases of enduring benefit cannot be considered to be of capital nature. I am, therefore, of the view that the claim for commission was allowable as a deduction. Hence I allow ground No. 1 in both the years. In other matters I agree.
S.S. Mehra, Judicial Member
1. Assessee by its present appeal challenges order dated 27-10-1986 of the learned Commissioner of Income-tax (Appeals), New Delhi for the asstt. year 1982-83.
2. First ground is against the confirmation of the addition of Rs. 16,415 on account of commission paid to M/s M.L. Verma and Sons on account of use of their registration and also the services which were said to have been rendered by the recipients for following up the matters with regard to the services of the tyres and payments thereon.
3. Rival submissions have been heard and considered. On behalf of the parties common submissions were made with regard to this ground and first ground for the asstt. year 1980-81. For the detailed reasons mentioned in that order we reject the assessee’s ground No. 1 for this year also. Ground No. 2 is against the confirmation of the disallowance out of car expenses. Submissions have been heard. For the reasons for deciding ground Nos. 3 & 4 for the asstt. year 1980-81 we decline to interfere here also. Ground No. 3 is against the confirmation of disallowance of investment allowance on the purchase of new machinery. Keeping in view our finding on ground No. 5 for asstt. year 1980-81, we vacate the learned Commissioner’s finding on the point and hold that the assessee was entitled to investment allowance.
4. Ground No. 4 is with regard to relief under Section 80(1) of the Act. Following our reasons for deciding ground No. 6 for the assessment year 1981-82 in the assessee’s case we hold that the assessee was entitled to relief. We thus vacate the finding under challenge.
5. Ground No. 5 is against the confirmation of the disallowance of setting off of loss. There was a ground taken before the learned Commissioner of Income-tax (Appeals) that the learned Income-tax Officer may be directed to adjust the brought forward loss of the earlier years and adjust against the profits. The learned Commissioner of Income-tax (Appeals) rejected this ground observing that there was no loss determined for the earlier year. Assessee’s present ground is against that finding.
6. Submissions have been heard and considered. It was the assessee’s contention before us that there was loss determined for the earlier years. This fact could not be verified from the record. We thus confirm the learned Commissioner’s finding on the point, however, observe that in case indeed there is some determined loss for the earlier year the same should be set off in accordance with law.
7. Ground No. 6 is against the confirmation of the addition of Rs. 675 out of interest paid. This ground is dismissed as not pressed.
8. Ground No. 7 is regarding interest under Section 215. The learned Commissioner of Income-tax (Appeals) has observed that interest under Section 215 will be recomputed on the basis of relief allowed in the appeal. Such interest is consequential.
We thus see no omission in the direction of the learned Commissioner of Income-tax (Appeals) on this issue.
9. In the result the appeal is allowed in part.
K.C. Srivastava, A.M.
1. For the reasons given in my separate order for the asst. years 1980-81 and 1981-82. I allow ground No. 1. On other grounds I agree.
ORDER under Section 255(4) OF THE I.T. ACT
Having differed on one ground involved in the above appeals, we refer the point of difference to the Hon’ble President for referring it to a Third Member as required under Section 255(4) of the Income-tax Act, 1961:
Whether, on the facts and in the circumstances of the case, the claim of the assessee-company for commission paid to M/s. M.L. Verma and Sons, HUF was allowable as a revenue expenditure in the three years under consideration.
G. Krishnamurthy, President
1. The learned Members of Delhi Bench ‘D’ having differed on the following point, referred the point of difference under Section 255(4) of the Income-tax Act to the President for nominating a Third Member. It was as a consequence of this reference that I happened to hear this matter as Third Member.
Whether, on the facts and in the circumstances of the case, the claim of the assessee-company for commission paid to M/s. M.L. Verma and Sons, HUF was allowable as a revenue expenditure in the three years under consideration ?
2. The assessee is a private limited company incorporated on 12-5-1976 engaged in the business of retreading of tyres. There is a HUF carrying on the same business of tyre retreading in the name and style of M/s. M.L. Verma and Sons. As and from 1-7-1976 the business carried on by M/s. M.L. Verma and Sons was taken over by the assessee-company with all its assets and liabilities, included the plant and machinery, stocks, furniture and fixtures, debtors, vehicles and deposits. The liabilities includes bank overdrafts, loans, creditors and bills payable. The HUF M/s. M.L. Verma and Sons agreed to transfer the rights, benefits and privileges, that were obtained by it to the assessee-company as a result of the take over. M/s. M,L. Verma and Sons was registered with the Government, Defence Department in particular as an approved contractor. The benefit of that contract for retreading of tyres was also agreed to be taken over by the assessee-company. The consideration for the transfer of the business by the HUF to the assessee-company was fixed at Rs. 1,67,912 as per the resolution passed at the meeting of the Board of Directors of the assessee-company on 22-7-1976. According to this resolution all the assets were taken over by the assessee-company at their book value, which worked out to Rs. 3,33,406 and the liabilities again at book value aggregating to Rs. 1,65,484 was deducted and the balance of Rs. 1,67,412 was determined as the net consideration. The net consideration was satisfied by issue of 16,791 equity shares of Rs. 10 each of the assessee-company to the HUF and the balance of Rs. 2.33 paise was paid in cash in full satisfaction. Subsequently an agreement was entered into on 10-9-1976 between M/s. M.L. Verma and Sons, the HUF and the assessee-company whereunder the benefit of the registration of the HUF with the Government as approved contractor for the retreading of tyres was sought to be assigned to the assessee-company. After tracing the history, the agreement in terms provided that the HUF has surrendered and transferred to the assessee the benefit of the contract and that the assessee-company shall thenceforward have the sole rights of the registration with the Government earlier held in the name of M/s. M.L. Verma and Sons and that in consideration of the transfer a commission of 1 per cent shall be paid by the assessee-company to the HUF on the business procured from the Government relatable to the rate contract. The relevant clause in the agreement is material and is reproduced below:
3. That in consideration of the transfer of their rights on the registration with the Govt. the second party shall pay to the first party commission at 1 per cent on their total business from the Govt. against the rate contract with DGS&D New Delhi on the retreading proceeds of Defence and other Govt. Departments. However, the HUF shall not be entitled for such commission on sale to other than the Govt. Department.
It is to be remembered that this clause specifically disentitles the HUF from the payment of commission on sales other than the business obtained through the transfer of rate contract with Government, i.e., to say the payment of commission is confined only to the rate contract. By Clause 4 the period of the agreement was made indefinite. In the meantime as a result of the efforts put in by M/s. M.L. Verma and Sons, the DGS&D by their letter dated 31-8-1976 agreed to treat the assessee-company as the contractor in respect of the outstandings A/Ts, R/Cs mentioned in the Schedule to the tripartite agreement. This letter indicates that there was a tripartite agreement entered into and it was in consequence of that tripartite agreement that the DGS&D agreed to treat the assessee-company as the successor of M/s. M.L. Verma and Sons (although the word ‘successor’ has not been mentioned in the letter, the tenor of the letter shows that the Govt. treated the assessee-company as successor to M/s. M.L. Verma and Sons).
3. Pursuant to this arrangement the assessee-company did business with the DGS&D of 8.38 lacs in the assessment year 1980-81, Rs. 14.17 lacs in 1981-82 and Rs. 16.41 lacs in the assessment year 1982-83 and paid a commission of Rs. 8,386, Rs. 14,176 and Rs. 16,414 respectively in these three assessment years to M/s. M.L. Verma and Sons and claimed the same as deductions in those three assessment years. It may be noted here that in addition to this business done with the Government under the rate contract, the assessee-company did business with the outsiders also and that business was not inconsiderable. The Income-tax Officer declined to allow these payments as revenue deductions according to him by these payments the assessee-company acquired an asset or a right to conduct business and therefore these payments were on capital nature. He also held that this was a payment made for acquiring the business as capital asset, namely, the business. In support of this conclusion, he relied upon two judgments of the High Courts in Addl. CIT v. Rohit Mills Ltd. [1976] 104 ITR 132 (Guj.) and CIT v. Belpahar Refractories Ltd. [1977] 109 ITR 667 (Ori.).
4. Aggrieved by these disallowances the assessee carried the matter in appeal before the Commissioner (A), who confirmed the disallowance with an additional reason that the agreement entered into between the assessee-company and the HUF did not provide for any rendering of service by the HUF to the assessee-company and consequently it must be presumed that the amount was paid only to acquire a capital asset. It was brought to the notice of the Commissioner (A) at the time of hearing that a similar payment was allowed as a deduction in the earlier assessment year and the disallowance of the same in subsequent years was not proper and just. He rejected this argument by pointing out that the principle of res judicata would not apply to income-tax proceedings.
5. Against the order of the Commissioner (A) a further appeal was filed before the Tribunal and the learned Members could not agree upon the conclusion. The learned Judicial Member held that the payment was of capital nature. In coming to this conclusion, he agreed with the reasonings given by the Commissioner (A). He substantially agreed with the view that this payment of commission was made for acquiring a business asset. But the learned Accountant Member held that this payment was not at all to acquire a business asset. The commission was payable with reference to the turnover and that payment was necessary to procure business and it had nothing to do with the acquisition of the asset and that such a payment could not be considered to be capital expenditure. He further held that it partook the nature of the rent or fees for the use of an advantage. He relied upon a decision of the Supreme Court in the case of British India Corpn. Ltd. (supra). The learned Accountant Member concluded his opinion by pointing out that as a result of the contract, it came upon the assessee-company as a liability to make this payment as it became necessary for carrying on its business and the said payment could not be considered to be a capital expenditure merely on the ground that the advantage of registration was of an enduring advantage because courts held that in all cases of enduring benefit, the amount paid to secure such a benefit could not be held to be a capital expenditure.
6. I have heard the learned representative for the assessee Shri D.P. Mahajan and the learned Departmental Representative Shri S.K. Bansal for sufficient length. The learned advocate in particular emphasised by relying upon the agreement and the decision of the Supreme Court in British India Corpn. Ltd.’s case (supra) and another decision of the Supreme Court in Travancore Sugars and Chemicals Ltd.’s case (supra) that the expenditure in question could not be considered to be of capital nature. He submitted that the consideration paid for the acquisition of the business was arrived at Rs. 1,67,412 and was paid in full and there was no dispute that the consideration fixed was in any manner less than the real value of the business, so that it could be argued, at least by implication, that that difference was sought to be paid in the guise of commission on an annual basis. Nor was it the case of the revenue that this business had any goodwill and the amount of commission paid, though annually, was towards goodwill. Any person can approach the DGS&D for enlisting as a contractor. That would ensure him business, enlisting with the DGS&D is not like payments made to Government for acquiring any mining rights or quarrying rights. The assessee-company sought the advantage of the registration of the HUF to be transferred to it subject to the understanding that it would remunerate it by 1 per cent commission on the business confined to the rate contract. Even without this rate contract, the assessee was free to carry on business and apply to DGS&D in its own right. In fact it did carry on business and therefore it cannot be said that the payment of commission was a sort of statutory requirement. The commission was paid with a view to maximise the turnover of the assessee-company, thereby earning more profits. It was therefore a payment made so related to carrying on of its business that it must be regarded as an integral part of profit-earning process and not for acquisition of an asset, the possession of which is a condition precedent to carrying on of business. He relied greatly upon the order of the learned Accountant Member and submitted that the learned Judicial Member had not appreciated the nature of the payment and he committed an error in observing that the payment was made for the acquisition of a capital asset when the payment made for acquisition of capital asset was separate and the quantum of which was never doubted and was treated by the assessee-company itself as capital expenditure.
7. On the other hand, the learned Departmental Representative submitted that the payment was made for the acquisition of an asset in the sense that it was by this payment that the assessee acquired the right of registration as rate contractor with DGS&D which gave him a permanent advantage and therefore it was a capital asset and any payment to acquire a right of such capital asset, which gave enduring advantage must be held to be on capital account. This was a payment made for initial outlay, though spread over annually making it dependent upon the turnover, the higher the business the more the payment. That was how the parties envisaged this payment but as held rightly by the authorities below as well as by the learned Judicial Member that this was a payment made to acquire a right and that was on capital account. He relied in support of this view on the decision of the Supreme Court in the case of CIT v. Jalan Trading Co. (P.) Ltd. [1985] 155 ITR 536, in which case the Supreme Court held that payment made for acquiring by assignment the right to carry on the business of sole selling agency on a long-term basis was for the acquisition of a capital asset and was not allowable as an revenue expenditure. In this case the Supreme Court distinguished its earlier decision in the case of Travancore Sugars and Chemicals Ltd. (supra) on which great reliance was placed upon by the learned Accountant Member. Referring to this position, the learned Departmental Representative submitted that reliance should no more be placed upon Travancore Sugars & Chemicals Ltd.’s case (supra) the view expressed by the learned Accountant Member and following the view of the Supreme Court in this case, it must be held that the payment made by the assessee was for the acquisition of the right to carry on the business with DGS&D and therefore amounted to acquisition of a capital asset. He also relied upon a decision of the Andhra Pradesh High Court in CIT v. Southern India Mining and Slab Co. [1988] 171 ITR 193. Here also the High Court held that any amount paid to obtain and assure enduring period of leasehold rights would be of capital nature. Finally he relied upon the latest decision of the Supreme Court in the case of CIT v. Associated Cement Companies Ltd. [1988] 172 ITR 257 for the view that a payment made to acquire a right is of capital expenditure.
8. On a consideration of the material placed before me and perusing the orders passed by the authorities below and by my learned Brothers and the arguments addressed to me at sufficient length and the authorities relied upon, I came to the conclusion that the payment in question cannot be said to be on capital account and no acquisition of capital asset was involved. As has been rightly observed by the learned advocate for the assessee, the payment made for the acquisition of the business was in a sum of Rs. 1,67,412, which was stated to be the full consideration. It was not suggested that the value of the business was more than the net consideration paid. There was no suggestion that any goodwill was involved. Even for the payment of the sum of Rs. 1,67,412 the agreement provided for the assignment of all rights that the HUF had with the Government departments. A separate agreement was entered into providing for the payment of commission on the assessee-company getting enlisted as a rate contractor with the DGS&D. This right to get enlisted with the DGS&D is not such a right as if that was essential and a condition precedent to carry on the business, i.e., to say it is not as if the assessee was prevented under law from carrying on business of tyre retreading unless it was registered with the DGS&D, like in the case of mining leases where no land can be exploited or ore could be won without first getting the licence from the Government. There the land belonged to the Govt. and the ore embedded in the land belonged to the Govt. It was only when a right to enter upon the land and excavate the ore was granted that the right to carry on business would accrue. That right was a capital asset and it was held by the Supreme Court repeatedly that expenditure incurred in acquiring such a right is capital expenditure but expenditure incurred in payment of royalty related to the quantity of ore excavated as held to be on revenue account. Amounts paid to acquire an assured supply of raw material like in the cases of H. Dear and Co. (P.) Ltd. v. CIT [1966] 60 ITR 546 (SC) and Mohanlal Hargovind of Jubbulpore v. CIT [1949] 17 ITR 473 (PC) was revenue expenditure. In H. Dear and Co. (P.) Ltd. the company was a supplier of sleepers to Indian Railways. Under an agreement the company was granted the right to cut sal trees, marked by the Forest Department and to convert the same into sleepers. The agreement provided that the company would pay to the department subject to a certain minimum at the specified rates for different types of sleepers. As to the question whether such a payment was revenue or capital expenditure, the Supreme Court held that under the terms of the agreement the company had made only an arrangement for obtaining what was its stock-in-trade and the money spent to acquiring stock-in-trade of the business was revenue expenditure. So too is the decision of the Privy Council in the case of Mohanlal Hargovind of Jubbulpore (supra) where bidi leaves were collected under an agreement entered into with the Government by paying certain amounts. It is therefore trite law that any amount paid for the procuration of raw material for the business to maximise the profit is a revenue expenditure. This principl can be applied even to cases where amounts were paid by way of commission to procure business. It can be argued that there is a difference between amounts paid to acquire a right, to procure raw material for business and amount paid to acquire a right to secure business. But in my opinion the underlying principle, namely, commercial expediency and maximisation of profits apply with equal force in both the situations. While procuring a right to get an assured supply of raw material helps the business to increase production, the acquisition of a right to supply the raw material, namely to sell the production is equally of the same character and enures for the advancement of the business while acquisition of raw material is at the bottom, sale of finished products is the end. In neither case there is a right of a capital nature acquired. It is also to be seen that the assessee-company is also able to carry on business other than with DGS&D and earn profits. Should the DGS&D decline to accept the assessee-company as a rate contractor in place of M/s. M.L. Verma and Sons, the assessee would have been forced if it is interested to get that contract to apply to the DGS&D on its own the DGS&D would not be able to throw out the assessee’s petition for recognition if it had satisfied all the conditions. Registration with DGS&D is open to all the public and it does not confer any monopoly on any one like a mining lease. Suppose the assessee had been able to procure contracts for the supply of retreaded tyres or retreading of tyres of almost all the Road Transport Corporations in the country and agrees to pay commission to the persons, who procure this business for it, that expenditure could not be said to be capital expenditure. We have seen instances where commission is paid to carpenters by timber merchants, brokers and factors by transport companies for procuring business and by shipping companies to the clearing agents and by large public sector undertakings to clearing and forwarding agents. Such payments of commission in business world is common phenomenon and is a necessary ingredient for the promotion of business. This happens in some form or the other in every business. Merely because the payment of commission is formalised by reducing it to writing and by standardizing the payment with reference to the percentage on the turnover, the nature of the payment does not undergo any change. It is therefore in my opinion incorrect to state that this payment was made for the acquisition of a business asset meaning thereby the right to obtain the rate contract with the DGS&D. Although the asses-see was able to get more business from DGS&D nonetheless the nature of the payment is a revenue expenditure and not a capital expenditure.
9. Here, I may refer to the decision of the Supreme Court in the case of Travancore Sugars and Chemicals Ltd. (supra) where the assessee-company Travancore Sugars and Chemical Ltd. took over the assets of certain undertakings run by the Government of Travancore, one of which was a sugar factory and the other was a distillery. The Govt. agreed to recognise the transfer of the licence for the distillery to the assessee-company and also to secure continuance of the licence for a period of 5 years after the termination of the existing licence. It also agreed to purchase the pharmaceutical products manufactured by the assessee-company. Apart from the cash consideration, the agreement provided for the payment of 20 per cent of the annual net profits subject to a maximum of Rs. 40,000 after providing for depreciation and salaries to the Government. The question arose as to whether the amount so paid to the Government could be allowed as a deduction under Section 10 of the Indian Income-tax Act, 1922. After examining the relevant clauses of the agreement and applying the principles decided by the Privy Council and the Supreme Court in earlier decisions, particularly in the case of Poona Electric Supply Co. Ltd. v. CAT [1965] 57 ITR 521, the Supreme Court held that the payment of the sum was in the nature of revenue expenditure and not capital expenditure because (a) the payment was for an indefinite period and had no limitation of time attached to it (b) the payment related to the annual profits which flowed from the trading activities of the appellant and had no relation to the capital value of the assets, and (c) the payment was not related to or tied up, in any way, to any fixed sum agreed between the parties as part of the purchase price. This decision thus laid down the principle that if payment was made unrelated to fixed sum unrelated to any capital and did not become part of the purchase price, the payment would be held to be revenue expenditure because the agreement to transfer the licence and secure the continuance of the licence was for the purpose of the business. I do not see how the principle laid down in this case is inapplicable to the facts of the case before me. The learned Accountant Member relied upon this decision because this very decision was relied upon by the Supreme Court in the case of British India Corpn. Ltd. (supra). So the principle laid down by the Supreme Court both in the cases of Travancore Sugars and Chemicals Ltd. (supra) as well as British India Corpn. Ltd. (supra) applied to the facts in all respects. It bears repetition to say that the purchase consideration was not held to be inadequate or was there any whisper that the business taken over from the HUF M/s. M.L. Verma and Sons had any goodwill and that the extra payment made was to compensate that extra purchase consideration. In the absence of such a finding and on the agreed principle that the purchase consideration was justly truly and correctly determined, the commission paid must be looked at de hors acquisition of the capital asset and not as a payment made to acquire the business asset. I am therefore unable to agree with the view propounded by the learned Judicial Member nor with the arguments addressed by the learned Departmental Representative.
10. In Jalan Trading Co. (P.) Ltd.’s case (supra) on which the learned Departmental Representative relied upon, the facts were totally different and the case was distinguishable. There the assessee, a private company took over under a deed of assignment the benefit of a sole selling agency acquired by a firm. The agreement was for two years with a right to renewal at the option of the selling agents. Under the deed of assignment the assessee-company was to pay the assigner-firm in consideration of the assignment by way of royalty an amount equal to 75 per cent of the profits and commission, remuneration and other moneys received from the manufacturers. The question was whether this sum paid could be allowed as a revenue expenditure. The Supreme Court held that the assessee was a new company, it had no other business and it acquired out of assignment the right to carry on the business of sole selling agency on a long-term basis subject to the renewal of the agreement stipulating to pay 75 per cent of its annual profits, the expenditure was made for the initial outlay and a capital asset was acquired thereby. The expenditure related to the acquisition of a capital asset and was not admissible as a deduction. Unlike in the case before me, in the case before the Supreme Court the assessee had no other business and had acquired under the deed of assignment the right to carry on the business of sole selling agency. It was held on the facts that the expenditure incurred was for the initial outlay and for the acquisition of a capital asset. In the present case, the initial outlay was Its. 1,67,412 and the commission paid has no relation to any outlay or capital asset except that it related to selling aspect. The amount paid to improve turnover from year to year cannot by any stretch of imagination be considered to be an initial outlay. Thus the principle laid down in this case, in my view, has no application to the facts before me.
11. The other case relied upon by the learned Departmental Representative, namely, Associated Cement Companies Ltd.’s case (supra) has also no application to the facts of the case. There the assessee-company, a manufacturer of cement was running a cement factory at Shahabad. The then Govt. of Hyderabad included the factory premises within the limits of Shahabad Municipality. A tripartite agreement was entered into between that Government, the municipality and the assessee-company whereby the company undertook to supply water to the municipality and provide water pipelines, to supply electricity for street lighting in the municipality and put up a transmission line therefore and to concrete the main road from the factory to the railway station. In return, the Government agreed not to levy municipal taxes for a period of 15 years. The assessee-company spent a certain sum towards installation of pipelines, which were to belong to and be maintained by the municipality. In an appeal to the Supreme Court on the question of allowability of this expenditure it was held that since the installations and accessories were the assets of the municipality and not of the assessee-company, the expenditure did not result in bringing into existence any capital asset for the company. The advantage secured by the assessee-company by incurring the expenditure was immunity from liability to pay municipal rates and taxes for a period of 15 years. If the assessee-company had paid these municipal rates and taxes, those payments would have been allowed as revenue expenditure. Therefore, the advantage secured was in the field of revenue and not capital. I do not know how these principles laid down by the Supreme Court in this case will advance the revenue’s point of view. This decision shows that if a payment has been made in consideration of avoidance of another payment, which had it been paid would have been allowed as a revenue deduction, the amount so paid would be allowed as a revenue expenditure. In the case before me no such thing has happened. The assessee got advantage of the rate contract for the procuration stipulated amount of commission was paid. If an expenditure incurred in laying down a pipeline on and for the account of the municipality is held to be revenue expenditure, in the circumstances mentioned in this case, namely, avoidance of municipal taxes, I do not see any reason why the commission paid to procure the registration with the DGS&D could be held to have resulted in the acquisition of a capital asset. It is in my opinion far from it.
12. In the case before the Andhra Pradesh High Court in the case of Southern India Mining and Slab Co. (supra), the assessee was a firm carrying on business in cuddapah slabs used for flooring. It took on lease quarries containing the deposits of these slabs from the State Govt. with the intention of removing these slabs, dressing them and sell them in the market. The lease was renewable. The assessee had to pay an annual rental under the terms of the lease agreement. The Tribunal held that these payments were on revenue account. But on reference, the High Court held that the lease was a statutory one for a fixed period and required the lessee to make the investment and the amount expended was to obtain assured supply of leasehold rights with exclusiveness. That amounted to securing an enduring advantage and the amount paid under the lease was therefore a capital expenditure. This decision also does not help the Revenue’s case because the assessee here did not acquire any statutory lesasehold rights by making this commission except that the commission was paid as consideration for the other party agreeing to transfer the benefit of the rate contract to the assessee.
13. For these reasons, I do not see the cases relied upon by the Departmental Representative help the Revenue’s case.
14. For these reasons, as I said in the beginning of this opinion, I am inclined to agree with the view expressed by the learned Accountant Member that these payments were allowable as revenue expenditure.
15. The matter will now go before the regular Bench for disposal of the appeals according to majority opinion.