Murray Coutts Trotter, Kt., C.J.
1. The Chief Justice–The facts in this case are simple and raise a point in a very clean form. The assessees were persons who used to try for and frequently obtain contracts from a large tea-growing company for the cartage of their tea down to Kodaikanal Road station for entrainment. The contracts were made at a flat rate which varied from year to year, so much per ton. In the year we are concerned with there was, and apparently there had been in, fonder years also a rival contractor who is referred to as Mr. X who was obviously regarded as likely to be a very dangerous competitor for the contract; and in order to induce him not to compete the assessees paid him down a sum of Rs. 12,000. That they say they are entitled to recover as being expenditure not in the nature of capital expenditure incurred solely for the purpose of earning such profits or gains. The result was that as Mr. X did not compete, they had the whole field to themselves, they got the whole contract and were able by screwing up the figures in former years to make more profits than they would have done in those former years. As a matter of fact the probability is that the extra profits they got just about squared with the Rs. 12,000 they paid to Mr. X. The principles that apply are contained in the statute of course and are much illuminated in our opinion by two cases, one in the Court of Appeal and another in the House of Lords in England to which we shall refer and which seem to us to explain in the clearest possible way the distinction between capital payments and expenditure not being capital, where it is conceded that in every case the expenditure is incurred solely for the purpose of earning the profits. I have really read the material part of the Indian Statute. It is Section 10(2)(ix):
(2) such profits or gains shall be computed after making the following allowances
and the only one we are concerned with is Sub-section (ix):
any expenditure (not being in the nature of capital expenditure) incurred solely for the purpose of earning such profits or gains.
2. The first English case to which I propose to refer is a case of the City of London Contract Corporation, Limited v. Styles (1887) 2 Tax Cases 239 in the Court of Appeal before a very powerful court consisting of Lord Esher, Bowen, L.J. and Fry, L.J. The first passage I am going to read is an observation made by Bowen, L.J. in the course of the argument and it appears to me to be as clear and sharp-cut a distinction as any to be found in the other cases. In that case the assessees took over a business of another company which had a number of unexecuted contracts on hand and the taking-over company paid a lump sum of money to the outgoing company to obtain the benefit of those contracts and claimed it as a deduction. Lord Justice Bowen in the course of the argument said this:
You do not use it (that is, the money which had bought the contractual rights) ‘for the ‘purpose of’ your concern (which means ‘for the purpose of carrying on your concern’) but you use it to acquire the concern.
3. Similarly Lord Esher at page 244;
Here is a clear statement that the difference between money expended in the year in order to earn income which was to be received in the year, and the income so received, was £128,000. That is the net profit within the year, that is the sum upon which income-tax is to be paid; and it is as plain as plain can be that you cannot deduct from those net profits so arrived at any part of the capital which you so invested, whether you paid it or not for the purchase of the business which you were obliged to purchase before you could begin the difference between expenditure and income year by year. If you do not darken it with words, it is as plain as plain can be.
4. Now I pass to a case in the House of Lords, John Smith & Son v. Moore (1921) 2 A.C. 13. The facts I need not really go into because the passage I am going to cite from Lord Sumner is really what directly bears on this case:
They (the company) said, much as has been said in this case, that before profits can be made out of working a contract, the contract has to be got and the payment of its price is the root of the profits. The Court held that, this sum was paid with the rest of the aggregate price to acquire the business and thereafter profits were made in the business; the sum was not paid as an outlay in a business already acquired, in order to carry it on and to earn a profit out of this expense as an expense of carrying it on. The same is true of the appellants. The whole price paid, in cash or in account, was a sum employed or intended to be employed as capital in the trade of the company, and therefore cannot be deducted in ascertaining profits for income-tax or excess profits duty.
5. I only wish to refer just in passing to one other case which is the case of the ship-builder and the buying of all the contracts, “Countess of Warwick” Steamship Co. v. Ogg (1924) 8 Tax Cases 652. It is the judgment of a single judge but it is a judgment of Rowlatt, J., a very great authority in income-tax cases in which he has specialised for so many years. I will not quote his language but the short point was this. The Steamship Company in question had arranged for the purchase of a steamship on the very common system whereby the ship-builders are paid a lump sum in part payment as soon as the keel is laid in the yard and the rest of the price is paid in instalments as the fabric is gradually built up. After about £30,000 had been paid to the ship-builders which was a very small portion of all that would ultimately have to be paid, there was a slump in freights and the owners came to the conclusion that it would be impossible for them to carry on the business of running this ship as a freight-earning ship at any profit whatever and they therefore sought to get out of the liability for paying for a thing that in their hands would be perfectly useless. The £30,000, of course, was gone, but in order to get out of the contract they had to pay another £30,000 and the argument that found favour was that this was not a loss which could be brought into the profit and loss account, because, although it is difficult to say it resulted in any increase of capital or plant in the nature of capital to the ship-owners, it was incurred in relation to that part of their business.
6. That being the state of affairs, what is the position here? Applying the one which, to my mind, is the easiest to apply, Bowen, L.J.’s test, surely any plain man would say that this money was paid not for the purpose of working the contract but of getting it, it was the price that had to be paid to obtain the contract at all. This appears to us to answer the first question propounded to us and to answer it adversely to the assessee. In that view it is unnecessary to answer the second question. We therefore answer the first question in the negative, confirming the decision of the Income-tax Commissioner, and order the assessee to pay Rs. 250 by way of costs to the Income-tax Commissioner.
7. I agree.
Madhavan Nair, J.
8. I agree.