C.I.T. V. JALAN TRADING CO. (PVT.) LTD. (1985) 155 ITR 536 (SC)
FACTS
The respondent-assessee claimed deduction of a sum under Section 10(1) or Section 10(2)(xv) of the Income Tax Act, 1922, for the assessment year 1954-55.
The claim was related to a payment made by the assessee company to a partnership firm for acquiring the sole selling agency rights of another company.
The claim was rejected by IT authorities.
Despite the absence of a specific sum for acquiring the asset, the Tribunal found that the expenditure was for acquiring an enduring benefit, classifying it as capital expenditure.
The High Court held that the payment represented business expenditure and was deductible under Section 10(2)(xv) of the Act.
Hence, the present appeal by the revenue against HC judgment.
ISSUE
Whether the payment made by the assessee company to the partnership firm constituted deductible business expenditure under the Income Tax Act.
RULE
If amount spent for obtaining capital asset, assessee would not be entitled to claim deduction under Section 10 (1)
The nature of the expenditure depends on the purpose for which it was incurred and not on the source of payment or its timing.
HELD
In the case of Assam Bengal Cement Co. Ltd. v. Commissioner of Income Tax, West Bengal, the assessee had obtained a lease with certain stipulations, including the payment of a sum of Rs. 5,000 per year. The Court emphasized that the nature of the payment should be determined by the nature of the asset acquired. Even though the payment was made in installments over time, it was still considered a capital expenditure because it was for acquiring an asset that provided an enduring benefit to the business. Therefore, the payment was not deductible.
The Supreme Court allowed the appeal, vacated the judgment of the High Court, and directed that the Tribunal's decision be implemented.
It agreed with the Revenue's argument that if the amount was spent for obtaining a capital asset, it could not be claimed as a deduction under Section 10(1) of the Act.
The court emphasized that income tax is to be levied on the real income, and expenditure for acquiring a capital asset would not be deductible as business expenditure.
COMMENTARIES RATIO/NOTE-
Few instances of Capital Expenditure-
Elimination of competition - Annual payments made by the lessee of limestone quarries to the Government who were the lessor in consideration of the latter's entering into certain covenants which ensured to the lesser elimination of competition during the period of the lease-Assam Bengal Cement Co. Ltd. v. CIT [1955] 27 34 (SC).
Payment for obtaining rights - Payments in addition to the stipulated royalty only with a view to obtaining the renewal or extension of lease agreement (it was held that the amounts so paid were capital expenditure since there was no legal obligation to pay those amounts under the terms of the original agreements and the said amount could not form part of the price of the assessee's stock-in-trade)-H. Dear & Co. (P.) Ltd v. CIT[1966]60 ITR 546 (SC).
Payment made for obtaining monopoly rights-Mewar Sugar Mills Ltd. v. CIT [1973] 87 ITR 400 (SC).