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C.I.T. V. TRAVANCORE SUGAR & CHEMICALS LTD., AIR 1973 SC 982

C.I.T. V. TRAVANCORE SUGAR & CHEMICALS LTD., AIR 1973 SC 982

FACTS

  • The case involves a limited company in Kerala engaged in sugar manufacturing, distillery, and tincture factory businesses.
  • The company entered into an agreement in 1937 with the government of Travancore to acquire assets, including those of Travancore Sugars Ltd., the Government Distillery, and the Government Tincture Factory.
  • The agreement stipulated various cash considerations and obligations, including annual payments to the government based on net profits.
  • The Appellate Assistant Commissioner disallowed the claim of the appellant for deduction of this amount on the ground that it was virtually mere sharing of profits after they came into existence.
  • The Appellate tribunal allowed the claim for deduction held that the case came within the principle of the decision in British Sugar Manufacturers Ltd. v. Harris (Inspector of Taxes) MANU/WB/0354/1937: [1939]7ITR101(Cal) 
  • The High Court initially held that the annual payments constituted capital expenditure, disallowing their deduction under the Income-tax Act. Then the matter adjudicated before the division bench but the judges had different opinion. Therefore, reference made to SC
  • Hence, the present appeal against HC judgment by the assessee.

 ISSUE

  • The main issue revolves around whether the annual payments made by the company to the government are allowable deductions under Section 10(2)(xv) of the Indian Income-tax Act, 1922.

RULE

  • The payment made was an expenditure made in order to earn profits, of the business and not an expenditure paid out of earned profits.

HELD

  • In the case of British Sugar Manufacturers Ltd. v. Harris [1939]7ITR101(Cal), the company agreed to pay two bodies 20% of its net profits for their technical and financial expertise. The payment was allowed as a deduction as it was deemed to be wholly and exclusively for the purposes of the trade. The court noted that the annual payments were not part of the purchase price for the assets but were linked to ongoing obligations under agreement.
  • The payments were for an indefinite period and were related to annual profits, not the capital value of the assets.
  • The agreement did not specify any fixed sum tied to the purchase price but rather referred to a percentage of net profits.
  • The court held that the annual payments were revenue expenditure, not capital expenditure.
  • It ruled in favour of the company, allowing the deductions for the payments under Section 10(2)(xv) of the Income-tax Act.

COMMENATRAIES RATIO/NOTE

  • a leasehold interest for a term of years may constitute a capital asset but the annual rent or royalty (as distinct from premium) paid for it would be on revenue account, even if the lease is for 99 years or in perpetuity.11. Singareni v CIT 66 ITR 553;