C. I. T. CENTRAL BOMBAY versus JALAN TRADING CO. (P) LTD.

Citation: [1985] SUPP. 2 S.C.R. 517 · Decided: 09-08-1985 · Supreme Court of India · Bench: V.D. TULZAPURKAR · Disposal: Appeal(s) allowed

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Judgment (excerpt)

517 
C. I. T. CENTRAL J!(llllAY 
v. 
JALAll TRADING CO. (P) LTD. 
AUGUST 9, 1985 
(V .D. TULZAPURKAR, SABYASACHI Mll!OIARJI AND RANGANATH MISRA, JJ • l 
Indian Income Tax 
Act 1922 -
Section lO(l)(xv) -
Firm 
obtaining sole selling agency - Benefit of agreement assigned to 
assessee, a newly incorporated company - 75% of annual profits to 
be paid to firm - Sum paid -
Whether deductible under section 
.10(1) (xv). 
A firm (JTC) . obtained the sole selling agency for the 
products of. a manufacturer for two years with a right of renewal. 
A few months later, under a deed of assignment, the firm assigned 
the benefits ot the agreement to the assessee cc)mpany'under Which 
the assessee carried on the business as sole selling agents for 
the products of the· manufacturer. Under the deed of assignment 
the assessee company should take over not the whole of the 
business of the firm but only the benefit of the contract with 
the manufacturers in consideration whereof the assessee was· to 
pay to the firm as and. by way of royalty, an amount equal to 75% 
of their profits and cODDission, rl!llllneration and other moneys 
received from the manufacturers. The assessee had the option to 
renew the agreement. 
0 
In its illCOlle tax return the assessee claimed under· section 
10 (1) (xv) of the Act deduction of a sum of Rs. 7,93 lacs, which 
under the deed of assignment it was required to pay to the firm, 
but the authorities below rejected the ·claim. 
On appeal the 
Appellate Tribunal held that although no ascertained sum was 
mentioned for acquiring the right or the enduring benefit, the 
amount was spent by the assessee for acquiring an asset of 
enduring benefit, and therefore, the . expenditure was capital 
expenditure. On reference although the High Court held that. the 
asset acquired by the assessee was of an enduring nature; iiurpor-
ting to follow the decision of this Court in Travancore·Sugars & 
"-'eel• Ltd. v. Cqw!ssioner of me.- Tu:, lerala 62 
ITR 566 
it held that the annual payment by the assessee of 75% of its 
profits was not in the nature of capital expenditure. 
It -was 
contended on behalf of the· Revenue that "if ·the 
amount had been spent for obtaining a capital asset the assessee 
WOnld not be entitled to claim it as a deduction. 
A 
B 
c 
D 
E 
F 
G 
H 
518 
SUPREME, COURT REPORTS 
[1985] SUPP;2 s.c.R. 
A 
On behalf of the assessee it was 
contended that once the 
assessee had paid 75% of its profits to the firm, the amJUllt was 
no more in its hands as income and since s. 10( 1) envisage the 
levy of tax on real income in the assessee' s hands this was not 
income wi'thin the ..,,.ning of s.10(1) and was not taxable. 
B 
Allowing the appeal, 
JIELD: 
On the finding of the High Court 
that the expendi-
ture related to acquisition of a capital asset, it was not 
admissible as a deduction under section 10(2) (xv) of the Indian 
Income Tax Act 192~. [528 G] 
· C 
It is well settled 
that if an expenditure is made for 
acquiring or bringing into existence of an asset for the enduring 
benefit of the busin~ss, it is prop~rly attributable to capital 
and is of the nature of capital expenditure. The aim and object 
of the expenditure would determine, 
whether it is capital 
expenditure or revenue expenditure. The source or the manner of 
the payment would be of no consequence. Where a company had 
D 
acquired an asset in consideration of recurring payment of 
certain sum per year ,which was a right to carry on its business 
unfettered by any competition from outsiders within the area it 
was held to be in the nature of a capital asset and the payment 
was not deductible under section 10(2) (xv) of the Act. [524 
A,C,G] 
E 
Aa&alll Bengal ~t 
Co. Ltd. Vo C<mdastoner of 1- TalC 
27 ITR 34 ~ (1955] s.c.R. 1972 applied. 
In Travancore Sugars 
and a-teals Ltd. which the High . 
Court purported to follow there was a substantial and definite 
F 
ilmount of outright cash payment over and 
above 
which 
an 
indefinite annual pa~t had been stipulated. The tests laid 
down in this case were. not intended to be of general application 
but were given to bring into bold relief the special aspects of 
the case. The Court i1'self has pointed this out. Therefore, the 
High Court erred in importing this reasoning as a test of general 
G. 
application to be appiied to the facts of the present case. 
[528 D,E] 
In the instant case, the High Court has categorically found 
that a capital asset 1u!4 been acquired under the agreem

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