COMMISSIONER OF INCOME-TAX, KERALA, ERNAKULAM versus TRAVANCORE SUGAR & CHEMICALS LTD.

Citation: [1973] 2 S.C.R. 738 · Decided: 27-10-1972 · Supreme Court of India · Bench: P. JAGANMOHAN REDDY · Disposal: Dismissed

Cited by 2 judgment(s) · see the full citation network in Lexace

Judgment (excerpt)

738 
COMMI~SIONER OF INCOME-TAX, KERALA, 
ERNAKULAM 
v. 
TRAVANCORE SUGAR & CHEMICALS LTD. 
October 27, 1972 
[P. JAGANMOHAN REDDY AND I. 0. DUA, JJJ 
Indian Income· Tax Act 1922, Section 10(2) (xv)-Payment of fixed 
percentage of the profits annually, apart from the carh consideration, for 
:aking over of the undtrtaklng, whether deductible, 
The appellant Company was floated with a ~iew to take over the assets 
of the three Government concerns, nllllllely, Sugar Factory, a distillery and· 
tincture factory and to run them. 
Clause 3 of the agreement provided 
that the cash consideration !for the sale of assets shall be Rs. 3.25 lakhs. 
Clause 4(b) a.nd (c) provided for the continuation of the distillery licence 
in favour of the appellant. The Government wa.s to purchase the phar-
maceutical products from the company under clause S(b). The Govern-
ment had a right to nominate a Director on the Board of llirectors. 
Clause 7 of the agreement read "Government shall be entitled to 20% 
of the net profits earned by the CompBllly in every year subject, however, 
to the maximum of Rs. 40,000/- per annum. 
Such net profits for the 
purpose of this clause to be ascertained by ded\lctions of expenditure from 
gross income and also after (i) provision has been made for depreciation 
at net loss than the rates of allowance provided for in the Income Ta« 
Act for the time being in force, and (ii) payment of the Secretaries and 
Treasmer's remuneration".. By subsequent agreement, the percentage was 
reduced to 10%. For the assessment yeac 1958-59, the amount payable 
10 the Government under the aforesaid clause 7 came to Rs. 42,480/ -. 
The appellant claimed that the payment of the said amount 
was 
an 
expenditure of the revenue nature 
and 
was 
allowable 
under 
sec-
tion 10(2)(xv) of the Act. 
The claim was disallowed by the Income 
Tax Officer and the Appellafe A5'istant Commissioner, but was allowed 
by the Tribunal holding that the paymClr>t was an expenditure made in 
order to earn profits of the business 
and not an expenditure paid out 
of the earned profits. At the instance of tbe respondent, the Tribunal 
referred the following question of law to the High Court of Kerala. 
"Whether on facts and in. the circumstances of the case, the payment 
of Rs. 42,480/- by the assessee to the Travancore Government under the 
agreements, dated June 18, 1937 and January 28, 1947 was allowable u/s 
10 of the Income-tax Act." The Kerala High Court held that the pay-
ment constituted capital expenditure and was not allowable under section 
10(2) (xv) of the Income-tax Act. On appeal by the appellant to Supreme 
Court, the Supreme Court reversed the High Court judgment and ;·emanded 
the matter to the High Court. On remand, the High Court held that the 
said expenditure was deductible. 
Rejecting the appeal, 
HELD : (i) Once the crucial question is decided that the expenditure 
is a revenue expenditure and not of capital nature, the answer to the 
reference should be in the affirmat;ve.. Whether the expenditure is to be 
A 
B 
c 
D 
E 
F 
G 
H 
I. 
A 
B 
c 
D 
E 
C.I.T. v. TAAVANCORE SUGAR (Jaganmohan Reddy, !.) 
739 
further considered as expenditure incurred at the very inception deductib:e 
as an over-riding charge on the whole of the profit making apparatus 
fruling under section 10(1) or whether it is an expenditure which apart 
from it being a revenue expenditure is also wholly and exclusively laid 
out for the purpose of trade, would not make any difference to the answer. 
[7460] 
(ii) Held further, the ::,ssessee had no choice at the time of the in-
ception as a condition of its coming into existence to agree to the several 
terms stipulated by the Government for transferring the profit-earning assets. 
There are obUgations in th<> contract which are inter-linked with the 
transf\!r of assets notwithstanding the fact that the Company paid a pricl! 
fixed for the transfer of assets. 
Under the contract, the comp2.,y had t<> 
engage Qr,Jy the Travancore labour and staff, that it had to take apprcn· 
tices recommended by the Government and train them and that there \\'06 
no limitation as to the period the company had to pay the annual sum 
out of the net profits, notionally computed for that purpose a'fter deduction 
of certain items mentioned in clause 7. 
All this appears to he stipulation 
for payment of an amount for a concession granted to it and is thcrcf('lr\! 
deductible at its inception. [751A} 
(iii) Held further, that

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