J. K. COTTON MANUFACTURERS LTD. versus THE COMMLSSLONER OF INCOME TAX, LUCKNOW

Citation: [1976] 1 S.C.R. 648 · Decided: 04-09-1975 · Supreme Court of India · Bench: HANS RAJ KHANNA · Disposal: Dismissed

Judgment (excerpt)

648 
J. K. COTTON MANUFACTURERS LTD. 
v 
THE COMMlSSlONER OF INCOME TAX, LUCKNOW 
Septemher 4, 1975 
(H. R. KHANNA, V. R. KRISHNA lYER, A. C. GUPTA ANDS. M. FAZAL 
Au, JJ.] 
. 
lnccrne~tax Act (11 of 1922) s. 10(2) (Xl')-Scdpe of-Payn1ent to. nianag-
1ng agent of co1npe11sation fo'r tcr111i11ati11g n1anogi11g agency-Whether capital 
or revenue expenditure. 
An: analysis of s. 10(2){xv). of tM Income-tax Act, 1922, shows that in 
order to be a deductible expenditure the· amount ha-Y to fulfil two conditions, 
(i) that it must be laid out wholly and exclusivel:Y for the purpose of the· 
business, profession or vocation; and (ii) that i_t should not b~ an expenditure 
of a capitnl nature. 
Both these conditions have to be complied with before 
an· ass&see can claim deduction under the section. [660 G] 
Sorr.e: of the tests that have been evolved. by courls for determining v.i·hen, 
on the facts and circumstances of a particular case, the expenses disbursed by 
an ~sses~ee amount to a capital expenditure or revenue r\::ceipt are : 
(a) Bringing into an asset or advantage of enduring nature would lead 
to the ir.Jerence that the expenditure is of a capital nature. The terms 'asset' 
or 'advantage of enduring nature' :ire dc~criptive ;fnd the question will depenJ 
upon the facts of each case. 
(b) An item of disbursement may be regarded as of a capital nature 
when it is re1atable to a fixed asset or capital, whereas circulating capital or 
stock-in-trade would be revenue receipt. 
Joh:i S111ith & Sons v. Moore 12 T.C. 266, 282, referred to. 
(c). E.xpenditure relatinl! to frame work of the business is generally or 
A 
B 
c 
D 
a capital nature. 
E 
(d) \Vhen a managing 
agency is 
tern1inatcd. if 1he 
tern1ination is i11 
terraren1, that is, if commercial expediency requires that the agency should 
be terminated as it had becon1e onerous, or it was creating difficulties or the 
agents \\i:re guilty of negli'gencc, etc., or if any payments. were n1ade as retrench-
ment compensation, or confirn1cnt of benefits on employees or for termination 
of other disadvantage~ or onerous relationship, it would be a capital expenditure, 
but if it is purely voluntary i'or obtaining substantial benefits, it would be 
revenue· e\pen<liturc. [659
1E-660Dl 
~ 
Tn the. p;·csent cnse, the appel!anL agreed to employ a firni. as its managing 
agent! for 20 years and to pay them comn1i~sion at 2.! % . But after two years, 
the appellant 
terminated the agreement. 
Th~ managing 
agents 
received 
Rs. 2,50,000 as compensation and '?Xecuted a release deed. 
The appellant there-
after employed another managing agent at 2o/o con1mission. There was nothing 
to show that the out-going managing agents were guilty of any faches, negli-
gence, or that they had caused any loss or disadvantage to the;..pppoellant so. a.;; 
to justify the sudden termination of their agency, or that they did not agree 
t<.l reduce the commission. 
On the other hand, the Board of 
Director~ paid 
high con1pliments to the 011tgoing: managing agents. 
By employing the new 
managing agents. at the lesser con1mission, a net profit of Rs. 30,000 was made 
by the appellant per annum. The members of the outgoing and incoming 
agents, belonged to the same family a<; the appellants, showing, that the appel-
lants were interested in both of them. 
The appellant contended that the 1;:xpenses of Rs. 2,50,000 was in.curred by 
the appellant wholly and exclusively for 
carrying on tlie business 
of 
the 
company and would therefore be an allowable deduction under s. 10(2)(xv); 
but the department and the Tribunal negatived the contention. 
On· reference. 
the High c·ourt held that the expenditure· was incurred wholly and exclusively 
for the purpose of' appellant's business. but. as the amount 'Y"~s in the nature 
of a capital expenditure, it was not deduwtible under the provision. 
F 
G 
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A 
B 
J. ~. COTTON I.TD. V. C.I. T· 
649 
Dismissing the appeal to this Court. 
HELD·: The High Court wa_s right in holding that the disbursement of 
compensation of Rs. 2,50,000 was of a capital natlire and was therefore not 
a deductible expenditure under s. 10(2) (xv). [661 G] 
( J) Merely because the expenditure is incurred in the course 
of the 
business it could not be said that it would never be a 
capital 
expenditure. 
Section 37 of the 1961 Act corresponding to s. 10(2)(xv) of the 1922 Act, 
itself contemplates a contingency where, even though 
th

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