TRAVANCORE SUGARS AND CHEMICALS LTD. versus COMMISSIONER OF INCOME-TAX, KERALA

Citation: [1967] 1 S.C.R. 423 · Decided: 20-09-1966 · Supreme Court of India · Bench: J.C. SHAH · Disposal: Appeal(s) allowed

Judgment (excerpt)

J& 
TRAVANCORE SUGARS AND CHEMICALS LTD. 
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D 
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G 
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v. 
COMMISSIONER OF INCOME-TAX, 
KERALA 
September 20, 1966 
[J. C. SHAH, V. RAMASWAMI AND V. BHARGAVA, JJ.] 
Jndmn Income-tax Act, 1922, s. 10(2) (xv)-PurchaSe of industrial 
undertaking from Government-Agreement t<> pay percentage of net pro-
fits to Guvernment annually-Such payment whether revenue or capi.tal 
expenditure. 
The appellant company was formed with a view to taking over certain 
industrial undertakings from the 
Government of the erstwhile .State of 
Travancore. Apart from the eash consideration for the said purchase the 
appellant agreed to pay to the Government a certain percentage of its 
net profits every year. 
In proceedings under 'the Indian Income-tax: 'Act, 
1922, for the assessment year 1958-59 the appellant claimed the amount 
so pa.id to be expenditure allowable under s. 10(2) (xv). The High Court 
in reference proceedings held against the appellant who thereupon came 
to this Court. It was urged on behalf of the appellant that the annual 
payment was in the nature of revenue expenditure because it was not 
related to any part of the purchase price of the assets; on the other hand 
the Government had undertaken certain obligations under the agreement 
and the payment was in lieu of these. On behalf of the respondent it was 
urged that the payment formed part of the consideration for the purchase. 
HELD : (i) No single test of universal application can be discovered 
for a solution of the question whether a particular ex.penditure is in the 
nature of capital expenditure ot revenue expenditure. 
The name which 
the parties may give to the transaction which is the source of the receipt 
and the characterisation of the receipt by them are of little conscquen_ce. 
The court has to ascertain the true nature and character of the transaction 
from the covenant.;; of the agreement tested in the· light 
of surrounding 
circumstances. 
[427 D-E] 
(ii) The percentage of the net profits payable by. the appellant c0m· 
pany to the Government under the agreement was payable for an inde. 
finite period wihout limitation; it was related to the annual profits which 
flowed from the trading activities of the company having no rclatioD. to 
the capital value of the assets; it was· also not tied up in any way to 
any fixed sum agrood between the parties as part of the purchase price 
of the three Government undertakings. 
There was no reference to any 
capital sum in this part of the agreement. 
On the contrary the very 
nature of the payment excludes the idea that any connection with the 
capital sum was intended by, the parties. 
It is true that the purchaser may buy a ·running concern and fix a 
certain price and the price may be payable in a lump sum or .may be 
payable by instalments. The mere fact that the capital sum is payable by 
instalment speC;=ied over a certain length of time will not convert the nature 
of that payment from the c@ital expenditure into a revenue expenditure, 
but the payment of instalments in such a case would always have some 
relationship to the actual price fixed for the sale of the particular under-
taking. As there was no specific sum fixed in the present case as an addi-
tional amount of price payable in addition to the cash consideration and 
payable in instalments or by any particular method the annual payment 
423 
424 
SUPREME COURT REPORTS 
(1967] l S.C.R. 
• 
made to the .Government could not be held to be in the nature of capital 
A 
expenditure. It was revenue expenditure. 
[428 A.CJ 
Case-law referred 10. 
CIVIL APPELLATE JURISDICTION : Civil Appeal No. 324 of 1965. 
Appeal by special leave from the judgment and order dated 
August 20,1963, of the Kerala High Court in l.T.R. Case No. 
B 
16 of 1962. 
A, K Sen, G. L. Sanghi, and B. R. Aganrala. for the appel-
lant. 
S. T. Desai, S. K. Iyer and R. N. Sachrhey, for the respon-
dent. 
The Judgment of the Court was delivered by 
Ramaswami, J.-The appellant is a limited company incorpora-
ted under the Travancore Companies Regulation' and is carrying 
on business. in the State of Kerala, of manufacturing sugar, run-
ning a distillery and also a tincture factory. The appellant-company 
was floated with a veiw to taking over the business assets of a com-
pany called 'Travancore Sugars Ltd. (which was being wound up 
and in which the State Government held the largest number of 
shares), the Government Distillery at Nagercoil and the business 
assets of the Gove

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