JUDGMENT <NAME>, J.

1. The <ORG> has referred the following question of law to this court under Section 256(2) of the I.T. Act, 1961 :

"Whether, on the facts and in the circumstances of the case and having regard to the provisions of Section 3 read with Section 28(1) of the I.T. Act, 1961, the <ORG> was right in holding that the amount of opening stock of Rs. 3,03,000 could be considered in arriving at the result in the manufacturing and trading account relating to the assessment year 1965-66 ?"

2. The assessee, <ORG>, is engaged in the business of manufacture of tyres. The relevant previous year of the assessee ended on 30th June, 1964, corresponding to the assessment year 1965-66.

3. The assessee-company had been incorporated on April 1, 1960. In the proceedings for assessment to tax for the accounting year relevant to the assessment year 1965-66, the ITO added Rs. 3,03,000 for the following reasons:

"On examination of various details it was further found that the cost of the materials debited to manufacturing a/c. consumed during the course of pre-production period has not been excluded. Assessee had, of course, capitalised a sum of Rs. 49,646 on account of fuel power charges pertaining to pre-production period. It is not denied that raw materials and stores were not consumed during the experimental stage prior to commercial production. After taking into account the expenditure incurred on power and fuel, in my opinion, 121/2% of the total raw materials and stores and spare parts consumed can be estimated to have been consumed for experimental purposes and thereby the cost of manufacturing account has been inflated to that extent. This would mean an addition of Rs, 3,02,855 or say Rs. 3,03,000. By making this addition the gross profit rate would go to reasonable figure."

4. The assessee appealed to the <ORG> and he confirmed the view taken by the <ORG>. According to him, the opening stock of materials debited to the manufacturing account was relatable to the pre-production period and this amount of Rs. 3,03,000 referable to expenses relating to the pre-production period. He further held that for stores and spare parts no adjustment was made for items in the pre-production period.

5. The assessee carried the matter further before the Tribunal. It was contended on behalf of the assessee before the Tribunal that there was no warrant for disallowing the expenses because the expenses were referable to expenses for the purpose of business of the assessee and when the expenditure was incurred in the course of business the expenditure was allowable because the expenditure related to cost of raw materials which were to be considered in the debit side in manufacturing and trading account for the purpose of arriving at the proper gross profit. It was also stated that, after all, the items used were for the purpose of making the quality products and that even some raw materials that were used during the experimental stage were ultimately used as raw materials by manufacturing process. It was further contended that the company undertook a very big project and in a big project it could not be expected that the assessee would earn profit from the very beginning and that in the immediately subsequent years the assessee itself declared a gross profit of 17% .

6. The <ORG>, on the other hand, contended that having regard to the provisions of Section 28(1) of the Act the expenditure was not relatable to manufacture of tyres and as such the expenses were not deductible revenue expenses when the assessee itself capitalised certain expenses.

7. The <ORG> held as follows :

"We are inclined to hold that the assessee is entitled to succeed. Section 3(1)(d) of the I.T. Act, 1961, states : 'For the purposes of this Act, "previous year" means in the case of a business or profession newly set up in the said financial year, the period beginning with the date of the setting up of the business or profession and ending with the said financial year.' According to Section 3(1)(b) 'previous year' means if the accounts of the assessee have been made up to a date within the said financial year, then, at the option of the assessee, the twelve months ending on such date. Section 28(1) of the I.T. Act states J ' The following income shall be chargeable to income-tax under the head "Profits and gains of business or profession", (1) the profits and gains of any business or profession which was carried on by the assessee at any time during " the previous year".' The <ORG> sought to rely upon Section 28(1) without considering the implication of the meaning of 'newly set up' as found in the definition of 'previous year' in Section 3 of the Act.

The profits or gains of any business which have been carried on by the assessee during the previous year should be taken along with the provisions of Section 3 relating to 'previous year'. Then we have to consider whether the expenses were allowable under the provisions of deductions as contemplated in the different sections of the Act. The <ORG> wanted to state that production should be linked up with the expenses on raw materials incurred for the purpose of production in that year."

8. The <ORG>, relying upon the decision of <ORG> in the case of <CITATION>  26 ITR 151 and the decision of <ORG> in the case of <ORG> , held that when the assessee's business had been set up, the <ORG> was not justified in disallowing the expenditure on the ground that it was prior to the commencement of the assessee's business. The <ORG> referred to the directors' report that the commercial production of the company commenced from December, 1963. The <ORG>, therefore, held that the business was set up before the commercial production commenced and, therefore, there was no reason to disallow the expenses in this case on the basis that the expenditure was incurred earlier to the commencement of commercial production. The only argument of the <ORG> before the <ORG> was that the expenditure was not allowable; in view of the wording of Section 28 of the I.T. Act, the expenditure was not connected with the business of the assessee. The <ORG> came to the conclusion as follows:

" When this was the position of law and when the assessee incurred the expenses for the purpose of arriving at a manufacturing and trading account, the entire debits with reference to the opening stock along with the purchase price of raw materials during the year are to be considered in the matter relating to computation of manufacturing profit or loss of the assessee-company."

9. At the instance of the Commissioner the question set out earlier has been referred by the <ORG>. The distinction between the setting up of the business and commencement of manufacturing operation is well recognised. The cases that have been cited before us do not depart from the principles laid down in the decisions which have been referred to by the <ORG>.

10. The only argument that has been urged on behalf of the <ORG> before us is that in this case the expenditure that has been allowed by the <ORG> was incurred even before the setting up of the business of the assessee. Now this argument is a departure from the stand taken before the <ORG>. Before the <ORG> it was argued that the expenditure was incurred before the actual commencement of production by the assessee-company. The <ORG> pointed out the distinction between the setting up of a business and the commencement of production and relied on a number of decisions for the purpose of bringing out this distinction. A large number of cases have been cited before us which have only reaffirmed the distinction pointed out by the <ORG> between setting up of a business and commencement of manufacturing operations. The cases reported in <CITATION> . , <CITATION> .  119 ITR 608 ( <CITATION> .,  119 ITR 616 ( <CITATION>  119 ITR 968 ( <CITATION>  102 ITR 25 (Guj), do not lay down any principle contrary to the distinction that has been drawn by the <ORG>, Therefore, it is not necessary to deal with these cases in detail.

11. The case that is now sought to be made out before us by the <ORG> was not made out before the <ORG>. This was also not the case of the <ORG> ; this argument was also not considered by the <ORG>. The question whether the expenditure was incurred even prior to the setting up of business was not gone into at any stage.

12. The argument that is now being canvassed before us raises a question of fact which was neither argued nor considered nor investigated by the <ORG>. In that view of the matter we are unable to hold that there was no material before the <ORG> to come to the conclusion that it did.

13. In view of the aforesaid, the question referred to us is answered in the affirmative and in favour of the assessee.

14. Parties will pay and bear their own costs.

<NAME>, J.

15. I agree.


ORDER

1. The assesses, a banking company, had the assessment for the year ending on December 31, 1968, completed on October 4,1969. Subsequently, however, the assessment was reopened under Section 147(a) of the Income-tax Act, 1961, to bring to tax a sum of Rs. 54,485 in respect of interest suspense account. It is, however, according to the assessee, the sums representing interest on loans, recovery of which was considered doubtful.

2. Incidentally be it noted that the assessee had disclosed this sum of Rs. 54,485 in the balance-sheet as unrealised amount of interest along with the return filed by it and the Income-tax Officer had accepted the return and as a matter of fact had excluded that amount in the assessment order completed on October 4, 1969.

3. The factual score depicts that in terms of a notice under Section 147(a) of the Act, the assessment was reopened and a sum of Rs. 54,485 was subjected to tax on the ground that the interest accrued and due on the loans advanced by the bank was the income of the bank for the relevant assessment year and the assessee has failed to disclose this income in the return filed earlier.

4. In the appeal against the reassessment order, the Commissioner of Income-tax (Appeals) upheld the order of the Income-tax Officer and on further appeal, the <ORG>, however, reversed the view of the Commissioner and held that the instructions of <ORG> contained in circular dated October 6, 1952, would govern the case and the reopening was not justified and on a reference before <ORG> under Section 256(1) of the Income-tax Act, <ORG> answered the reference in favour of the assessee upon recording its approval on to the order of the <ORG>.

5. The records depict that two questions were raised before <ORG> (see [1986] 157 ITR 509) namely (page 510):

"1. Whether, on the facts and in the circumstances of the case, <ORG> is right in law in holding that the provisions of Section 147(a) are not attracted ?

2. Whether, on the facts and in the circumstance of the case, <ORG> is right in law in holding that the interest of Rs. 54,485 taken directly to interest suspense account is not assessable to income-tax ?"

6. So far as the second question is concerned, <ORG> recorded that the matter need not be gone into by reason of the circular dated October 6, 1952, issued by <ORG>. Neither do we feel it necessary to go into the issue any further.

7. Turning attention to the first question as regards the provisions under Section 147(a) be it noted and as the facts depict, there is no failure on the part of the assessee in furnishing the particulars pertaining to the above noted sum as not recoverable for the relevant accounting year and the statements filed along with the original return disclosed the full details of the aforesaid account. There is, therefore, no failure on the part of the assessee to disclose fully and truly the material facts necessary for the assessment years for the respective years and as such Section 147(a) has no manner of application and is not attracted in the facts of the matter under consideration. <ORG> on consideration of the facts came to the conclusion that the <ORG> was justified in coming to the said finding and we also record our concurrence therewith.

8. Incidentally this issue came for consideration before this court in a batch of cases on more or less identical situations and this court while dealing with this matter finally, recorded that the question as regards reopening of the assessment under Section 147(a) of the Act would not arise further. The question in the facts of the matter under consideration is thus covered by the judgment of this court in <CITATION>  158 ITR 102.

9. In that view of the matter, these appeals fail and are dismissed. No order as to costs.


PETITIONER: <NAME> Vs. RESPONDENT: STATE OF MADHYA PRADESH AND OTHERS DATE OF JUDGMENT: 01/04/1969 BENCH: <NAME>, J.C. BENCH: <NAME>, J.C. HIDAYATULLAH, M. (CJ) RAMASWAMI, V. MITTER, G.K. GROVER, A.N. CITATION: 1970 AIR 93 1970 SCR (1) 156 1969 SCC (1) 853 CITATOR INFO : RF 1977 SC1825 (51) D 1979 SC 418 (1) RF 1981 SC 873 (13) R 1983 SC1155 (22,23,25) RF 1986 SC1205 (12) ACT: Constitution of India- Article 19(1)(8)- Notification by <ORG> having effect of banning slaughter of bulls and bullocks-If violative of the fundamental right under Art. 19(1)(g)- Principles for considering constitutionality of law restricting or prohibiting carrying on a business. HEADNOTE: Certain bye-laws framed by the Jabalpur Municipality, which permitted the slaughter of various animals including bulls -and bullocks, were confirmed by the respondent <ORG> Government in 1948. By a notification on January 12, 1967, in exercise of its powers under s. 430 of Madhya Pradesh Municipal Corporation Act 23 of 1956, <ORG> cancelled the confirmation of certain bye-laws "insofar as the bye--laws relate to the slaughter of bulls and bullocks". The petitioner challenged the constitutionality of the notification by a writ petition under Art. 32 on the, ground that it infringed his fundamental right under Art. 19(1) (g) of the Constitution. It was contended on behalf of the respondent <ORG> that (1) its power to rescind confirmation of the bye-laws could not be challenged by reference to Art. 14 or Art. 19 of the Constitution, because the power vested in the Government to confirm the bye-laws carried with it the power to rescind such confirmation; and (2) that since every person desiring to use a slaughter house, had to apply for and obtain a licence, which may be refused, and if given was liable to be withdrawn, no person may insist that he shall be given a licence to slaughter animals in a slaughter-house. HELD: Allowing the petition, The, impugned notification, though technically within the competence of <ORG>, directly infringed the fundamental right of the petitioner guaranteed by Art. 19(1)(g). It could be upheld only if it was established that it sought to impose reasonable restrictions in the interests of the general public and a less drastic restriction would not ensure the interest of the general public. [161 D] The sentiments of a section of the people may be hurt by permitting slaughter of bulls and bullocks in premises maintained by a local authority. But a prohibition imposed on the exercise of a fundamental right to carry on an occupation, trade or business will not be regarded as reasonable. if it is imposed not in the interest of the general public, but merely to respect the susceptibilities and sentiments of a section of the people whose way of life, belief or thought is not the same as that of the claimant. [161 H] The power to issue bye-laws indisputably includes the power to cancel or withdraw the bye-laws, but the validity of the exercise of the power to Issue and to cancel or withdraw the bye-laws must be adjudged in the light of its impact upon the fundamental rights of persons affected thereby. When the validity of a law placing restriction upon the exercise of fundamental rights in Art. 19(1) is challenged, the onus of proving to the satisfaction of the <ORG> that the, restriction is reasonable lies upon the <ORG>. A law requiring that an act which is inherently dangerous, noxious or 157 injurious to public interest, health or safety or is likely to prove a nuisance to the community, shall be done under a permit or licence of an executive authority, is not per se unreasonable and no person may claim a licence or permit to do that act as of right. Where the law providing for grant of a licence or a permit confers a discretion upon an administrative authority regulated by rules or principles expressed or implied, and excersiable in consonance with rules of natural justice, it will be presumed to impose a reasonable, restriction. Where, however, power is entrusted to an administrative agency to grant or withhold a permit or licence in its uncontrolled discretion, the law ex facie infringes the fundamental right under Art. 19(1) [16O  <CITATION> ,  S.C.R. 629; <CITATION> ,  2 S.C.R. 610; and <CITATION> ,  2 S.C.R. 375; referred to. JUDGMENT:

ORIGINAL JURISDICTION : Writ Petition No. 60 of 1969. Petition under Art. 32 of the Constitution of India for the enforcement of fundamental rights.

<NAME>, <NAME> and <NAME>, for the peti- tioner.

<NAME>, for the respondents.

The, Judgment of the Court was delivered by <NAME> The petitioner <NAME> who carries on the vocation of slaughtering bulls and bullocks at the Madar Tekdi Slaughter-House at Jabalpur claims a declaration that the notification dated January 12, 1967 issued by the Governor of Madhya Pradesh in exercise of the powers conferred under sub-s. (3) of S. 430 of the Madhya Pradesh Municipal Corporation Act 23 of 1956 Cancelling confirmation of the bye-laws" made by <ORG> for inspection and regulation of slaughter-houses "in so far as the bye-laws relate to slaughter of bulls and bullocks" infringes the fundamental freedoms guaranteed under Arts. 14 and 19 of the Constitution.

Section 5(37) of the Madhya Pradesh Municipal <ORG> Act 23 of 1956 defines "municipal slaughterhouse". By s. 66(m) it is made obligatory upon the <ORG> to make adequate provision for the construction, maintenance and regulation of a slaughter-house. By sub-s. (1) of s. 257 of the Act the <ORG> may and when required by the <ORG> shall fix places for the slaughter of animals for sale, and may with the like approval grant and withdraw licences for the use of such premises. By sub-s. (3) it is enacted that when premises have been fixed under sub-s. (1) no person shall slaughter any such animal for sale within the city at any other place. By sub-s. (4) bringing into the city for sale, flesh of any animal intended for human consumption, which has been slaughtered at any slaughterhouse, or place not maintained or licensed under the Act, without the written permission of the Commissioner, is prohibited. Section 427 authorises the <ORG>, with the sanction of the <ORG>, to make bye-laws consistent with the provisions of the Act and the rules made thereunder for carrying out "the provisions and intentions" of the Act. The bye-laws may, inter alia, relate to the management of municipal markets and the supervision of the manufacture, storage and sale of food, and for that purpose may regulate the sanitary conditions in municipal slaughter-Houses. By S. 430 it is provided that no bye-law made by the <ORG> under the Act shall have any validity until it is confirmed by the <ORG>. Power is conferred upon the <ORG> by S. 432 to modify or repeal either wholly or in part any bye-laws in consultation with the <ORG>. In exercise of the power conferred by s. 178(3) of the C.P. and Berar Municipalilties Act 2 of 1922, bye-laws were made by the Jabalpur Municipality in January 1948. Those bye- laws continued to remain in force under the Madhya Pradesh Municipal <ORG> Act 23 of 1956. The bye--laws controlled and regulated the conditions under which animals may be slaughtered in the premises fixed for that purpose and provided for inspection and for ensuring adequate precaution in respect of sanitation and for slaughter of animals certified by competent authorities as fit for slaughtering. By the notification issued by the Jabalpur Municipality a slaughter-house at a place called 'Madar Tekdi" was fixed as premises for slaughtering animals. Under that notification bulls and bullocks were permitted to be slaughtered along with other animals like buffaloes,- sheep, goats and pigs. But on January 12, 1967, the State <ORG> issued a notification "cancelling the confirmation of the bye-laws" insofar as they related to slaughter of bulls and bullocks at Madar Tekdi Slaughter- House. That notification places restrictions upon the right of the petitioner to carry on his hereditary vocation. The question of permitting slaughter of cows, bulls and bul- locks has, for a long time, generated violent sentimental differences between sections of the people in our country. After the enactment of the Constitution the controversy relating to the limits within which restrictions may be placed upon the slaughter of cows, bulls and bullocks was agitated before this Court in <CITATION> (1). In that case the validity of provisions made in three State Act s which imposed a total ban upon slaughter of all categories of "animals of the species of bovine cattle" was challenged. These Act s were the Bihar Preservation and Improvement of Animals Act, 1955, the U.P. Prevention of Cow Slaughter Act, 1955, and the C.P, (1)S.C.R.-629 and Berar Animals Preservation Act, 1949. The petitioners who followed the occupation of butchers and of dealing in the byproducts of slaughter-houses challenged the validity of the three Acts on the plea that the Acts infringed their fundamental rights under Arts. 14, 19 (1) (g) and 25 of the Constitution. This Court held-(i) that a total ban on the slaughter of cows of all ages and calves of cows and of she- buffaloes, male and female, was reasonable and valid; (ii) that a total ban on the slaughter of she-buffaloes or breeding bulls or working bullocks (cattle as well as buffaloes), so long as they were capable of being used as milch or draught cattle, was also reasonable-and valid and

(iii) that a total ban on the slaughter of she-buffaloes, bulls and bullocks (cattle or buffalo) after they ceased to be capable of yielding milk or of breeding or working as draught animals was not in the interests of the general public and was invalid.

Attempts were made from time to time to circumvent the judg- ment of this Court in <NAME> case("). After that judgment, Legislatures of the State of Bihar, U.P. and Madhya Pradesh enacted the minimum age of animals to be slaughtered. The Bihar Act prohibited slaughter of a bull, bullock or shebuffalo unless the animal was over 25 years of age and had become useless. Under the U.P. Act slaughter of a bull or bullock was permitted only if it was over 20 years of age and was permanently unfit. Under the Madhya Pradesh Act slaughter of a bull, bullock or buffalo, except upon a certificate issued by the competent authority, was prohibited. The certificate could not be issued unless the animal was over 20 years of age and was unfit for work or breeding. This Court held in <CITATION> (2) that the ban on the slaughter of bulls, bullocks and she-buffaloes below the age of 20 or 25 years was not a reasonable restriction in the interests of the general public and was void. The Court observed that a bull, bullock or buffalo did not remain useful after it was 15 years old, and whatever little use it may then have was greatly offset by the economic disadvantages of feeling and maintaining unserviceable cattle. This Court also held that the additional condition that the animal must, apart from being above 20 or 25 years of age, be unfit was a further unreasonable restriction. On that ground the relevant provisions in the Bihar, U.P. and Madhya Pradesh Act s were declared invalid. The present case is apparently another attempt, though on a restricted scale, to circumvent the judgment of this Court in <NAME> case(1)'. The bye-laws of the Jabalpur Municipality permitted slaughter of bulls at bullocks. Alicence (1)  S.C.R. 629. (2)  2 S,C.F,. 61 0.

had to be- obtained for that purpose. Slaughter of animals in places outside the premises fixed by the Municipality was prohibited by S. 257(3) of the Act, and sale of meat within the area of the Municipality of the animals not slaughtered in the premises fixed by the Municipality was also prohibited. Under the notification by which the bye-laws were issued in 1948, bulls and bullocks could be slaughtered in premises fixed for that purpose. But by the notification dated January 12, 1967, confirmation of the bye-laws insofar as they related to bulls and bullocks was cancelled. The effect of that notification was to prohibit the slaughter of bulls and bullocks within the Municipality of Jabalpur. This cancellation of the confirmation of Bye-laws imposed a direct restriction upon the fundamental right of the petitioner under Art. 19(1)(g) of the Constitution. In the'affidavit filed on behalf of the <ORG> of Madhya Pra- desh two principal contentions were raised :-(1) the power to rescind confirmation of the bye-laws cannot be challenged by reference to Art. 14 or Art. 19 of the Constitution, because the power vested in the Government to confirm the bye-laws carries with it the power to rescind such confirmation and (2) that since every person desiring to use a slaughter-house had to apply for and obtain a licence, which may be refused, and if given was liable to be withdrawn, no person may insist that he shall be given a licence to slaughter animals in a slaughter-house. The power to issue bye-laws indisputably includes the power to cancel or withdraw the bye-laws, but the validity of the exercise of the power to issue and to cancel or withdraw the bye--laws must be adjudged in the light of its impact upon the fundamental rights of persons affected thereby. When the validity of a law placing restriction upon the exercise of fundamental rights in Art. 19(1) is challenged, the onus of proving to the satisfaction of the <ORG> that the restriction is reasonable lies upon the <ORG>. A law requiring that an act which is inherently dangerous, noxious or injurious to public interest, health or safety or is likely to prove a nuisance to the community, shall be done under a permit or licence of an executive authority, it is not per se unreasonable and no person may claim a licence or permit to do that act as of right. Where the law providing for grant of a-licence or a permit confers a discretion upon an administrative authority regulated by rules or principles expressed or implied, and exercisable in consonance with rules of natural justice. it will be presumed to impose a reasonable restriction. Where, however, power is entrusted to an administrative agency to grant or withold a permit or licence in its uncontrolled discretion, the law ex facie , infringes the fundamental right under Art. 19(1). Imposition of restric-on the exercise of a fundamental right may be in the form of control or prohibition, but when the exercise of a fundamental right is prohibited, the burden of proving that a total ban on the exercise of the right alone may ensure the maintenance of the general public interest lies heavily upon the <ORG>.

This <ORG> in <CITATION> (1) held that the word "restriction" in Arts. 19(5) and 19(6) of the Constitution includes cases of "prohibition" also; that where -a restriction reaches the stage of total restraint of rights special care has to be taken by the <ORG> to see that the test of reasonableness is satisfied by considering the question in the background of the facts and circumstances under which the order was made, taking into account the nature of the evil that was sought to be remedied by such law, the harm caused to individual citizens by the proposed remedy, the beneficial effect reasonably expected to result to the general public, and whether the restraint caused by the law was more than what was necessary in the interests of the general public. The impugned notification-, though technically within the competence of <ORG>, directly infringes the fundamental right of the petitioner guaranteed by Art. 19(1)(g ), and may be upheld only if it be established that it seeks to impose reasonable restrictions in the interests of the general public and a less drastic restriction will not ensure the interest of the general public. The <ORG> must in considering the validity of the impugned law imposing a prohibition on the carrying on of a business or profession, attempt an evaluation of its direct and immediate impact upon the fundamental rights of the citizens affected thereby and the larger public interest sought to be ensured in the light of the object sought to be achieved, the necessity to restrict the citizen's freedom, the inherent pernicious nature of the act prohibited or its capacity or tendency to be harmful to the general public, the possibility of achieving the object by imposing a less drastic restraint, and in the absence of exceptional situations such as the prevalence of a state of emergency- national or local--or the necessity to maintain essential supplies, or the necessity to stop activities inherently dangerous, the existence of a machinery to satisfy the administrative authority that no case for imposing the restriction is made out or that a less drastic restriction may ensure the object intended to be achieved. The sentiments of a section of the people may be hurt by permiting slaughter of bulls and bullocks in premises maintained by a local authority. But a prohibition imposed on the exercise of a fundamental right to carry on an occupation, trade or business will not be regarded as reasonable, if if is imposed not in (1) 2 S.C.R. 375, the interest of the general public, but merely to respect the susceptibilities and sentiments of a section of the people whose way of life, belief or thought is not the same as that of the claimant.

The notification issued by <ORG> must, there- fore, he declared ultra vires as infringing Art. 19 (1) (g) of the Constitution.

It is unnecessary to consider the validity of s. 430 of the Act which was sought to be challenged in the petition or to consider whether there has been any infringement of the guarantee of the equality clause of the Constitution. The petitioner will be entitled to his costs in this Court. R.K.P.S. Petition allowed.


JUDGMENT <NAME>, J.

1. The assesses is a public limited company carrying on business as manufacturer of plywood furniture and of battens for sale. On October 8, 1950, <ORG> of the assessee resolved to raise a loan of three lakhs of rupees, by issusing 600 First Mortgage Debentures of Rs. 500/- each, bearing interest at 71/2 per cent per annum less income-tax, redeemable in three successive years at one lakh every year, "to be utilised towards the working capital of the company."

The debentures were fully subscribed, and the subscriptions were received between August 24, and November 27, 1950. In issuing the debentures, expenses, by way of stamp paper for the relative trust deed, or underwriting commission, and of registration and lawyer's fees, totalling Rs. 12,923-14-0 or roughly Rs. 12,924/- were incurred. In the revised statement of the case which is furnished to us, by the appellate <ORG>, it is stated, that "on the basis of the entries in the cash book and on consideration of the cash balances at various dates" the loan raised "can he stated in a rough and ready way to be identified with payments" towards the purchase of timber and casein for over Rs. 1,76,000 cash purchases on December 18, 1950, for over Rs. 24,000, and discharge of loans on suspense account between October 28 and November 23, 1950, amounting to over Rs. 82,900 and with a deposit of Rs. 5l,500/- under a separate account, for the payment of dividends for the year ended March 31, 1950, as declared at the Annual General Meeting held on November 15, 1950.

The assessee did not claim a deduction of the aforesaid expenditure of 12,924/- In the return of income filed for the year ended March 31, 1950, for the assessment year 1951-1952, but made the claim before the Appellate Assistant Commissioner, which was admitted and allowed. On appeal by <ORG>, the <ORG> disallowed the claim, holding, that it is in the nature of capital expenditure and therefore inadmissible under Section 10(2)(xv) of the Indian Income-tax Act, 1922, which may be referred to as the Act. At the instance of the assessee, the "<ORG> has referred the following question to this court for decision:

"Whether the aforesaid expenditure of Rupees 12,924/- is a capital expenditure not deductible under Section (2)(xv)."

The contention of the assessee is, that the amount of three lakhs of rupees is not a capital receipt, and that therefore the expenses are deductible.

2. The relevant parts of Section 10 of the Act may be reproduced:

Section 10(1) . "The tax shall be payable by an assessee under the head ''Profits and gains of business, profession or vocation" in respect of the profits or gains of any business, profession or vocation-carried on by him."

(2) "Such profits or gains shall be computed after making the following allowances namely:--"

(XV) "any expenditure not being an allowance of the nature described in any of the clauses (i) to (xiv) inclusive, and not being in the nature of capital expenditure or personal expenses of the assessee laid out or expended wholly and exclusively for the purpose of such business, profession or vacation."

On the arguments addresssed to us, the only question which arises for decision is, whether the sum of Rs. 12,924 is in the nature of capital expenditure. As a first step, it may be taken, that this represents expenditure incurred for the issue of debentures to the extent of three lakhs of rupees. If the amount so raised is capital receipt, money expended to raise it, has to be held to be in the nature of capital expenditure, either as forming part of the capital so raised and reducing the amount available to the assessee pro tanto, or alternatively, as partaking of the same character as such capital itself.

The question therefore resolves itself to whether, the sum of three lakhs of rupees raised by debenture is a capital receipt or a revenue receipt, Though the term "capital expenditure" is not defined in the Act, as observed by <NAME>, J. in In re, Tata Iron & Steel Co. Ltd., (1875-83) 1 Tax Cas 125 the words "in tile nature of capital expenditure "make the meaning of the expression elastic in its application to the facts of each case." Capital may be subscribed or borrowed, and as for the latter, the act itself makes allowance for interest payable in respect of it. A borrowing of capital has to be distinguished from securing mete temporary or day to day accommodation, or from banking or overdraft facilities, and may be either by way of addition to the capital, or for improving the capital position.

The above distinction was pointed out by <NAME>, J., in <ORG> v. <NAME>, (1932) 18 Tax Cas 1 and was affirmed by <NAME>, J. in <ORG> v. <NAME>, (1942) 24 Tax Cas 171, who considered a temporary accommodation to be an ordinary incident in carrying on the business. In a commercial sense, no one would speak of his banking facilities as part of his capital assets. In <NAME> v. <ORG>, (1934) 19 Tax Cas 94, Singleton, J., quoted as follows, from the judgment of <ORG>, in <ORG> v. <NAME>, (1912) 5 Tax Cas 693 at p. 698:

"it may well be said, that if money is borrowed on a permanent footing, as from year to year, the capital of the concern is in a commercial sense enlarged thereby and the business extended."

The category of short loans which may be contracted in carrying on a business, also comes within the scope of temporary accommodation or of ordinary trading facilities. But the raising of money debentures or mortgage, cannot be regarded as an ordinary incident in carrying on the business, or be treated as on a par with trading or banking facilities, but must prima facie and in the absence of other indications, be considered to affect the capital of the concern and its profit-making structure.

In (1942), 24 Tax Cas 171 the assessee became liable to a German company on account of the purchase of raw materials, when, on receipt of a commission, a Dutch company guaranteed payment. The assessee made a further borrowing secured by debenture, the repayment of which was guaranteed by another company on receipt of commission. The court allowed deduction of the first commission, as being for the discharge of an existing trade debt, but disallowed the second, under 8 and 9 Geo. V C. 40, Schedule D, Cases I and II, Rule 3(f), as being for capital facilities.

The same Rule was applied similarly in <NAME> v. <NAME>, (1943) 25 Tax Cas 385 where the assessee, a firm of estate developers, claimed deduction for premium payable on repayment of a loan secured by a legal charge. In (1934) 19 Tax Cas 94 referred to, the issue of notes whether for one year or for a longer period, was held to be a capital nature or of the nature of a fund, employed or intended to be employed as capital, and in any case, as different from what might be regarded by business-men as facilities obtained for trading purposes. To earn profits by business activities, there must of course be capital, but the arrangements by which capital is raised, are distinct From the activities themselves, and expenditure incurred in relation to such arrangements are of a capital nature, and not for earning profits. Accordingly, in <ORG> v. Minister of National Revenue, 1944-13 ITR, Sup. 1 "the financial readjustment of their borrowed capital" was held to be "an isolated episode, unconnected with the day to day conduct of their business, and the benefit which they derived, was not "earned" by them in their businesses."

To ascertain the profits of a trade, the necessary expenses incurred in earning them have of course to be deducted, but, such ascertainment has. or ought to have nothing to do with how the capital is found; for, as <NAME>, J. observed in <ORG>, (1894) 3 Tax Cas 255 "there cannot be one law for a company having sufficient money to cany on all its operations and another which is content to pay for the accommodation". A borrowing for capital is thus distin-uishable from obtaining temporary accommodation, or banking or trading facilities for the purpose of carrying on business, though the distinction is a matter of degree. We are not, therefore, impressed by the argument, that the borrowing in the present case though subject to repayment in three years in terms, of the resolution, was a temporary accommodation or a trading facility as distinguished from the acquisition of capital.

3. The resolution of <ORG> of the assessee itself reveals, that it had no doubt in its mind as to the nature of the borrowing, which was to furnish the "working capital" of the company; the expenses for raising the loan were not, therefore, claimed as an allowance under the Act, before the Income-tax Officer. A distinction between share capital and borrowed capit'al" was attempted by <NAME>, Q. C. in his arguments in 1894-3 Tax Cas 255, maintaining that the capital of the company, properly, so-called, is the share capital; but <NAME>, <NAME> interposed observing, that "to the extent you borrow, you increase the capital of the company." In (1875-83) 1 Tax Cas 125, observing; that the cost of raising additional capital cannot be treated differently from that of raising the original capital, <NAME>, C. J, held, that "expenses incurred in raising capital are expenses of exactly the same character, whether the capital is raised at the floatation of the company or thereafter."

4. But counsel for the assessee maintained, that the borrowing here, represented circulating; capital as distinguished from fixed capital. Viscount <NAME> in <NAME> v. <NAME>, (1921) 12 Tax Cas 266 has adopted <NAME> definition of fixed capital as "what the owner turns to profit by keeping it in his own possession," and of circulating capital as "what he makes profit of by parting with it and letting it change masters." The "circulating capital" has thus been used as synonymous with tile term stock-in-trade" or the term "trading assets," as distinguished from fixed capital or capital assets. What is fixed capital for one buisness or trade, may be circulating capital for another, depending on the nature of the business or trade. The following passage from the judgment of <NAME>. L. J. in <ORG> v. <NAME>, (1934) 18 Tax Cas 280 at 300 illustrates, this:

"The land upon which a manufacturer carries on his business is part of his fixed capital. The land with which a dealer in real estate carries on his business is part of his circulating capital. The machinery with which a manufacturer makes the article that he sells is part of his fixed capital. The machinery that a dealer in machinery buys and sells is part of his circulating capital, as is the coal that a coal merchant buys and sells in the course of his trade. So, too, Js the coal that a manufacturer of gas buys and from which he extracts his gas."

A seller of annuities may have to purchase them before he sells, as in <ORG> v. <NAME>, (1892) 3 Tax Cas 185, an investment or a banking company may have to borrow for making investments as in <NAME> v. <ORG>, (1912 AC 118), or for lending; the price paid for the annuity in one case, and the amount borrowed in the other, are not capital assets in the real sense, and may be deemed to be trading assets or circulating capital.

But the assessee here is doing no such thing, but purchases the raw materials for manufacture, converts them into finished goods and sells them; we were told, that the need was felt by the assessee to obtain more raw materials; of course on payment. This, as we understand, was only by way of enlarging or extending its business, if it was paying its way, or was by way of establishing its business, if it was not; both mean the same thing.

At one stage of the argument, counsel seemed to assume that the enlargement or extension of business can only be in additional building, plant or machinery; we do not see sufficient warrant for this assumption, though cases of additional business are conceivable without a corresponding addition to capital. It is clear law, that outlay for the extension of business is in the nature of capital (investment; On this, it is sufficient to cite In re, <NAME>, (1947) 15 ITR 185: (AIR 1947 Lah 162) decided by a Full Bench of <ORG>. It was urged, that according to the revised statement of the case, over two lakhs of rupees, stated to be out of the amount borrowed had been applied for the discharge of debts incurred in the purchase of raw materials, such as timber and casein. The nature of the receipt by borrowing, whether capital or revenue, is not to be judged solely by the use, which the assessee has found for it subsequently. We are also unable to discover anything contrary to this principle, in the observations of <ORG> in <CITATION> , 1955-27 ITR 34 at p. 45: ((S) AIR 1955 SC 89 at p. 96), on which reliance was placed, that ''the aim and object of the expenditure would determine the character of the expenditure whether it is capital expenditure or a revenue expenditure."

This is different rom saying that the subsequent use or application of borrowing funds, which may be accidental, is decisive of their character. The resolution of <ORG> which authorised the borrowing, only declared, that the amount was to be utilised as the working capital of the assessee, and made no mention of the discharge of trade debts. While pursuing this line of reasoning the learned counsel had necessarily to agree, that there is no evidence as to the nature of the "hand-loans on suspense account," in discharge of which a sum of over Rs. 82,000 was paid, and also, that the deposit of Rs. 51,500 for the payment of dividend, could not in any view be debited to revenue; he therefore maintained, that at least the balance of the amount borrowed, which may be taken to have been applied towards the purchase of stock-in-trade, may be treated as not capital, and the proportionate Dart of the expenditure, out of Rupees 12,924/-, allowed to be deducted, It was not disputed by him, that in submitting the return of income, and in the computation of profits of the business, the cost price of raw materials or stock-in-trade was brought into account. The argument thus concedes a dual character to the borrowing, and involves a notional splitting of the borrowed amount and the expenses, for which we see no rational basis, and which is also contrary to the prescription in Section 10(2)(xv) , implicit in the expression "laid out or expended wholly and exclusively." but the argument is useful for one purpose, as indicating the limit, to which it can be extended.

5. We have so Far examined the question in the right of the general principles, deducible also from decided cases. We also find, that authorities are not wanting, which have taken a similar view. The learned counsel for the assessee cautioned us, against accepting too readily the decisions of <ORG>, as they are based on different statutory provisions. We agree, that the provisions of the concerned statutes in England and in this country, are not all in pari materia; but in the study and elucidation of fundamental concepts and general principles, like capital receipts and disbursements, revenue receipts and disbursements, as pointed out by <ORG> itself in <CITATION> , AIR 1959 Sc 814, English decisions afford considerable help and guidance. Before adverting to them, it has to be borne in mind, that under the English statutes too, from 5 to 6 Vict. C. 35, down to 15 and 16 Geo. 6 and 1 Eliz, 2 C 10 (being the Income-tax Act , 1952) questions do arise as to the nature of the receipt, whether capital or revenue, as no deduction is permissible in respect of any capital withdrawn from or any sum employed or intended to be employed as capital in a trade, profession or vocation.

In 1894-3 Tax Cas 255 cited, the court decided against deduction of expenditure incurred in issuing debentures, being in the nature of capital receipt. Incidentally, reference was made in the judgment to <ORG> v. <NAME>, (1894) 3 Tax Cas 239, in which interest on short loans from Bankers was not allowed to be deducted in the computation of income; in this respect, it may be mentioned, there is a difference in the corresponding provision in Section 10(2)(iii) of the Act. The case of <ORG>, (1894) 3 Tax Cas 239 was distinguished by <ORG> in <NAME> v. <ORG>, 1912 AC 118, a case also about deduction of interest, on the ground, that the assessee in that case, was a company which carried on investment business, and that therefore the nature of the borrowing was different.

We do not agree, that the authority of 1894-3 Tax Cas 255 has in any way been shaken by this pronouncement. Later, <ORG> had occasion to point out in (1932) 18 Tax Cas 1 referred to, that <NAME> v. <ORG>, 1912 AC 118 was a decision only on the subject of interest as deduction, and not on what is, and what is not capital, for the purpose of the rule adverted to above, with which this case is more directly concerned. In 1932-18 Tax Cas 1, advances made by an American company were held to constitute capital receipts. (1875-83) 1 Tax Cas 125 was a case in which the deduction claimed of twenty eight lakhs of rupees paid by way of commission to under-writers for the issue of seven hundred thousand preference shares of Rs. 100/-each, was held to be inadmissible under Section 9(2)(ix) of the Indian Income-tax Act, 1918, which in material respects, corresponds to Section 10(2)(xv) of the Act.

<CITATION> , 6 ITC 28 (Nag) the expenses of raising a debenture loan was disallowed under Section 10(2)(xv) of the Act, as being of a capital nature. 1942-24 Tax Cns 171, 1943-25 Tax Cas 385, 1934-19 Tax Cas 94 and 1944-13 ITR Sup. 1 which have been cited earlier, have decided against allowing expenses of raising loans, as being of a caoital nature. <CITATION> . 1953-23 ITR 134 (Punj) the assessee issued debentures in 1916 with a provision to redeem them after the year 1921 on payment of bonus. It was decided, that bonus paid for redemption was an inadmissible allowance, as the view prevailed, that the debentures constituted capital receipts. We consider, that the ratio of these decisions is applicable to the present case. Therefore, both on principle and authority, we come to the conclusion, that the sum of three lakhs of rupees raised by debentures was a capital receipt. To the question, referred, we return the answer that the expenditure of Rs. 12,924/- is capital expenditure, not deductible under Section 10(2)(xv) .

The assessee shall pay the costs of this reference, including advocate's fee Rs. 150/-.


PETITIONER: <ORG>. Vs. RESPONDENT: THE COMMISSIONER OF INCOME TAX, LUCKNOW DATE OF JUDGMENT04/09/1975 BENCH: FAZALALI, SYED MURTAZA BENCH: FAZALALI, SYED MURTAZA KHANNA, HANS RAJ KRISHNAIYER, V.R. GUPTA, A.C. CITATION: 1975 AIR 1945 1976 SCR (1) 648 ACT: Income-tax Act  s. 10(2) (xv)-Scope of- Payment of managing agent of compensation for terminating managing agency Whether capital or revenue expenditure. HEADNOTE: An analysis of s. 10(2) (xv) of the Income-tax Act , 1922, shows that in order to be a deductible expenditure the amount has to fulfil two conditions, (i) that it must be laid out wholly and exclusively for the purpose of the business, profession or vocation. and (ii) that it should not be an expenditure of a capital nature. Both these conditions have to be complied with before an assessee can claim deduction under the section. [660 G] Some of the tests that have been evolved by courts for determining when. an the facts and circumstances of a particular case, the expenses disbursed an assessee amount to a capital expenditure or revenue receipt arc: (a) Bringing into an asset or advantage of enduring nature would lead to the inference that the expenditure is of a capital nature. The terms `asset' or `advantage of enduring nature' are descriptive and the question will depend upon the facts of each case. (b) An item of disbursement may be regarded as of a capital nature when it is relatable to a fixed asset or capital, whereas circulating capital or stock-in-trade would be revenue receipt. <ORG> v. <NAME> 12 T.C. 266, 282, referred to . (c) Expenditure relating to frame work of the business is generally of a capital nature. (d) When a managing agency is terminated the termination is in terrorem, that is if commercial expediency requires that the agency should the terminated as it had become one, or it was creating difficulties or the agents were guilty of negligence, etc., or if any payments were made as retrenchment compensation, or confirment of benefit an employees or for termination of other disadvantages or onerous relationship it would be a capital expenditure but if it is purely voluntary obtaining substantial benefits it would be revenue expenditure. [659E-660D] In the present case, the appellant agreed to employ a firm as its managing agent for 20 years and to pay them commission at 2 1/2%. But after two years the appellant terminated the agreement. The managing agents received Rs. 25,000 as compensation and executed a release deed. The appellant thereafter employed another managing agent at 2% commission. There was nothing to show that the out-going managing agents were guilty of any faches, negligence, or that they had cause and loss or disadvantage to the appellant so as to justify the sudden termination of their agency, or that they did not agree to reduce the commission. On the other hand, <ORG> paid high compliments to the outgoing managing agents. By employing the new managing agents at the lesser commission 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 as the appellants, showing, that the appellants were interested in both of them. The appellant contended that the expenses of Rs. 2,50,000 was incurred by the appellant wholly and exclusively for carrying on the business or the company and would therefore be an allowable deduction under s. 10(2) (xv); but the department and the <ORG> negatived the contention. On reference, <ORG> held that the expenditure was incurred wholly and exclusively for the Purpose of `appellant's business. but. as the amount was in the nature of a capital expenditure, it was not deductible under the provision. 649 Dismissing the appeal to this Court, ^ HELD: <ORG> was right holding that the disbursement of compensation of Rs. 2,50,000 was of a capital nature and was therefore not a deductible expenditure under s. 10(2) (xv ). [661 (G] (1) Merely because the expenditure is incurred in the course of the business is in 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 templates a contingency where, even though the expenditure us incurred wholly and exclusively for the purpose of the business, it may still be of a capital nature. But <ORG> was in error in this case in holding that the expenditure was wholly and exclusively the purpose of the business, because. the finding is not borne out by the facts and circumstances of the case. [660 H-661 A, G-H] (2) The question whether compensation paid to the outgoing managing agents is capital or revenue expenditure depends on the facts and circumstances of each case. [662 A- B] (3) The present case is covered by the decision of this Court in <CITATION> (47 I.T.R. 381). That case has considered all the previous decisions and has laid down that in circumstance such as in the instant case the expenditure would be a capital expenditure in the hands of the payer and a capital receipt in the hands of the payee-company within the managing of s. 10(2) (xv) . The contention that the case was concerned any as with the nature of the payment in the hands of the payee company and that the observations regarding the nature of the payment in the hands of the payer-company would be abiter, is without substance. [654C, G-H] (4)(a) The appellant has brought into existence an advantage of an enduring nature by the change in managing agency, because, the amount of Rs. 30,000 which the appellant got by way of recurring benefit per annum must be regarded as an advantage of an enduring nature so as to fall within its definition in Atherton v. <ORG> (10 T.C 671) leading to the inference that the expenditure is of a capital nature. [661 F] (b) It was not the case of the appellant reducing its expenditure by getting rid of the managing agency and taking over the management itself to save the middleman profit. [653 B] (c) In the present case the only inference that could be drawn from the circumstances of the case is that the termination of the managing agency by the appellant was with the oblique motive of benefiting both the managing agents, in whom the appellant was interested, and not because of and commercial expediency. [661 <CITATION>  3 S.C.C. 736, 740-41. <CITATION>  3 S.C.C. 201. 204 and <CITATION>  3 S.C.C. 30, 34 followed. <ORG> <CITATION> 1 T.T.R. 129 133; <CITATION> . 59 I.A. 206, 211; <ORG>. ( <CITATION> 80 I.T.R. 167, 171. <CITATION> . Private Ltd. 681 T.R. 147, 156 and <CITATION> 48 I.T.R. 111, 134, explained. JUDGMENT:

CIVIL APPELLATE JURISDICTION: Civil Appeal No. 2203 of 1970.

Appeal by Special Leave from the Judgment and order dated the 26th September. 1969 of <ORG> in Income Tax Ref No. 420 of 1963 11-L9255SupCI/75 <NAME> and <NAME>, for the appellant. <NAME> and <NAME>, for the respondent. The Judgment of the Court was delivered by <ORG> is an appeal by special leave against the order of <ORG> dated September 26, 1969 on a reference made to it by <ORG>, Allahabad Bench. The facts giving rise to the present appeal may-be briefly summarised as follows:

The appellant assessee is a public limited company known as `<ORG> and the matter in dispute relates to the assessment year 1944-45. The appellant entered into an agreement with the firm called <ORG> and employed the said firm as the Managing Agents of the Company. The agreement was executed on August 8, 1941 and the Managing Agents were to work for the Company for a period of 20 years and were to charge commission at the rate of 21%. About two years later the appellant decided to terminate the agreement executed in favour of <ORG> and the said Managing Agents readily accepted the offer made by the appellant as a result of which a deed of release was executed by the Managing Agents <ORG> on September 28, 1943. Under the release the appellant agreed to pay a sum of Rs. 2,50,000 to the outgoing Managing Agents by way of compensation for terminating the agreement much earlier than stipulated under the original contract. The appellant, however, employed another firm, namely, <ORG> as their new Managing Agents and executed an agreement in their favour on September 30, 1943. The action of the Company was approved by <ORG>.

The dispute in the instant case centres round the question as to whether the compensation of Rs. 2,50,000 paid to the outgoing Managing Agents was a capital or a revenue expenditure incurred by the appellant. The stand taken by the assessee before the revenue was that as the expenses were incurred wholly and exclusively for the purpose of carrying on the business of the Company it would fall under s. 10(2)(xv) of the Income-tax Act , 1922, which is the same as s. 37(1) of the Income-tax Act, 1961, and therefore an allowable deduction under the aforesaid provision. The appellant's case was negatived by the Income-tax officer, the Appellate Assistant Commissioner and also by the <ORG>. The <ORG> also refused to make a reference to <ORG> as in its opinion no point of law arose. The appellant then approached <ORG> of Allahabad which directed the <ORG> to make a reference on the following four points and accordingly the <ORG> made a reference to <ORG> on those points:

"1. Whether there was any material on the basis ofwhichthe Appellate Tribunal could hold that the goodwill of <ORG>, was transferred to <ORG>,

2. Whether there was any material on the record for a finding that the said transfer had been for a sum of Rs. 1.00,000 or for any other sum, and

3. Whether there was any material on the record from which it could be held that the land had appreciated in value form Rs. 49,526/13,/6 to Rs. 1 ,00,000,

4. Whether a sum of Rs. 250,000 paid by the assessed to the Managing Agents for the termination of their Manning Agency is an expenditure admissible under Section 10(2) (xv) of the Income-Tax Act ,"

When the matter was heard by <ORG>, the assesses did not press any other point excepting point No. 4 which related to the question whether a sum of Rs. 2,50,000 paid by the assesses to the outgoing meaning Agents was an admissible expenditure under s. 10(2) (xv) of the Income-tax Act , 1922. <ORG> by it judgment dated September 26, 1969, held that the expenditure in question was incurred wholly and exclusively, for the purpose of assessee's business, but as the amount was in the nature if a capital expenditure it was not (deductible under the provisions of the income tax Act and hence this appeal before us by special leave.

Mr. <NAME> learned counsel for the appellant for submitted two points before us in support of his case. In the first place it was contended that <ORG> having held that the expenditure incurred was wholly and exclusively l`or the purpose of the business should have held that s. 10(2) (xv) applied in terms and therefore. the expenditure was a revenue expenditure which would be deductible under s 10(2) (xv) of the Income-tax Act ; and second, it was submitted that the High court was in error in not correctly applying the decision of this court in <CITATION> city(1).

The learned counsel for the appellant has adumbrated four pro positions before us for consideration:

(1) Where a payment is made by the payer Company to the payee Company ill lieu of termination of its agency it does not follow that the said pay meat which was made for the purpose of business must ipso facto be considered to be capital expenditure in the hands of the player Company.

(2) So far as the payee Company is concerned. the law is that generally any compensation received by it not he considered as capital receipt (1) 37 I.T.R. 381.

(3) So far as the payer Company is concerned, if payment is for the purpose of business, the mere fact that it has, bar virtue of the payment, increased its profits and reduced its expenses, should not be regarded as expenditure of capital nature but would be one in the course of business unless some oblique or gratuitous purpose is involved. (4) The principles laid down in <ORG> case (supra) would have to be read as laying down only a proposition that the payer company, namely, the managed company, was making a payment to the payee company as a capital contribution to the payee company and in the hands of the payee company the amount becomes a receipt of compensation for incurring losses. In other words <ORG> did not correctly apply the decision of this <ORG> in <ORG> case (supra). So for as propositions Nos. (1) to (3) are concerned their correctness cannot be disputed, because these propositions are covered by abandon authorities. As regards proposition No. (4) it seems to us that on a close and careful reading of the judgment of this <ORG> in on <ORG> case (supra) the contention of the learned counsel for the appellant on this point appears to be without any substance. We shall show that the facts of the present case appear to be on all fours with the ratio laid down by this <ORG> in <ORG>'s case (supra).

Mr. <NAME> appearing for the revenue, however, submitted that the termination of the managing agency by the appellant was made for extra-commercial reasons, the main intention being to benefit both the outgoing Managing Agents <NAME> and the incoming Managing Agents <ORG> which belonged to the same family of <NAME> and, therefore, as the compensation paid to the outgoing Managing Agents led to a profit to the company it would amount to acquisition of a new asset and would, therefore be a capital expenditure.

Before dealing with the contentions raise before us by the learned counsel for the appellant, it may be necessary to mention a few facts which have been found by the <ORG> and whose correctness has not been disputed before us.

(1) That there was no suggestion nor any iota of evidence to show that the outgoing Managing Agents were in any way guilty of laches, negligence or that they had caused any loss or disadvantage to the appellant so as to justify a sudden termination of their agency after two years although it was stipulated to continue for 20 years. On the other hand the annexures filed along with the statement of the case sent by the <ORG> to <ORG> clearly show that <ORG> paid high compliments to the outgoing Managing Agents <NAME>.

(2) That although the` incoming Managing Agents J.K. Commercial Corporation were prepared to serve the appellant on a commission of 2 % only, there is nothing to suggest that the outgoing managing Agents had refused to reduce their commission if that was the only ground for changing hands of the managing agency-.

(3) This is not a case where the appellant reduced its expenditure by doing away with the middleman's profit, e.g. to get rid of the managing agency and taking the managing agency itself. It is only question of substituting one Managing Agent l`or another (4) That although a compensation of Rs. 2,50,000 was paid by the appellant to the outgoing Managing Agents yet by employing the new Managing Agents a net profit of Rs 30,000 was made by the Company which was in the nature of a recurring benefit, apart from other facilities.

(5) That constitution of the two Managing Agents, namely, out going and the incoming Managing Agents shows that <NAME> family (the appellant) had major interest in both of them.

These facts have been clearly proved by the additional documents filed in this Court which were the annexures filed by the <ORG> in the statement of the case sent to <ORG> along with the reference. Annexure 'G' at p. 69 of the Paper Book shows that at the time of terminating the agency of <NAME> high compliments were paid to the said Managing Agents as would appear from the minutes of the meeting held on August 24, l 943 . The following observation, were made in that meeting:

"There was a frank discussion among the Directors and it was unanimously agreed that even though the present Managing Agents have been rendering very good services to the Company, and have been carrying on its affairs in a creditable manner, there was no denying of the truth that the appointment of Managing Agents of the constitution and composition of <ORG> would give to the Company unique advantages which the present Managing agents may perhaps be not able to impart, being a partnership firm. and further as <ORG>, has offered its services on lower terms, the company would be benefited by a saving of above Rs. 30,000/- per annum."

The minutes quoted above would clearly show two things-that vary high compliments were paid to the outgoing Agents for their very good services. and (2) that by the terms offered to the new Agents, namely, <ORG> there was to be a saving of Rs, 30,000/. per annum Similarly the <ORG> in its order of reference to <ORG> and the statement of case has found as follows: (p. 65 of the Paper Book) "The constitution of the two managing agents do show that the <NAME> family has major interest in both them.

The <ORG> on the basis of these facts came to the conclusion that the compensation was paid due to extra- commercial reasons and could not be regarded as expenditure incurred wholly and exclusively for the purpose of the business. <ORG> differed from the reasons given by the <ORG> but affirmed its view on the ground that the expenditure incurred by the assessee <ORG> being of a capital nature it was not deductible Having regard to the facts and circumstances of the present case we have no doubt that this case is wholly covered by the decision of this court ill Godrej & <ORG>'s case (supra). In this case, while it is true that this <ORG> was-dealing with the case of compensation in the hands of the payee <ORG> who were the Agents, yet in view of the clear observations made by the <ORG> there can be no manner of doubt that be expenses incurred in the present case by way of payment of compensation to the outgoing Agents would be of a capital nature. This <ORG> in the aforesaid case observed as follows:

"In the light of those decisions the sum of Rs. 7,50,000 was paid and received not to make up the difference between the higher remuneration and the reduced remuneration but was in reality paid and received as compensation for releasing the company from the onerous terms as to remuneration as it was in terms expressed to be. In other words, so far as the managed company was concerned, it was paid for securing immunity from the liability to pay higher remuneration to the assessee firm for the rest of the term of the managing agency and, _ therefore, a capital expenditure and some far as the assessee firm was concerned, it was received as compensation for the deterioration of injury to the managing agency by reason of the release of its rights to get higher remuneration and, therefore, a capital receipt within the decisions of this <ORG> in the earlier cases referred to above."

Mr. <NAME> tried to distinguish this case on the ground that the <ORG> was concerned in <ORG> case (supra) only with the nature of the payment in the hands of the payee company and any observations made as to what would be the nature of the payment in the hands of the payer company would be obiter, and, therefore. not binding on this <ORG>. We are, however, unable to agree with this knew. <ORG> case (supra) has considered all the previous decisions and has clearly laid down that in the circumstances. such as the present, the expenditure incurred would be a capital expenditure in the hands of the payer company and a capital receipt in the hands 1 of the payee company within the meaning of s. 10(2)(xv) of the Income-tax Act. The distinction sought to be made by the learned counsel for the appellant is extremely subtle and it is a distinction without any difference. Moreover, there are a number of other circumstances which clearly show that the expenditure concerned cannot, but be treated as a capital expenditure.

Mr. <NAME> then submitted that if the <ORG> and Company's case (supra) is held to be an authority for the proposition that the amount of compensation in the hands of the payer company also would be of a capital nature, then that case was wrongly decided and should be re-considered by us. We are, however, unable to agree with this argument, because apart from the principle of stare decisis, on the facts and circumstances of the present case, we do not find any special reasons to reconsider the decision in <ORG> & Company's case (supra) particularly when in view of the facts and circumstances of this case we are really of the opinion that the amount in question is undoubtedly a capital expenditure.

Reliance was placed by the learned counsel for the appellant on a decision of <ORG> in Anglo- Persian oil <CITATION> - tax(1). It is true that some observations in the aforesaid case are presumably in favour of the appellant but <ORG> was careful to guard itself against its decision being treated as a general principle to apply to all cases and in this connection it observed as follows:

"The case of payer and payee must be considered upon an independent statement of the relevant facts provide in his presence, there being no over-riding principle of law that the Income tax authorities are entitled to tax once at least on every payment."

In that case the Court proceeded on the admitted finding of fact that the expenditure incurred was wholly and exclusively for the purpose of the business. This, however, is not the case in the present case. In these circumstances, the decision in <ORG> case(1) does not appear to be of any assistance to the assessee.

Reliance was also placed on a decision in <CITATION> (2) in which case <ORG> of <ORG> merely affirmed the finding of <ORG> that the sums received by the respondents were not income, profits or gains within the meaning of the Act though they gave different reasons for that conclusion. It may be noticed that <ORG> and Company case(2) turned upon the facts and circumstances of the case and the nature of the payment made to the Company. While affirming the finding of <ORG> their Lordships observed as follows:

"The question was however, re-stated by the learned Chief Justice in more precise terms-namely, 'whether these sums are income profits or gains within the meaning of the (1) 80 I I.T.R. 129,133, (2) L.R. 59 L.A. 206, 211, Act at all,' and for the reasons stated in his judgment he came to the conclusion that they were not. Their Lord ships think that his conclusion was right though they arrive at this result by a slightly different road."

Reliance was also placed on a decision of this Court in <NAME> and Bros. <CITATION> (1), where this Court observed as follows:

"As held by this court in Commissioner of Income- tax , Chari and Chari Ltd. (57 I.T.R. 400), that ordinarily compensation for loss of office or agency is regarded as a capital receipt, but this rule is subject to an exception that payment received even for termination of an agency agreement would be revenue and not capital in the case where the agency was one of the many which the assessee held and its termination did not impair the profit-making structure of the assessee, but was within the framework of the business, it being a necessary incident of the business that existing agencies may by terminated and fresh agencies man be taken."

This was, however, a case where their Lordships were dealing with that question as to whether or not the amount of compensation in the hands of the payee company for loss of office or agency would be regarded as a capital receipt. <NAME> and <ORG> case (supra) does not throw any light on the point with which we are concerned in the instant case.

I Great reliance was sought to be placed on the decision of <ORG> in <CITATION> .(2) where <ORG> observed as follows:

"It is now well settled that the expression 'expenditure laid out or expended wholly and exclusively for the purpose of such business' includes expenditure voluntarily incurred for commercial expediency and in order indirectly to facilitate business. It is immaterial if a third party also benefits thereby. It is further well settle that an expenditure incurred in maintaining the efficiency of the manpower from time to time utilised in a business is also expenditure wholly or exclusively laid out for the purpose of such business. It is also well settled that the employment of, say a director, at a reasonable extra remuneration to supervise a particular business of the company, regard being had to his expert knowledge in that particular line of business, is expenditure within the meaning of section 10-(2) (xv) and the revenue authorities are not justified in reducing such remuneration. The expression 'commercial expediency' is an expression of wide import and expenditure in commercial expediency includes such expenditure as a prudent man may incur for (1) 80 I.T.R. 167, 171. (2) I.T.R R 147 156 the purposes of business. An expenditure which is entirely gratuitous and has no connection with the business does not come within the meaning of section 10(2)(xv) of the Act."

This case also is distinguishable from the facts of the present case, in as much as in <ORG>'s case (supra) there was no question of termination of any managing agency but what had happened was that two directors had retired and in their place an expert director was appointed to manage the affairs of the company. on the facts of that case this Court held that the expenditure was incurred for commercial expediency in order to facilitate business. In the instant case, as we have already pointed out, termination of the. managing agency of the outgoing Agents was a voluntary act not caused by any negligence, inefficiency by the outgoing managing agents In these circumstances on the facts a circumstances be would not consider whether it was commercially expedient in order to facilitate business that the managing agency of the outgoing Agents should have been terminated.

Learned counsel for the appellant also referred us to the decision of <ORG> in <CITATION> (1) where <ORG> observed as follows:

"We have already said that the inference drawn on the material on record is that the managing agency agreement had been terminated with the object of taking over its management by the board of directors and there is no evidence which will lead to an inference that it was done with the oblique motive or oblique purpose of securing the payment of the said amount of Rs. 17 lakhs to the managing agents.

For reasons stated above, our answer to the question is in the affirmative, i.e. in favour of the assessee."

This was obviously a case where the Managing Agents had not changed hands at all but what happened that the managing agency was terminated and the managing agency was taken over by the Board of Directors themselves. Thus this case also does not appear to be of any assistance to the appellant.

<CITATION> .(2) this Court indicated the various considerations which would govern the Court in deciding whether a particular amount is of a capital nature. Relying on a decision in the case of <ORG> v. <ORG>) this Court observed as follows:

"The character of the payment can be determined, it was added by looking at what is the true nature of the asset which has been acquired and not by the fact whether it is a (1) 48 I.T.R. 111, 134.

(2) [1971]3 S.C.C. 736, 740, 741.

(3) 10 T.C. 671.

payment in a lump-sum or by installments. It is also an accepted proposition that the words 'permanent' and 'enduring' are only relative terms and not synonymous with perpetual or ever-lasting.

There are some other tests like those of fixed capital and circulating capital for determining the nature of the expenditure. An item of disbursement can be regarded as capital expenditure when it is referable to fixed capital. It is revenue when it can be attributed to circulating capital."

Similarly in <CITATION> . (1) this Court observed as follows:

"A long line of decisions have laid down that when an expenditure is made with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade there is good reason (in the absence of special circumstances leading to the opposite conclusion) for treating such an expenditure as properly attributable not to revenue but to capital.

From the facts found, it is clear that the managing agency was terminated on business considerations and as a matter of commercial expediency. There is no basis for holding that by terminating the managing agency, the company not only saved the expense that it would have had to incur in the relevant previous year but also for few more years to come. It will not be correct to say that by avoiding certain business expenditure, the company can be said to have acquired enduring benefits or acquired any income yielding asset."

It may be seen that in that case there was a finding of fact that the termination of the managing agency was purely on business considerations and as a matter of commercial expediency and that no enduring benefits were acquired by the company.

Similarly in <ORG> v Commissioner of Income-tax, Kalipur.(2) my brother <NAME>, J., speaking for the <ORG> indicated the real tests to determine whether an amount is of a capital nature. In this connection the <ORG> observed as follows:

"The answer to the question as to whether the money paid is a revenue expenditure or capital expenditure depends not so much upon the fact as to whether the amount paid is large or small or whether it has been paid in lump-sum or by installments, as it does upon the purpose for which the payment has been made and expenditure incurred. It is the real nature and quality of the payment and not the quantum or the manner of the payment which would prove decisive. If the object of making the payment is to acquire a capital (1) [19731 S.C.C. 201, 204. (2) [1973] S. C.C. 30. 34.

asset, the payment would partake of the character of a capital payment even though it is made not in a lump sum but by installments over a period of time."

It would thus appear that numerous cases have laid down various tests to determine as to when on the facts and circumstances of a particular case the expenses disbursed by an assessee amount to a capital expenditure or a revenue receipt. The classic test laid down is by <NAME>, L.C., in <NAME>'s case (supra) where he observed at pp. 192-193 as follows:

But when an expenditure is made, not only once and for all, but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade, I think that there is very good reason (in the absence of special circumstances leading to an opposite conclusion) for treating such an expenditure as properly attributable not to revenue but to capital."

<ORG>'s case (supra) has been followed by this <ORG> in a large number of decisions such as in <ORG> case (supra) and <ORG> case (supra) and lot of other cases.

Several tests that have been evolved over the years by this Court as also the other <ORG> may be briefly formulated as follows:

(1) Bringing into an ass or advantage of enduring nature would lead to the inference that the expenditure disbursed is of a capital nature These terms, such asset" or "advantage of enduring nature"

are, however, purely descriptive rather than definitive and no rule of universal application can be laid down. Ultimately the question will have to depend on the facts and circumstances of each case, namely. quality to, and quantum of the amount, the position of the parties, the object of the transaction which has impact on the business, the nature of trade for which the expenditure is incurred and the purpose thereof etc. (2) An item of disbursement may be regarded as of a capital nature when it is relatable to a fixed asset or capital, whereas the circulating capital or stock-in-trade would be treated as revenue receipt.

Lord <NAME> in <ORG> v. Moore(1) has aptly and adroitly explained the terms 'field capital' and 'circulating capital' thus:

"Fixed capital is what the assessee turns into profit by keeping it in his own possession and circulating capital is what he makes profit of by parting with it and letting it change masters.

(1) 12 T.C. 255, 282 (3) Expenditure relating to framework of business generally capital expenditure.

(4) Another important and safe test that may be laid down particularly in cases where the managing agency is terminated would be to find out whether the termination of the agency is in termination of purely voluntary for obtaining substantial benefits. In other words, the decisive test to determine whether or not termination of the agency is in terrorem would be to find out is in such case commercial expediency requires that the agency should be terminated as it had become onerous or it was creating difficulties or the Agents were guilty of negligence etc. It will also include payments for retrenchment compensation or conferment of benefits on employees or termination of other disadvantages or onerous relationships. These arc some of the instances which I have given but they are by no means exhaustive The present case, however, falls within condition No (4) pointed out by us above, and the termination of the. agency cannot be said to be in terrorem but was voluntary so as to obtain an enduring or recurring benefit.

Before applying these tests to the facts of the present case, I would like to stress the important ingredients of s. 10(2)(xv) of the Income-tax Act, 1922 itself. Section 10(2)(xv) runs thus:

10. (2) Such profits or gains shall be computed after making the following allowances, namely:-

(xv) any expenditure not being an allowance of the nature described in any of the clauses (i) to (xiv) inclusive. and not being in the nature of capital expenditure or personal expenses of the assessee laid out or expanded wholly and exclusively for the purpose of such business, profession or vocation An analysis of this section would clearly show that in order to be deductible expense the amount in question must fulfil two essential conditions: (i) that expense must be laid out wholly and exclusively for the purpose of the business, profession or vocation; and (ii) that it should not be expense of a capital nature. Both these conditions have to be complied with before an assessee can claim deduction under s. 10(2)(xv) . <ORG> in this case has found that while the assessee had complied with the first condition that the expenditure was incurred for the purpose of the business, yet it has held that in the circumstances the expenditure is of a capital nature. It cannot be argued as was suggested by Mr. <NAME> at one time that whenever an expenditure is incurred in the course of the business it would never be a capital expenditure because s. 37 of the income-tax Act, 1961, itself contemplates contingency where even though the expenditure may be incurred wholly and exclusively for the purpose of the business yet it may be of a capital nature.

Let us now apply the tests laid down by the <ORG> as specified by us to the facts of the present case. We have already given the facts found by the <ORG> which have not been disputed before us. In this connection there are two circumstances which clearly indicate that the expenses incurred by the assessee were not dictated by commercial expediency but were inspired be a profit-hunting motive:

(1) That there was absolutely no necessity to terminate the managing agency of <ORG> only two years after the appellant entered into agreement with them. There was no complaint that the Agents had m any way' caused any loss or damage to the appellant or to their reputation, nor was there anything to show that the outgoing agents were guilty of negligence, laches, fraud or negligence. In these circumstances, therefore, the only irresistible inference that could be drown is that the assessee wanted to benefit both the firms, namely, incoming agents and the outgoing agents, which belonged to the <NAME> family as found by the <ORG> and not disputed before us. The outgoing agents were benefited because an amount of Rs. 2,50,000 was paid to them and the incoming agents were benefited because they were given the managing agency of the Company and as found by the <ORG> the appellant had pledged their goods in lieu of advance, (2) That it is the admitted case of the appellant that by virtue of the fact that the incoming agents had agreed to charge only 2% commission, the appellant got a benefit of Rs. 30,000 per annum. this amount is a recurring benefit to the appellant and can safely be regarded as an advantage of an enduring nature so as to fall within the definition laid down by Viscount Cave, L.C In these circumstances therefore, the present case is fully covered by the 'decision of this <ORG> in <ORG> case (supra).

For these reasons we are satisfied that <ORG> was right in holding that the disbursement of compensation of Rs. 2,50,000 was of a capital nature and was, therefore, not deductible expenditure under s. 10(2)(xv) of the Income- tax-Act 1922. We, however, feel that <ORG> was in error in giving a cryptic finding that the expenditure in question was incurred wholly and exclusively for the purpose of the business. This finding has been arrived at without considering the facts mentioned by us above and is not borne out from the facts and circumstances proved in this case. Nevertheless we uphold the order of <ORG> on reasons different from those given by <ORG>.

We would, however, like to make it clear that we have held that the compensation paid to the outgoing Agents in the peculiar facts of the present case amounts to capital expenditure. But we should not be understood as laying down a general rule that in all cases where compensation is paid to the Managing Agents whose agency is terminated it would amount to capital expenditure. We have already pointed out the various tests to be applied which are by no means exhaustive, nor are they of universal application. Each case has to be examined in the light of the circumstances of the case.

The appeal accordingly fails and is dismissed with costs.

<ORG> dismissed.