Commissioner Of Income-Tax, … vs Travancore Sugar & Chemicals Ltd on 27 October, 1972 – Case Summary

In the case of the Commissioner of Income-Tax, Kerala, Ernakulam vs Travancore Sugar & Chemicals Ltd, a significant legal dispute arose concerning the interpretation of the Indian Income-Tax Act 1922, Section 10(2)(xv). The case was heard before the Supreme Court of India on 27 October 1972, with Justice P. Jaganmohan Reddy presiding over the bench.

Facts of the Case

The appellant, Travancore Sugar & Chemicals Ltd, was established with the intention of acquiring the assets of three government enterprises: a sugar factory, a distillery, and a tincture factory. The agreement for the sale of assets stipulated a cash consideration of Rs. 3.25 lakhs. Additionally, the government was to purchase pharmaceutical products from the company, and had the right to nominate a director on the company’s board.

A significant clause in the agreement, clause 7, stated that the government would be entitled to 20% of the net profits earned by the company each year, subject to a maximum of Rs. 40,000 per annum. This percentage was later reduced to 10% in a subsequent agreement. For the assessment year 1958-59, the amount payable to the government under clause 7 amounted to Rs. 42,480. The appellant claimed that this payment was an expenditure of a revenue nature and was allowable under section 10(2)(xv) of the Act.

Issues Raised

The Income Tax Officer and the Appellate Assistant Commissioner disallowed the claim, but the Tribunal allowed it, holding that the payment was an expenditure made to earn profits of the business, not an expenditure paid out of earned profits. The Tribunal referred the following question of law to the High Court of Kerala: “Whether on facts and in the circumstances of the case, the payment of Rs. 42,480 by the assessed to the Travancore Government under the agreements, dated June 18, 1937 and January 28, 1947 was allowable under section 10 of the income-tax Act?”

Court’s Observations and Judgment

The Kerala High Court initially held that the payment constituted capital expenditure and was not allowable under section 10(2)(xv) of the Income-tax Act. However, on appeal to the Supreme Court, the judgment was reversed, and the matter was remanded to the High Court. Upon re-examination, the High Court held that the expenditure was deductible.

The Supreme Court, in its judgment, made several key observations:

1. Once it is decided that the expenditure is a revenue expenditure and not of capital nature, the answer to the reference should be in the affirmative. Whether the expenditure is to be considered as an expenditure incurred at the very inception deductible as an over-riding charge on the whole of the profit-making apparatus or whether it is an expenditure which, apart from being a revenue expenditure, is also wholly and exclusively laid out for the purpose of trade, would not make any difference to the answer.
2. The assessee had no choice at the time of inception as a condition of its coming into existence to agree to the several terms stipulated by the Government for transferring the profit-earning assets. There are obligations in the contract which are inter-linked with the transfer of assets, notwithstanding the fact that the Company paid a price fixed for the transfer of assets.
3. Clause (xv) of Sub-section 2 of Sec. 10 is confined to the payments wholly and exclusively laid out for the purpose of business in which expenditure of a revenue nature would also be included along with the expenditure of various other categories. The contention that the said clause covers expenditure of both the capital and revenue nature and also payments wholly and exclusively

laid out for the purpose of business, was rejected.

The Supreme Court, therefore, held that the payment made by the appellant to the government was not a capital expenditure but a revenue expenditure, and was deductible under section 10(2)(xv) of the Act. The court further noted that the payment was not related to the capital value of the assets, nor was it related to any fixed sum agreed between the parties as part of the purchase price of the undertakings. The court also rejected the argument that the transaction should be treated as a joint venture with an agreement to share profits.

Implications of the Judgment

This judgment provided significant clarity on the interpretation of section 10(2)(xv) of the Income-tax Act, particularly in relation to the distinction between capital and revenue expenditure. The court’s decision underscored the importance of considering the nature of the expenditure and the purpose for which it was made, rather than simply the source of the funds or the manner in which the payment was structured.

The ruling also highlighted the need to consider the overall context and circumstances of a transaction when determining the nature of an expenditure. In this case, the court took into account the terms of the agreement between the appellant and the government, the obligations imposed on the appellant, and the indefinite duration of the payment obligation.

Overall, the judgment in the case of Commissioner of Income-Tax, Kerala, Ernakulam vs Travancore Sugar & Chemicals Ltd has had a significant impact on the interpretation and application of the Indian Income-Tax Act, and continues to be cited in subsequent cases involving similar issues.