Decided on April 05,1968



- (1.) THE assessee here is a limited company incorporated under the Travancore companies Regulation and is carrying on the business of manufacturing sugar. It also runs a distillery and a tincture factory. The assessee-company was floated with a view to take over the business assets of a company called Travancore sugars Ltd. , which was being wound up and in which the State Government held the largest number of shares, the Government Distillery at Nagercoil and the business assets of the Government Tincture Factory at Triyandrum. An agreement was entered into between the Government of Travancore and Sir William Wright on behalf of Parry and Co. Ltd. . the promoters of the assessee-company. Under the agreement, the assets of all the three concerns were agreed to be sold by the government of Travancore to the assessee-Company. It is not necessary to set out all the clauses in the agreement. Apart from the cash consideration for the transfer of the assets, Clause 7 of the agreement provided that: "the Government shall be entitled to twenty per cent, of the net profits earned by the company in every year subject however, to a maximum of rupees forty-thousand per annum, such net profits for the purposes of this clause to be ascertained by deduction of expenditure from gross income and also after- (i) provision has been made for depreciation at not less than the rates of allowances provided for in the income-tax law for the time being in force, and (ii) payment of the Secretaries and Treasurers' remuneration". On the 28th January, 1947, Clause 7 was substituted by another clause, which reads. "the Government shall be entitled to ten per centum of the net profits of the company in every year. For the purpose of this clause net profits mean the amount for which the company's audited profits in any year are assessed to income-tax in the State of Travancore. "
(2.) FOR the assessment year 1958-59, the corresponding previous year being 1st may, 1956 to 30th April 1957, the amount payable to Government under the aforesaid clause came to Rs. 42,480. The Appellate Assistant Commissioner disallowed the claim of the assessee for deduction of this amount on the ground that the clause virtually provided for sharing the profits after they came into existence, On appeal by the assessee, the Income-tax Appellate Tribunal held that the case will come within the principle of the decision in British Sugar manufacturers, Ltd. v. Harris (Inspector of Taxes), 1939-7 ITR 101 and that the payment was an expenditure made to earn the profits of the business and not an expenditure paid out of the earned profits, and allowed the appeal. At the instance of the Department, the Tribunal referred the following question to the High Court: "whether on the facts and in the circumstances of the case, the payment of Rs. 42,480 by the assessee to the Travancore Government under the agreements dated 18-6-1937 and 28-1-1947 was allowable under section 10 of the Income-tax Act?"
(3.) THIS Court held that the payment of the aforesaid amount constituted capital expenditure and was not an allowable deduction under Section 10 (2) (xy) of the income-tax Act. Against this judgment, an appeal was preferred by special leave to the Supreme Court. The Supreme Court held that the amount is not capital expenditure but revenue payment and sent back the case to this Court for decision of certain questions namely, whether 'the payment of the commission is tantamount to diversion of profits by a paramount title', whether 'the transaction should be treated as a joint venture with an agreement to share profits' between the assessee and the Government, and whether 'the requirements of Section 10 (2) (xv) have been satisfied in this case'.;

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