A.D.V.REDDY, J. -
(1.)THIS reference under S. 66(1) of the Indian IT Act of 1922 has been made by the Tribunal at the instance of the Department for answering the following question :
"Whether, on the facts and in the circumstances of the case, the commission paid by the assessee to the Mineral Products & Co. of Calcutta was allowable as a business expense laid out wholly and exclusively for the purpose of its business ?"
(2.)THE assessee is a firm operating as shipping, clearing and forwarding agents at the Machilipatnam Port. As it was in need of securing business from M/s General Produce Co. Ltd., it had approached M/s Mineral Products & Co., who after the necessary negotiations procured the business to the assessee. THE business procured consisted in the right of the assessee in carrying out the job of clearing and forwarding iron ore belonging to M/s General Produce Co. Ltd. for shipment from Machilipatnam Port, and in consideration of such service the General Produce Co. Ltd. agreed to pay the assessee-firm handling charges at Rs. 8.87 per ton including port dues, stevedoring and trimming, undertaking the responsibility until the goods are shipped, providing storage and accommodation and also agreeing to bear the demurrage charges, if any. For procuring this business, the agreement with M/s Mineral Products & Co. provided for a payment of Rs. 1.25 per ton in respect of shipping of iron ore belonging to the General Produce Co. Ltd. It was further provided that this contract should run concurrently with the contract with the General Produce Co. Ltd. THEse two contracts lasted one year and eight months and in this connection for the asst. yr. 1960-61, the assessee paid M/s Mineral Products & Co., the procuring agent, commission of Rs. 46,465 and debited this amount to the shipping account.
During the assessment for that year, the ITO found that as the assessee had secured the sole right to clear the goods of M/s General Produce Co. Ltd., through the mediation of M/s Mineral Products & Co., this had resulted in an expansion of the assessee's business and, therefore, it was a capital expenditure and disallowed the same. On appeal, the AAC considered it to be comparable to an acquisition of goodwill and as asset of a capital nature and upheld the decision of the ITO. But, the Tribunal on further appeal found that there is nothing in the contracts between the parties to suggest conferring of any right in the nature of monopoly on the assessee-firm, that it was not in the nature of capital payment, that it should only be treated as ordinary brokerage paid for securing additional business and as such constitutes revenue expenditure allowable under S. 10(2) (xv) of the Indian IT Act of 1922. Hence, this reference.
The assessee-firm had entered into an agreement with M/s Mineral Products & Co. of Calcutta to procure only the business relating to the export of iron ore from Machilipatnam Port belonging to M/s General Produce Co. Ltd., and had undertaken to pay brokerage of Rs. 1.25 per ton in relation to that contract. This obligation to pay brokerage is only with regard to this particular contract relating to the goods of General Produce Co. Ltd., is to run concurrently with it and is to last only for the duration of that contract. Admittedly, the contract had lasted only for one year and eight months. Under these circumstances, it has to be seen whether it is in the nature of a capital expenditure or a revenue expenditure. Very often sharp distinctions are drawn between capital and revenue expenditure. Pollock M. R. in Atherton vs. British Insulated & Helsby Cables Ltd. (1924) 10 TC 155 (CA) pointed out :
"Now what is capital and what is attributable to revenue account I suppose is a puzzling question to many accountants, and I do not suppose that it is possible to lay down any satisfactory definition."
(3.)THEREFORE, the decision in each case depends on a variety of circumstances, e.g., the nature of the expenditure, the source from which the money was spent, whether the payment was made once and for all or is a recurring expenditure and whether the asset acquired is going to be a source of permanent income or it exhausts itself either during the year when it was acquired or within a short period thereafter. The main test, however, appears to be its permanency, i.e., whether the capital of the company or its assets or its goodwill is permanently increased by reason of such expenditure and it was a tangible asset for the enduring benefit of the trade.
The learned counsel for the Department relied on two decisions for his contention that the commission paid in this case is in the nature of a capital expenditure. R. M. G. Sundararamier Radhakrishnier & Co. vs. CIT (1952) 21 ITR 184 (Mad) is a case where the assessee had entered into an agreement with another for procuring him the licence for exporting goods to Ceylon and had undertaken to pay 50 per cent of the profits realised and when he claimed the amount paid to the person who procurred him the business as revenue expenditure, the Court rejected that contention and held that what was paid was really in form and in substance a division of ascertained profits and as such the assessee was not entitled to any deduction under S. 10(2)(xv) of the Indian IT Act of 1922. This decision has no bearing on and has no similarity at all to the facts of the present case. In Chintalapudi Ranganayakulu vs. CIT (1964) 51 ITR 276 (AP) the assessee had entered into lease agreements for purposes of mining and had paid brokerage to certain persons for getting them mining leases and it was held that as, under the lease agreements, the assessee obtained only a right to extract ore which was in the nature of capital, the lease money and the brokerage were, therefore, payments of capital nature and were not allowable as revenue expenditure under S. 10(2)(xv) of the Indian IT Act of 1922. The decision in this case also will not apply to the facts in the present case. An outlay is deemed to be capital when it is made for the initiation of a business, or for a substantial replacement of equipment and any expenditure relating to the main framework of the assessee's business. If there is an expansion of the business into other lines by reason of opening of business of a new type, the initial expenditure connected with it may be considered to be for the acquisition of an asset and, therefore, of a capital nature. In the present case the assessee has been carrying on his business as a shipping, clearing and forwarding agent. His contract with the General Produce Co. Ltd. was only one of the transactions during the course of the business done by him and that too only with regard to the shipping of particular tonnage of iron ore. It is to procure this business that the assessee had entered into an agreement with M/s Mineral Products & Co., and had agreed to pay commission at Rs. 1.25 per ton with respect to the goods of M/s General Produce Co. Ltd., that was being shipped, from Machilipatnam Port and this obligation was to run concurrently with the contract with M/s General Produce Co. Ltd., and admittedly this lasted only for one year and eight months. It cannot be contended that this had resulted in an expansion of the assessee's business and has, therefore, brought benefit of an enduring nature as was held by the ITO. If that were so, commission or brokerage paid for every transaction in the course of business will be exigible to tax as an expenditure of capital nature. Nor can this be held to be comparable to an acquisition of goodwill as was done by the AAC, as the transaction has not the impress of durability and in fact it was terminable and would enure only for the period of contract with M/s General Produce Co. Ltd. It is not desirable to draw tortured inferences to make it fit into the groove of capital expenditure. In this case, the benefit acquired was during the course of business with regard to one of the many transactions of the assessee-company, and this had lasted only for a short duration with no permanent or lasting benefit to the assessee and, therefore, it cannot be considered to be an expenditure of capital nature.