Sabyasachi Mukharji, J. - (1.) In this reference under Section 256(1) of the I.T. Act, 1961, the following question has been referred to this court: "Whether, on the facts and in the circumstances of the case, the Tribunal was correct in holding that the payment of Rs. 2,50,000 made by the assessee-company to M/s. Navin Glass Products did not represent a capital expenditure and that it was an allowable deduction in computing the profits and gains of the business of the assessee-company ?"
(2.) This reference arises out of the assessment order for the assessment year 1970-71, The question relates to the allowance of deduction of Rs. 2,50,000 paid by the assessee to M/s. Navin Glass Products and the question in this reference, as often is referred to is whether the expenditure in question is capital expenditure or revenue expenditure. There is no dispute that the expenditure in question was incurred for the business of the assessee. The amount was paid as a result of a tripartite agreement and the parties to the agreement were, (1) the assessee, (2) Surat Cotton Spinning & Weaving Mills (P) Ltd., the proprietors of Navin Glass Products, hereinafter referred to as "Navins", and (3) Window Glass Ltd. All these three companies were engaged in the manufacture of wired and figured glasses. The purpose, the motivation and the manner of payment would better be understood in the light of the language used in the agreement. It would, therefore, be material to refer to the relevant portion of the agreement. In the recital clause, after setting out the names of the parties, it is stated as follows : "WHEREAS the above three companies have come to the conclusion that there is tremendous excess productive capacity within the country for making wired and figured glasses in relation to the demand for these types of glasses (which provides scope for utilisation of only about 25% of the total installed capacity) and losses are being incurred in this line of business by all of these companies and, therefore, to save the Wired and Figured Glass industry from further heavy losses and possible annihilation it will be in the common interest of the three companies if one of the three Wired and Figured Glass Factories do not make such glass for a period of 5 years, and commercial expediency dictates that some arrangement of the type embodied here should be entered into by the three companies. AND WHEREAS Navins have agreed not to make or sell glass except as provided in this agreement during the subsistence of this agreement in consideration of payment of an agreed compensation by HPG and Windows. AND WHEREAS HPG and Windows have agreed to purchase for Navins stocks of such glass as Navins have on the terms hereinafter set out,"
(3.) Thereafter, it is stated as follows: "1. In consideration of the payment of compensation of Rs. 12.50,000 (rupees twelve lakhs and fifty thousand) only each by HPG and Windows to Navins (amounting to a total of rupees twenty-five lakhs for both in instalments as hereinafter provided, Navins agree not to make or sell except as provided in this agreement whether in India or abroad, directly or indirectly, in any way, the following types of glass (hereinafter referred to as 'the products' during the subsistence of this agreement: (a) Figured (white, coloured or heat absorbing) glass; (b) Wired (white, coloured or heat absorbing) glass ; (c) Profilite type of glass. 2A. The compensation as per Clause (1) shall be payable by HPG and Windows in nine instalments. The first instalment shall be of Rs. 2,50,000 each and shall fall due on the expiration of 12 months from the date of this agreement and thereafter the compensation in instalments of Rs. 1,25,000 each shall be payable at intervals of every six months during the subsistence of this agreement. 2B. The compensation money will be paid within the month of the dates on which it is payable as per Clause 2A. 2C. So long as Navins observe their obligations under this agreement the above compensation shall be payable irrespective of whether : (a) Navins (i) Run their rolled glass plant to manufacture products other than 'the products'. (ii) Keep their plant idle for the agreement period of 5 years, or (iii) Partially or totally scrap their plant, or (b) any other party makes or sells 'the products". Clause 3 is on the following terms : "3. Navins agree not to sell, lease, transfer or in any way alienate or part with possession of their rolled glass plant to anybody so as to permit the buyer or lessee or transferee to use the plant in India for manufacture of the products, and there should be a condition made with such buyer, lessee or transferee that he will not manufacture in India from this plant the products during the subsistence of this agreement. If any such buyer, lessee or transferee makes in India any of the products during the tenure of this agreement the same will constitute a breach of the provisions of this agreement by Navins as referred to in Clause 7 hereafter." Clauses 5A, 5C, 5D, 5G, 5-I and 5K read as follows: "5A. Navins also agree to sell to HPG and Windows and HPG and Windows agree to buy by September 15, 1968, in the proportion of half and half Navins stocks which are at present insured and will remain so at least till September 15, 1968, at a price of Rs. 21,54,385.75 arrived at as per Schedule A less the glass value of Navins' despatches from May 17, 1968, till the actual date of the purchase of the stocks by HPG and Windows, such prices to be paid by HPG and Windows in equal shares to Navins immediately on the date the sale is effected. Till the date the requisite payment is made to Navins by HPG and Windows of the consideration value of Navins glass calculated as above, HPG and Windows will pay to Navins interest at 9% per annum from the date of this agreement on their respective half shares of the said consideration amount remaining outstanding. 5C. In view of Navins agreeing to assist HPG and Windows in getting financial arrangement respectively from any reputable bank for paying the above price, HPG and Windows agree to pay to the bank full realisation of glass value on the sale of such stocks. They in any case agree to repay to the bank at least Rs. 3 lakhs per month commencing from 1 month after the date of obtaining advance from the bank, if the payment into the bank during any month by sale of glass as in this clause is not equal to that amount, by paying into the bank the balance amount to make up Rs. 3 lakhs. 5D. The price calculated as per Clause 5A is for delivery at Navins factory at Baroda of the already packed glass in packed condition and for the loose glass the value of packing that will have to be done for such of it as is packable has been deducted as in schedule. 5G. Navins will exercise all such care of such stocks as a man of ordinary prudence will take for his own goods, but is hereby made entirely at the risk of HPG and Windows in all matters and in particular as regards breakages, while cutting, packing, shifting, forwarding or any type of deterioration or damage before despatch. 5-I. HPG and Windows may keep at Navins factory at all times one or more responsible representatives of theirs to supervise the cutting, packing, loading and despatching, and all such other matters as regards the glass sold to them as above. 5-K. Since Navins are keen that their godowns should be cleared as expeditiously as possible HGP and Windows jointly and severally agree to try their best to clear the stocks purchased by them from Navins on an average in 12 equal quantitative instalments p.m. of the different types of glass in the 12 months from July, 1968 to June, 1969, HPG and Windows in any case jointly and severally undertake to clear at least 80% of the stocks in aggregate sq. ft. by December 31, 1969, and balance 20% which would be predominantly of coloured and heat absorbing glass, by December 31, 1970, Navins shall be entitled to shift, stack and store at HPG's and Windows' risk such balance 20% at any godown outside its factory at Baroda." Clauses 9, 11 & 12 are relevant and those read as follows : "9. In. case of default of payment of any instalment of compensation of Rs. 121/2 lakhs payable by each of HPG and Windows to Navins on the dates fixed for payment as per Clause 2, the party in default, i.e., either HPG or Windows as the case may be shall be liable to pay forthwith the whole or balance of the said sum of Rs. 121/2 lakhs payable by each of HPG and Windows." "11. This agreement shall be deemed to have commenced on May 17, 1968. The provisions of this agreement shall be operative for a period of 5 years from the date of its commencement unless earlier terminated by mutual consent in writing of all three parties. 12. Any modification of this agreement shall be expressed in writing and signed by all three signatories to this agreement; otherwise it shall not be operative.";