Shyamal Kumar Sen, J. - (1.) In this application under Section 256(1) of the Income-tax Act, 1961, the following questions have been referred to this court for determination : "(1) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that payment of Rs. 10 lakhs to Messrs. Octavius Steel and Co. Ltd. under the agreement dated March 10, 1983, was capital in nature and hence was not admissible as a revenue expenditure ? (2) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in confirming the disallowance of litigation expenses of Rs. 1,05,019 claimed by the assessee as revenue expenditure ?"
(2.) The facts leading to the reference, inter alia, are that the year of assessment involved is 1982-83. The assessee is a non-resident company having its head office in the U. K. and was carrying on the business of cultivation and manufacture of tea in India and sale thereof in and outside India. It has no other branch in any other country except its head office in the U. K. The assessee-company entered into an agreement dated December 17, 1975, to sell its Coombergram Tea Estate to Messrs. Octavius Steel and Co. Ltd. (for brevity, "OSCL") with effect from January 1, 1975, and it was, inter alia, provided thereunder that all the profits and losses on and from January 1, 1975, shall belong to OSCL. The said sale agreement was rescinded by the assessee. Consequently, the OSCL instituted a suit in the original jurisdiction in this court for specific performance of the said contract (sale agreement dated December 17, 1975) which was decreed by the High Court in favour of OSCL directing the assessee to execute the deed of conveyance of the said tea estate in terms of the agreement. The assessee went in appeal before the High Court (in appellate jurisdiction) against the said judgment and decree of the High Court on the original side. During the pendency of that appeal, parties compromised. A memorandum of settlement dated December 22, 1981, was recorded. In terms of the said settlement, OSCL agreed to forgo and abandon all its claims and rights under the said decree of the High Court and, in consideration thereof, the assessee agreed to pay Rs. 23,61,000 equal to half of the assessable income of the assessee for the years 1975 to 1981, subject to certain conditions. The said settlement was substituted by another settlement dated March 10, 1982, in terms of which the assessee-company agreed to pay Rs. 10 lakhs to OSCL in full and complete settlement of all the claims which OSCL had under the decree of this court or in anywise OSCL to meet its cost of litigation expenses, etc. The assessee claimed deduction of the said amount of Rs. 10 lakhs agreed to be paid to OSCL. The assessee further claimed deduction of Rs. 1,05,019 as litigation expenses in the said matter. The Income-tax Officer disallowed the claim on the reasoning that Rs. 10 lakhs was agreed to be paid in connection with the title of a business and not for deriving profit out of the business activities of the assessee. Further, the Income-tax Officer observed that the settlement took place on March 10, 1983, that is to say, after the close of the accounting period of the assessee on December 31, 1981, for the instant assessment year 1982-83 and as such the said claim did not relate to the instant assessment year. The Income-tax Officer also disallowed the claim of deduction of Rs. 1,05,019 on the same reasoning, viz., that the expenditure was made concerning the title of the business and not for the purpose of earning any income.
(3.) The assessee went in appeal before the Commissioner of Income-tax (Appeals) who endorsed the order of the Income-tax Officer and upheld the disallowance of Rs. 10,00,000 on the ground that the liability did not accrue during the relevant previous year. However, he did not decide the question as to whether the payment was in the nature of revenue or capital. He also did not decide the objection of the assessee as to disallowance of Rs. 1,05,019 though such ground of objection was raised before him.;