- (1.) THE assessee-company, Dalmia Dadri Cement Ltd. , is a manufacturer of cement. Mr. Prabhu Dayal Agrawal had found some kankar deposits, suitable for manufacture of cement, in the former Jind State, and he made available what he had enquired into and found in this respect to Mr. Shanti Prasad Jain. In consequence, and with the assistance of Mr. Prabhu Dayal Agrawal, an agreement was entered into on April 2, 1938, between the then Ruler of the former Jind State and Mr. Shanti Prasad Jain, for the sole and exclusive right of manufacturing cement in the former Jind State by the latter and to win and work the kankar and limestone deposits in that State in the terms and conditions of that agreement. The assessee-company having been formed, Mr. Shanti Prasad Jain transferred the rights under that agreement to it by another agreement of May 4, 1938, on the same terms and conditions as the original agreement. The assessee-company then entered into the business of manufacture of cement in the former Jind State. On May 27, 1938, the assessee-company entered into an agreement, annexure "b" to the statement of the case, with Mr. Prabhu Dayal Agrawal. In the preamble of that agreement it was stated that Mr. Prabhu Dayal Agrawal, being one of the promoters of the assessee-company, had rendered considerable service in its promotion, had helped in bringing about the agreement of April 2, 1938, between the former Ruler of Jind State and Mr. Shanti Prasad Jain, and had enquired and found kankar deposits in the former Jind State, suitable for manufacture of cement. It was then said that the parties agreed that the said beneficiary (Mr. Prabhu Dayal Agrawal) will get a commission so long as agreement exists between this company and the Government of Jind State at the rate of 1% on the yearly net profits of the company derived from the cement factory at Dalmia Dadri, including all the extensions that will be carried on in the said factory from time to time. Such yearly net profits will be calculated after making all proper allowances and deductions from revenue for interest on loans and advances, repairs, and outgoings for all the usual working charges, depreciation, bounties or subsidies received from Government or from a public body, profits by way of premium on shares sold, profits on sale proceeds and forfeited shares, or profits from the sale of the whole or part of the undertaking of the company but without any deduction in respect of income-tax or super-tax, or any other tax or duty on income or revenue or for expenditure by way of interest on debentures or otherwise on capital account or on account of any sum which may be set aside in each year out of the profits for reserve or any other special fund. In the years following the date of the agreement of May 27, 1938, the income-tax department treated the annual payment under the agreement by the assessee-company to Mr. Prabhu Dayal Agrawal as revenue expenditure in the hands of the assessee-company prior to the assessment year 1955-56. This was not questioned by the revenue in those years as capital expenditure. The Income-tax Officer having found in favour of the assessee-company in this respect, it was open, in exercise of his powers of revision under Section 33b of the Income-tax Act, 1922 (XI of 1922) to the Commissioner of Income-tax if he considered that the order made by the Income-tax Officer was erroneous in so far as it was prejudicial to the interests of the revenue to pass such order thereon as the circumstances of the case justify, including an order enhancing or modifying the assessment or cancelling the assessment and directing a fresh assessment, but this was not done ; if that had been done, it would have been open to the assessee-company to take an appeal against such an order under Sub-section (3) of Section 33b to the Income-tax Appellate Tribunal. So the revenue did not, earlier to the assessment year 1955-56, question the allowance of the payment to Mr. Prabhu Dayal Agrawal by the assessee-company under the agreement as revenue expenditure in its hands.
(2.) AN amount of Rs. 18,597 having been paid by the assessee-company to Mr. Prabhu Dayal Agrawal in the year ending December 31, 1954, with regard to the assessment year 1955-56, the assessee-company claimed this as revenue expenditure. However, earlier to that in 1951, the assessee-company having refused to make payment of the amount due to Mr. Prabhu Dayal Agrawal under the agreement with him, the latter instituted a suit against it making a claim under the agreement. In that suit the parties settled the matter on June 11, 1954, and it is in the assessment order, annexure "a" to the statement of the case, made by the Income-tax Officer that the settlement between the parties was on the terms that the assessee-company agreed to pay an amount of Rs. 15,000 under the agreement each year for the years 1951, 1952 and 1953, and terminating the agreement of May 27, 1938, on and from June 11, 1954, it agreed to pay a lump sum of Rs. 70,000 in lieu of Mr. Prabhu Dayal Agrawal's claim under the agreement with it. The payments were made to him by June 15, 1954. This latter amount of Rs. 10,000 has been claimed as a deduction by the assessee-company under Section 10 (2) (xv) of the Act as a revenue expenditure. The Income-tax Officer allowed the first amount of Rs. 18,597 as revenue expense for the assessment year 1955-56, but disallowed Rs. 70,000 as revenue expenditure being of the opinion that the expenditure having been nude once and for all, absolved the assessee-company from the burden of an onerous character and the payment did not help the carrying on of the business of cement manufacturing one way or the other. On appeal, the Appellate Assistant Commissioner, while maintaining the order of the Income-tax Officer with regard to the amount of Rs. 70,000, reversed the conclusion of the Income-tax Officer with regard to the other amount of Rs. 18,597 being of the opinion that it was capital expenditure. On further appeal, the Income-tax Appellate Tribunal found on both these claims for the assessee-company. The learned Tribunal did not accept the contention on the side of the revenue that the amount of Rs. 18,597 was paid to Mr. Prabhu Dayal Agrawal as promotional expenditure, meaning expenditure in connection with the promotion of the assessee-company, and in its order it was observed that the company was promoted decades ago and it is true that Prabhu Dayal did render some services at the time of its floatation. But the mere fact that some services were rendered then does not establish that the present payment was for services rendered in the promotion of the company. On the other hand, it is clear that the expenditure was made for the services rendered in procurement of the raw materials. The Tribunal further found "that the payment was made in the past and was always allowed as revenue expenditure. There is no special feature which would entitle one to come to the finding that any special rights were secured by means of this agreement. There is an insurmountable obstacle in proving the case of the department, viz. , that the payment was not made to the owner of the lands and, therefore, it cannot be said that it was for securing any capital right. At best the payment would be in the nature of a middle-man's remuneration for services rendered. . . . if this expenditure be described as capital expenditure, then some capital rights would be secured by the services of Shri Prabhu Dayal, if so, then such capital expenditure itself would be disallowed. There is no trace of any such capital expenditure being disallowed either during the previous year or in any of the earlier years. It means that the revenue itself adopted the view that such expenditure, which was incurred, was only for the purchase of the materials and, therefore, admissible". Having come to the conclusion that the payment of Rs. 18,597 made in the accounting year ending December 31, 1954, for the services rendered in procurement of raw materials was rightly allowed by the Income-tax Officer, the learned Tribunal was of the opinion that the payment of Rs. 70,000 as compensation for terminating the earlier agreement was also of the same nature admissible as revenue expenditure. So both the items were allowed to the assessee-company as deductions being revenue expenditure. On an application by the Commissioner of Income-tax, Patiala, the Tribunal under Section 66 (1) of the Act referred these questions to this court: " (1) Whether, on the facts and in the circumstances of the case, the payment of Rs. 18,597 by way of commission to Shri Prabhu Dayal was allowable as revenue expenditure ? and (2) Whether, on the facts and in the circumstances of the case, the compensation of Rs. 70,000 paid to Shri Prabhu Dayal was allowable as revenue expenditure ?"
(3.) IN Assam Bengal Cement Company Ltd. v. Commissioner of Income-tax, [1955] 27 I. T. R. 34; (1955] 1 S. C. R. 972 (S. C.), at page 44, their Lordships observed : "if what is got rid of by a lump sum payment is an annual business expense chargeable against revenue, the lump sum payment should equally be regarded as a business expense, but if the lump sum payment brings in a capital asset, then that puts the business on another footing altogether Thus, if labour saving machinery was acquired, the cost of such acquisition cannot be deducted out of the profits by claiming that it relieves the annual labour bill, the business has acquired a new asset, that is, machinery. ";