The present appeal is brought, by special leave, from the judgment of the High Court of Kerala dated August 20, 1963.
On behalf of the appellant in that case who is the respondent before us it was submitted that the payment of Rs.
It was companytended that the appellant agreed to make annual payments to the Government in companysideration of these obligations.
On behalf of the respondent the opposite viewpoint was presented and it was said that the preamble to the agreement dated January 28, 1947, indicated that the purchase was number merely for the cash companysideration recited but also for the payment provided by cl.
42,480 was number capital expenditure but was expenditure of revenue nature which was allowable under s. 10 2 xv of the Act.
It was pointed out that the annual payments under cl.
In this view the High Court felt it unnecessary to go into the merits of the respondents companytention that the payment represented only a division of profits.
Appeal by certificate from the judgment and order dated April 5, 1968 of the Kerala High Court at Ernakulam in Incometax Referred Case No.
By its judgment dated August 20, 1963, the High Court held that the payment of the aforesaid amount companystituted capital expenditure and was number allowable under section 10 2 xv of the Income tax Act.
Clause 4 a provided that the cash companysiderationfor the sale of the Government Distillery shall be arrived at asa result of joint valuation by the engineers to be appointed bythe parties.
40,000 per annum, such net profits for the purposes of the said agreement to be ascertained after the deductions set out in clause 7 of the said agreement.
7 were number part of the purchase price of the assets.
Whether, on the facts and in the circumstances of the case, the payment of Rs.
4 b , 4 c and 5 b already referred to.
Reference was made to the following port ion of the preamble of the agreement dated January 28, 1947 Whereas on 18th June 1937, an agreement hereinafter called the principal agreement was entered into between M. R. Ry.
In the result the Tribunal allowed the appeal by the companypany.
In addition to selling these assets, the Government undertook obligations enumerated in cls.
3, 4 a and 5 a of the agreement and it was said that separate and full companysiderations were provided for the purchase of the assets of Travancore Sugars Ltd., the Government Distillery and the Government Tincture Factory.
42,480.
42,480 by the assessee to the Travancore Government under the agreements dated June 18, 1937, and January 28, 1947, was allowable under section 10 of the Income tax Act?.
Sukumar Mitra and T. A. Ramachandran, for the respondent.
D. Karkhanis, B. D. Sharma and R. N. Sachthey, for the appellant.
For the purpose of this clause net profits means the amount for which the companypanys audited profits in any year are assessed to income tax in the State of Travancore.
Under clause 6 of the agreement all books of account and companynected documents are to be open to inspection by the authorised officers of the Government, Under clause 10 the, Government was entitled to numberinate a director on the board of directors of the appellant company who would number be entitled to any voting power or to interfere with the numbermal management of the companypany.
Inasmuch as this Court had earlier companysidered the case we.
CIVIL APPELLATE JURISDICTION Civil Appeal No.
By another agreement dated January 28, 1947, the following clause was substituted for the above caluse 7 of the original agreement The Government shall be entitled to ten per centum of the net profits of the companypany in every year.
clauses 3, 4 a and 5 a and 2 the companysideration that Government shall be entitled to 20 per cent of the net profits earned by the appellant in every year subject to a maximum of Rs.
Under the said agreement the assets of all the three companycerns were agreed to be sold by the Government of Travancore to the appellant company.
324 of 1965 on September 20, 1966 and remanded the case for being re heard and dealt with in accordance with the directions given in that judgment.
may take the facts as stated in the following passage in that judgment The appellant is a limited companypany incorporated under the Travancore Companies Regulation and is carrying on business, in the State of Kerala of manufacturing sugar, running a distillery and also a tincture factory.
It examined the transaction and was of the view that the companysideration for the sale of the three undertakings in favour of the appellants was 1 the cash companysideration mentioned in the principal agreement, viz.,
The Appellate Assistant Commissioner relied upon the decision in Pondicherry Railway Co. Ltd., v. Commissioner of Income tax 1931 5 I.T.C. 363 58 I.A. 239 in disallowing this item of expenditure The appellant preferred an appeal against the order of the Appellate Assistant Commissioner to the Income Tax Appellate Tribunal which held that the case came within the principle of the decision in British Sugar Manufacturers Ltd. v. Harris Inspector of Taxes 1939 7 T.R. 101 C.A. , and that the payment of companymission was an expenditure made in order to earn profits, of the business and number an expenditure paid out of earned profits.
Clause 5 a stated that the cash companysideration for the sale of assets of the Government Tincture Factory shall be the value according to the books.
16 of 1962.
Clause 3 of the agreement provided that the cash companysideration for the sale of assets of the Travancore Sugars Ltd. shall be 3.25lakh rupees.
Apart from the cash companysideration referred to in the agreement, clause 7 of the said agreement provided for further payments as follows The Government shall be entitled to twenty per cent of the net profits earned by the companypany 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 provision has been made for depreciation at number less than the rates of allowances provided for in the income tax law for the time being in force, and payment of the secretaries and treasurers remuneration.
Reference was made to cls.
2161 of 1969.
After the matter went back a Division Bench of the Kerala High Court, Raghavan, J. as he then was and Issac, J. heard the matter but as there was difference of opinion between the learned Judges the case was placed before Mathew, J. as he then was who agreed with the judgment of Raghavan, J.This is an appeal against that judgment by certificate.
For the assessment year 1958 59 the companyresponding previous year being May 1, 1956, to April 30, 1957 the amount payable to the Government under the aforesaid clause 7 came to Rs.
The Judgment of the Court was delivered by JAGANMOHAN REDDY J. This is a second round of litigation because on the first occasion this Court allowed Appeal No.
For this purpose an agreement dated June 18, 1937, was entered into between the Government of Travancore and Sir William Wright on behalf of Parry Co. Ltd., the promoters of the appellant company.
Under clause 5 b of the agreement the Government agreed to purchase the pharmaceutical products manufactured by the appellant in the tincture factory, for its medical requirements.
The appellant companypany was floated with a view to taking over the business assets of a companypany called Travancore Sugars Ltd. which was being would 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 Trivandrum.
Chief Secretary to the Government acting for and on behalf of the said Government of His Highness the Maharaja of Travancore of the one part and Sir William Wright, Kt.
C.B.E., of Messrs Parry Co. Ltd., Madras, acting for and on behalf of the said Messrs Parry Co., Ltd. of the other part, whereby the said Government should sell and the companypany should purchase the assets including the lands of the Travancore Sugars Ltd. with the buildings, out houses, machinery and other things attached thereto and more fully described in the Schedule A annexed to the said principal agreement, the factory known as the Government Distilleries situate at Nagercoil in South Travancore with lands, buildings, machinery and other things attached thereto and more particularly described in the schedule B annexed to the principal agreement, and all the assets of the factory known as the Government Tincture Factorysituated at Trivandrum and more parti cularly described in he Schedule C annexed to the principal agreement for the cash companysideration in the said principal agreement mentioned and also in companysideration, inter alia that the Government should be entitled to 20 of the said net profits earned by the companypany in every year subject however to a maximum of Rs.
The Appellate Assistant Commissioner disallowed the claim of the appellant for deduction of this amount on the ground that it was virtually mere sharing of profits after they came into existence.
Rao Bahadure Rajyasevanirata N. Kunjan Pillai Avl.,
Under clause 4 b and c of the agreement the Government undertook to recognise the transfer of the licence from the licensees of the distillery to the appellant and to secure to it the companytinuance of the licence for a companytinuous period of five years after the termination of the then existing licence.
At the instance of the respondent the Tribunal referred the following question of law to the High Court of Kerala.
