COMMISSIONER OF INCOME TAX Vs. JACOBS PRIVATE LIMITED

JUDGEMENT

(1.) THESE three references by the Commissioner of Income-tax, under Section 256(1) of the I.T. Act, arise out of three different appeals disposed of by the Appellate Tribunal for the assessment years 1972-73 to 1974-75. The assessee is a private limited company, in the name and style M/s. Jacob (P.) Ltd. formed for taking over some of the assets and liabilities of a predecessor firm. The said firm was carrying on business in wholesale in liquor. It was also the sole selling agents of M/s. McDowells & Co, Ltd. which was having a distillery at Shertallai. There was no written agreement conferring the sole selling agency between M/s. McDowells & Co. and the firm. But it is beyond dispute that the firm had the right of sole selling agency vis-a-vis the company in the earlier years. Two of the partners of the firm floated the limited company which is the assessee in this case. The main business of the company was to be the same as that of the firm. By an agreement dated September 24, 1970, the company undertook to take over some of the assets and liabilities in the business done by the firm. The terms and conditions of the agreement would be noticed presently. The company was also to be given the right to carry on the business in continuation of the firm. In consideration of assigning the rights to carry on the business of sole selling agency the firm was to be entitled to a royalty of Re. I per case of liquor sold by the company. It was also provided that the company was to pay 2.31 lakhs of rupees in fully paid shares to the partners of the firm, as consideration for the sale.

(2.) FOR the accounting year ended 30th September, 1971, the assessee-company paid Rs. 21,584 by way of royalty to the firm. FOR the accounting year ended September 30, 1972, it paid Rs. 16,165 under the same account and for the year ended September 30, 1973, Rs. 27,492. In their income-tax returns these were claimed as business expenditure. The ITO allowed the claim for the year 1972-73, but he reopened the assessment under Section 147(b) and held that the deduction was not allowable. FOR the remaining two years 1973-74 and 1974-75, the officer disallowed the claim even in the original assessment. The officer took the view that royalty was a consideration paid for taking over the capital asset, viz., the sole selling agency business, and, therefore, was a capital expenditure. On appeal by the assessee, the AAC agreed with the ITO. On further appeal to the Tribunal, the Tribunal held that the ITO and the AAC were not justified in their view, relying largely on the decision of the Supreme Court in Travancore Sugars Ltd. [1966] 62 ITR 566. The Tribunal, to put matters briefly, held that the deductions claimed by the assessee in the three assessment years in question were allowable deductions. The following question of law has accordingly been referred for our determination :

(3.) THE provisions of the document have appeared to us to be rather complex and ingenious. THE preambulary part states that the vendors are desirous of selling to the company the selective assets and liabilities and have also authorised the company to negotiate and take up the rights of sole selling agency of "McDOWELLS ". At this stage, it appears as if the vendor's desire extended only to sale of the assets and liabilities and to an authorisation to negotiate and take up the rights of sole selling agency and no more. When we turn to Clause 1 of the agreement, that clearly and unequivocally refers to two distinct items, viz., (I) a sale as a going concern, of the assets and rights and the liabilities of the vendors described in the Schedule ; and (2) sale of the right to carry on business as sole selling agents of McDowell & Company, Sherthallai, together with the right to carry on the said business in continuation of the vendors' business. Clause 2 again unequivocally proceeds on the basis that there was an assignment of the sole selling agency business and that the consideration for the same is one rupee per case of liquor sold by the company. Clause 3 provides that Rs. 2,31,000 shall be the consideration of "the said sale". What is the meaning to be attributed to the term "the said sale"? It might, in one sense, comprehend the composite sale or the sale of the two different assets, indicated in Clause 1 which we have earlier described. But, having regard to the intervening Clause, viz., Clause 2, which expressly deals with assignment of the right to carry on the sole selling agency of McDowell & Co., it appears to us that Clause 3 can deal only with the residue, or the remaining part of what was sold, viz., the assets and the rights of the vendors. THE consideration provided by Clause 2 represents a consideration for sale of the right of the sole selling agency. THE assessee would not be entitled to deduction of the receipts under this head, as it represents a capital receipt, viz., purchase of a capital asset for carrying on business.