CHELPARK COMPANY LIMITED Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) THE assessee is a company engaged in the manufacture and sale of ink under the trade name "Quink". Mr. Advani was the managing director of the company for about 18 years between 1953 and 1971 and left the company on October 31, 1971. Contrary to the normal expectations that Mr. Advani would enjoy his well-earned leisure, he appears to have entertained the idea of utilising his experience with the assessee company in the manufacture and sale of ink. A partnership was formed consisting of the wife and two daughters of Mr. Advani for the purpose of manufacture and sale of writing ink. Preparations had also been made by the partnership with the various authorities of the Government for acquiring an industrial site, for opening and operating bank accounts and printed materials containing advertisements, publicity material, letter-heads, labels and cartons were also got ready. An advertisement had also been issued by the partnership calling for applications for filling up the post of ink chemist. While matters stood thus, an agreement was entered into on February 14, 1972, between the assessee-company and the partnership and the terms of the agreement, inter alia, were as follows :

(2.) A further provision in the agreement was that on the carrying out of the undertakings in clauses (b), (c) and (d) and without prejudice to the undertaking in clause (a), Advani may collect the cheque of the assessee for Rs. 1,00,000 by way of compensation from the solicitors of the assessee and pass on a receipt to the solicitors in full and final settlement of the compensation. Annexure I, earlier referred to, forming part of the agreement, stated that the advertisement inserted in the Deccan Herald dated January 12, 1972, calling for applications for the post of ink chemist was withdrawn as cancelled, since Advani decided to cancel the manufacture and sale of the ink. It is not now in dispute that the assessee paid a sum of Rs. 1,00,000 to the partnership as per the terms of the agreement referred to earlier. Later, some time in April, 1972, the partnership was dissolved. In the course of the assessment proceedings for the assessment year 1972-73, the assessee claimed that the payment of Rs. 1,00,000 should be subjected to tax treatment as an item of revenue expenditure in computing its taxable profits. The Income-tax Officer disallowed the claim made by the assessee as, according to him, the expenditure was incurred by the assessee once and for all to ward off competition in the business and also with a view to bring into existence an enduring benefit or advantage to the assessee. Thus regarding the expenditure as an item of capital expenditure, the Income-tax Officer added back this amount. On appeal by the assessee before the Appellate Assistant Commissioner, on a consideration of the terms of the agreement and the fact that Mr. Advani had also left the shores of India, he took the view that the assessee had obtained an advantage of enduring nature by preventing a potential competitor from continuing a business similar to the business activity of the assessee through the payment of compensation and that advantage or benefit was of an enduring nature. The disallowance was thus upheld. On further appeal before the Tribunal, it took into account the terms of the agreement as well as the deed of dissolution and concluded that the payment of Rs. 1,00,000 by the assessee to the partnership secured to the assessee an enduring advantage to its business in that a powerful competitor had been eliminated for a period of five years by payment of this amount and, therefore, the departmental authorities were justified in disallowing the amount paid by the assessee as a capital expenditure. Under section 256(2) of the Income-tax Act, 1962 (hereinafter referred to as "the Act"), at the instance of the assessee, the following question of law has been referred to the court for its opinion :