Law:

Section:

Section 37(1) of the Income-tax Act, 1961 - Business expenditure - Allowability of - Assessment year 1985-86 - Assessee had entered into agreements with selling agents for distributing its products for over 20 years - Said agreements subsequently were terminated during assessment year 1985-86 and assessee took over the agents' marketing establishments for distribution of its products - It claimed deduction on account of compensation paid to marketing agents on termination of their marketing agency agreements - Whether since it was not a case of mere termination of agreements, but money was paid as consideration for transfer of a profit-making apparatus of distributing agents as there was transfer of staff, dealership network, brand image and other marketing infrastructure and there was also a restriction in agreements that distributors should not compete with the assessee for a period of few years from the date of termination compensation paid for termination of said agreements was a capital expenditure - Held, yes FACTS The assessee-company was engaged in the manufacture and sale of cycle chains and industrial chains. It had entered into agreements with three selling agents for distributing its products for over 20 years. Out of the three companies/selling agents, two companies belonged to the same group of companies and the third distributor was a firm constituted by the partners belonging or known to the assessee-group. The said agreements were terminated during the previous year relevant to the assessment year 1985-86 and the assessee took over the agents' marketing establishments for the distribution of its products. It claimed deduction on account of compensation paid to its marketing agents on the termination of their marketing agency agreements. The ITO disallowed the claim on the ground that the compensation paid was not to get rid of any onerous agreements, but to acquire a profit-making apparatus and, therefore, the payment was a capital expenditure and not a revenue expenditure. On appeal, the Commissioner (Appeals) upheld the Assessing Officers order. On second appeal, Tribunal upheld the Commissioner (Appeal)'s order. On reference, assessee's case…

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