Law: Income Tax Rules, 1922

Section: 10(2)(xv)

Income-tax-Business expenditure - Purchase of allied concerns-Agreement by purchaser to pay the vendor a percentage of profit annually in addition to cash consideration-Share of profits paid to vendor-Whether allowable as business expenditure Indian Income-tax Act, 1922, S. 10(2)(xv). The assessee, a limited company manufacturing sugar and running a distillery, purchased 3 concerns from the Government of Travancore, viz. the Travancore Sugars Ltd., the Travancore Government Distillery, and the Government Tincture Factory, and, in addition to a cash consideration, agreed to pay ten per cent. of the net profits of the assessee-company every year to the Government of Travancore. In pursuance of this agreement the assessee paid Rs. 42,480 to the Travancore Government for the assessment year 1958-59, and claimed that this amount was an allowable deduction in computing its profits under section 10 of the Income-tax Act. The Appellate Assistant Commissioner disallowed the claim, but the Tribunal allowed the claim on the ground that it was an expenditure laid out wholly and exclusively for the purposes of the business within the meaning of section 10(2)(xv) of the Income-tax Act. 1922. Of! a reference to the High Court Held, per Raghavan and Mathew, JJ. (Isaac, J,. dissenting).----- the payment in question made by the assessee to the Travancore Government was an expenditure laid out wholly and exclusively for the purpo3e of the business of the assessee, and was allowable n computing its profits under section 10 of the Income-tax Act. Per Isaac, J. (contra).-------The 10 per cent. of the profits paid to the Government was not a case of diversion of profits by a paramount title nor an expenditure incurred by the assessee solely and exclusively for the purpose of his business and was not allowable in computing the assessee's profits. In making the payment, the assessee was only discharging its obligation to satisfy one part of the consideration for the sale of the three undertakings by the State of Travancore to the assessee, in the manner provided in the agreement. It was a case of application by the assessee of its income pursuant to a contract, which it had entered…