Law:

Section:

Section 37(1) of the income-tax act, 1961-Business expenditure-Assessee took over business with certain assets and liabilities of predecessor-firm along with right to act as sole selling agent of company manufacturing liquor-Assessee agreed to pay some fully paid up shares to partners in consideration of sale and royalty of RE. 1 per case of liquor sold for assignment of right to carry on sole selling agency-Whether payment of royalty was allowable as revenue expenditure-Held, no, as it was capital expenditure Facts The assessee, a private limited company, was formed (by two partners of the firm) to take over some of the assets and liabilities of the business of a firm which was a wholesale dealer in liquor and the sole selling agent of McDowells & Co. Ltd. manufacturing liquor. By an agreement, dated 24-9-1970, the assessee purchased the business of the firm as a going concern by taking over some selective assets and liabilities for Rs. 2.31 lakhs fully paid equity shares to be allocated amongst persons specified in clause 3 of the agreement. The assessee-company also purchased the right to carry on business as a sole selling agent for which, as per clause 2 of the agreement, it would pay a royalty of Re. 1 per case of liquor sold. In the assessment years 1972-73, 1973-74 and 1974-75, the assessee paid specified amounts of royalty at the rate of Re. 1 per case and claimed the same as business expenditure. The ITO disallowed the claim saying that the expenditure was capital in nature as it was a consideration paid for taking over the capital asset, viz., the right to act as a sole selling agent of McDowells & Co. Ltd. The AAC confirmed the ITO's order. The Tribunal, however, allowed the assessee's claim. On reference : Held On analysis, there were two distinct and different items of sale and the consideration for the sale of sole selling agency business expressly mentioned in clause 2 of the agreement was only the receipt of a capital nature and not a deductible revenue expenditure. Hence, royalty pad was a capital expenditure. Case review Travancore Sugars & Chemicals Ltd. v. CIT [1966] 62 ITR 566 (SC) distinguished. Cases referred to Travancore…

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