Law:

Section:

section 37(1) of the income-tax act, 1961-capital or revenue expenditure-assessee, carrying on business of arranging exhibition of advertisement and film shorts in licensed public cinema theatres, paid rs. 1,50,000 to a rival to induce the latter not to compete with it for nine years-whether payment was allowable as a revenue expenditure under section 37(1)-held, no Facts The assessee-company was carrying on the business of arranging exhibition of advertisement and film shorts in the licensed public cinema theatres in the four southern States of Madras, Andhra Pradesh, Kerala and Mysore. B, another company, was also carrying on the business of exhibition of film shorts on behalf of X & Y in the aforesaid States. The assessee-company felt that it would be commercially profitable to it, if it could eliminate B from the business. The assessee-company, therefore, entered into an agreement with B whereby the latter not only agreed to part with its business of exhibition of film shorts but also agreed not to compete with the assessee-company in the business for a period of nine years for a consideration of Rs. 1,50,000. The assessee paid the said sum as per the terms of the agreement and claimed the same as a business expenditure. The ITO held that payment was made by the assessee-company for obtaining the right to exhibit advertisement and film shorts and not for the purpose of purchasing any stock-in-trade or raw material and, therefore, the expenditure was of a capital nature. The ITO accordingly disallowed the claim. The AAC upheld the ITO's order. The Tribunal held that the expenditure was not incurred to carry on the business of the exhibiting of film shorts but was incurred to acquire an asset or a right of a permanent character for a period of nine years and, therefore, it could not be regarded as a revenue expenditure. On reference, the assessee-company contended that since the expenditure was incurred for acquiring the film shorts, it should be taken to have been expended for acquiring stock-in-trade of the assessee's business : Held The agreement entered into by the assessee-company with B does not indicate that the film shorts as stock-in-trade were…

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