Law:

Section:

Section 37(1) of the income-tax act, 1961-Capital or revenue expenditure-Under agreement, one director of assessee-company, who held distribution right of products produced by another company, R, assigned her rights in favour of assessee for five years for certain annual consideration payable in equal monthly instalments-Agreement provided that impugned assignment would empower assessee to directly deal with R-Whether, monthly payments so made by assessee were capital in nature and hence not allowable as deduction-Held, on facts, yes Facts S, one of the directors of the assessee-company, was the distributor for the purchase and sale of certain articles, manufactured by company 'R'. Under an agreement, S, after obtaining the consent of company 'R', assigned her rights of franchise in favour of the assessee for a period of five years for an annual consideration payable in equal monthly instalments. The agreement provided, inter alia, that the assessee would, as a result of the assessment, directly deal with 'R' as if the assessee had been appointed as distributor by the company 'R' For the relevant assessment year, the assessee claimed deduction of the sums paid in monthly instalments to S on the ground that it was an expenditure incurred for the purpose of business. The ITO disallowed the assessee's claim, inter alia, on the ground that the impugned payments were capital in nature. On appeal, the Tribunal upheld the ITO's order. On reference : Held The impugned agreement made it clear that S, after getting appointment in her favour as distributor for the purchase and sale of the articles produced by company 'R' parted with her rights for a certain consideration in favour of the assessee. The fact that the consideration for the assignment of the rights was paid in monthly instalments would not affect the character of the payment, which was in the nature of a consideration for acquiring the distribution rights from S which she had in turn acquired from company 'R' But for the acquisition of the distribution rights by the assessee-company from S, the assessee could not have carried on the business of purchase and sale of the articles manufactured by company 'R' as…

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