Law: Income Tax Act, 1961

Section: 256

Income tax---Capital or revenue expenditure Assessee taking over similar business of another company Assessee agreeing to pay commission to other company as consideration for execution of unfinished contracts Profit earned on fulfilling pending contracts offered for assessment Assessee would not be in a position to execute contracts and earn profits unless commission was paid Payment of commission was compensation for letting assessee to execute unfinished contracts No enduring benefit or advantage obtained Expenditure, held, was deductible as revenue expenditure. JUDGMENT S.K. DESAI, J. In this reference made to us under section 256(1) of the I.T. Act, 1961, the following question of law stands referred to us for our opinion: "Whether, on the facts and in the circumstances of the case, in computing the income of the assessee for 1964 65 the sum of Rs.52,966 is ,deductible ?"The assessee is a private limited company engaged in the manufacture and sale of solvent extraction plants. There was another company called Oil Corporation of India Private Ltd. (hereinafter referred to as the "oil company") carrying on similar business. During the year of account the assessee company took over the business of manufacturing solvent extraction plants from the oil company. This was under an agreement dated 21st December 1962, which agreement was to be effective as and from Ist October 1962. One of the terms of the agreement related to the unexecuted contracts for supply of machinery pending with the oil company on Ist October 1962. There were five contracts, which were required to be considered, and the aggregate value of the same came to Rs.30.86 lakh. The oil company had already supplied machinery worth Rs.22.01 lakh. For these supplies the oil company had received the payments and had also appropriated the profits. The value of the machinery remaining to be supplied was Rs.10.59 lakh. Under the agreement the assessee company contracted to complete the execution of the pending contracts and also agreed to indemnify the oil company against any claim or demands in respect of the completed contracts for Rs.22.01 lakh. In respect of this indemnity the oil company agreed to pay…

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