Blaze and Central (P.) Ltd. vs Commissioner of Income Tax

Ramanujam, J.—The following question of law has been referred to us for our decision by the Income Tax Appellate Tribunal, Madras, u/s

256(1) of the I.T. Act, 1961, at the instance of the assessee, the applicant herein :

Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that the sum of Rs. 1.5 lakhs was

not deductible as an allowable expenditure ?

The assessee is a private limited company carrying on business of arranging exhibition of advertisement and film shorts in the licensed public

cinema theatres in the four southern States of Madras, Andhra, Kerala and Mysore. One M/s. Saraswathi Publicities, Madras, was also carrying

on the business of exhibition of film shorts on behalf of M/s. Hindustan Lever Ltd. and Lintas Ltd. for the said four southern States. The assessee

felt that it would be commercially profitable if it could also carry on the business of exhibition of film shorts on behalf of M/s. Hindustan Lever Ltd.

and Lintas Ltd. in the said four southern States. With this object in view it entered into an agreement with M/s. Saraswathi Publicities on April 1,

1966, under which the latter had agreed to part with its business of exhibiting film shorts and not to compete with the assessee in the business of

exhibition of advertisement of film shorts in the four southern States for a period of 9 years in consideration of the assessee paying a sum of Rs.

1,50,000. In the assessment year 1968-69, when the said payment of Rs. 1,50,000 was made by the assessee to M/s. Saraswathi Publicities as

per the terms of the said agreement, the same was claimed as a deductible expenditure. The ITO, however, held that the sum of Rs. 1,50,000 was

spent by the assessee for obtaining the right to exhibit advertisement films of Hindustan Lever Ltd. and Lintas Ltd. in the four southern States and

not for the purchase of any stock-in-trade or raw material, and, therefore, the expenditure incurred was capital in nature. In this view, he

disallowed the claim for deduction. On appeal, the disallowance was upheld by the AAC. There was a further appeal to the Tribunal.

It was contended by the assessee before the Tribunal that the expenditure had been incurred for carrying on the business more profitably and,

therefore, it should be regarded as a revenue expenditure. The revenue on the other hand contended that by parting with a sum of Rs. 1,50,000 the

assessee had acquired a right to carry on the business of film shorts in the cinema theatres in the four southern States to the exclusion of the rival

and that this had resulted in an advantage of enduring benefit to the business of the assessee as a whole and, therefore, the expenditure has to be

treated as capital in nature. The Tribunal held that the expenditure of Rs. 1,50,000 was not related to the carrying on of the business of exhibiting

film shorts but has resulted in the acquisition of an asset or a right of a permanent character for a period of 9 years without any competition from

M/s. Saraswathi Publicities and that as the expenditure had been incurred for the purpose of securing an enduring advantage to the business as a

whole, it cannot be regarded as a revenue expenditure. Aggrieved against the order of the Tribunal the assessee has sought this reference.

Before us the learned counsel for the assessee submitted that the sum of Rs. 1,50,000 has been expended by the assessee for acquiring the film

shorts of Hindustan Lever Ltd. and Lintas Ltd., for the purpose of exhibition in cinema theatres in the four southern States and, therefore, it should

be taken to have been expended for acquitting stock-in-trade of the assessee''s business and, therefore, the expenditure should be taken to be

revenue in nature. It cannot be disputed that if the amount has been spent lor acquiring stock-in-trade of the assessee''s business, the expenditure

has to be treated as a revenue expenditure. But on the facts it is not possible to say that the assessee has merely acquired stock-in-trade by

expending a sum of Rs. 1,50,000. A perusal of the agreement dated April 1, 1966, entered into between the assessee and M/s. Saraswathi

Publicities indicates that the assessee had taken over the latter''s business with Hindustan Lever Ltd. and Lintas Ltd. for carrying on the same in the

four southern States for a period of 9 years on condition that the latter should not carry on the said business for 9 years in the said four States. The

agreement does not indicate that the film shorts of Hindustan Lever Ltd. and Lintas Ltd., as stock-in-trade, were the subject-matter of the bargain.

In substance and effect, the agreement involves a transfer of the business of Saraswathi Publicities with the Hindustan Lever Ltd. and Lintas Ltd. in

the four southern States to the assessee who was also carrying on the same business herein, for a total consideration of Rs. 1,50,000. We cannot,

therefore, agree with the learned counsel for the assessee that the sum of Rs. 1,50,000 was expended for acquiring the stock-in-trade of the

business of the assessee.

On the facts, we take the view that the assessee has taken over the business of exhibition of film shorts of Hindustan Lever Ltd. and Lintas Ltd.

in the four southern States for a period of 9 years for a consideration of Rs. 1,50,000. It cannot be disputed that the business which the asses-see

had taken over from M/s. Saraswathi Publicities was intended to generate income for a period of 9 years and the agreement under which the

business was taken over for a period of 9 years also provides that M/s. Saraswathi Publicities cannot carry on the same business in the four

southern States during the said period. Thus, the assessee has, warded off competition in business by this bargain. In Commissioner of Income

Tax, West Bengal II, Calcutta Vs. Coal Shipment (P) Ltd., , it has been held that a payment made to ward off competition in business to a rival

would constitute capital expenditure if the object of making that payment is to derive an advantage by eliminating the competition over some length

of time, and that how long the period of contemplated advantage should be in order to constitute enduring benefit, would depend on the

circumstances and the facts of each individual case. In this case, the assessee has not only warded of the business rivalry but also acquired the

business of the rival for a period of 9 years in a specified area. By, this arrangement the assessee has not only derived an advantage by eliminating

the competition but also acquired a business which actually generates income. Any amount expended for acquiring a business or asset which

generates income or for avoiding competition in business has to be treated as capital in nature. This follows from the decision of the Supreme Court

referred to above.

The learned counsel for the assessee refers to the decision of the Kerala High Court in V. Damodaran Vs. Commissioner of Income Tax,

Kerala, Ernakulam, as supporting his stand that if an expenditure is incurred for avoiding rivalry it will be a revenue expenditure. In that case, an

assessee, a forest contractor, carrying on business in timber paid a sum of Rs. 2,577 to each of two rival forest contractors in order to persuade

them not to compete in an auction of a coupe held by the forest department. The question arose as to the character of the said expenditure. The

court held that the expenditure had been incurred to secure a portion of the stock-in-trade of the assessee''s timber business at an advantageous

price and, therefore, the expenditure was in the nature of business expenditure and allowable as such. We do not see how that decision will help

the assessee in this case. There the amount has been spent for acquiring stock-in-trade at an advantageous price by avoiding a competition in an

auction to be held by the forest department. In this case, we have already seen that there is no question of any stock-in-trade. The acquisition was

of the right to carry on the business owned by a rival on condition that the rival should not carry on the same business for a period of 9 years.

These facts clearly attract the decision of the Full Bench of this court in Alaganan Chetty v. CIT [1928] 3 ITC 44 ; The Commissioner of Income

Tax Vs. Rao Saheb A.S. Alaganan Chetty of Bodinayakanur, . In that case, the assessee, a carrying contractor, paid a sum of Rs. 12,000 to a

rival contractor to induce the latter not to compete with him. As a result of the non-competition of this rival, the assessee obtained the carrying

contract at a rate higher than the previous year''s rate and this enabled him to make larger profits. The said sum of Rs. 12,000 was claimed as

deduction in the computation of the taxable profits u/s 10(2)(ix) of the 1922 Act. The Full Bench took the view that the payment of Rs. 12,000 not

being for the purpose of working the contract but for obtaining the same, the expenditure was capital in nature and, therefore, not a permissible

allowance u/s 10(2)(ix). In support of its view the Full Bench had relied on the decision in City of London Contract Corporation Ltd. v. Styles

[1887] 2 TC 239 , wherein a payment made by a company for taking over a business of another rival company on payment of certain sum was

held to be a capital expenditure. In our view, therefore, the Tribunal is right in holding that the sum of Rs. 1,50,000 was not deductible as an

allowable expenditure.

The question is, therefore, answered in the affirmative and against the assessee. The assessee will pay the costs of the revenue which we fix at

Rs. 250.