JUDGMENT
The Judgment of the Court was delivered by
Ratnam, J.:— The assessee is a company engaged in the manufacture and sale of ink under the trade name “Quink”. Mr. Advani was the managing director of the company for about 18 years between 1953 and 1971 and left the company on October 31, 1971. Contrary to the normal expectations that Mr. Advani would enjoy his well-earned leisure, he appears to have entertained the idea of utilising his experience with the assessee-company in the manufacture and sale of ink. A partnership was formed consisting of the wife and two daughters of Mr. Advani for the purpose of manufacture and sale of writing ink. Preparations had also been made by the partnership with the various authorities of the Government for acquiring an industrial site, for opening and operating bank accounts and printed materials containing advertisements, publicity material, letter heads, labels and cartons were also got ready. An advertisement had also been issued by the partnership calling for applications for filling up the post of ink chemist. While matters stood thus, an agreement was entered into on February 14, 1972, between the assessee-company and the partnership and the terms of the agreement, inter alia, were as follows:
“(1) Chelpark has been engaged in the manufacture and sale of writing ink under the brand name ‘Quink’ in the territory of India in the course of which it has established a good market for its products;
(2) Advani has been formed and established for the purpose of manufacturing writing inks and the sale thereof similar to those made and sold by Chelpark and is thus a competitor of Chelpark;
(3) Chelpark desires to avoid the competition from Mr. Advani and has, therefore, negotiated a settlement with Advani on the terms and conditions hereinafter set out:
(4) In consideration of Chelpark paying to Advani by way of compensation a sum of Rs. 1,00,000 (Rs one lakh only), Advani hereby undertakes:
(a) that it shall forthwith discontinue and shall not recommence at any time within a period of five years from the date of this agreement at any place in India, either directly or indirectly, the manufacture of writing inks and sale thereof or any other business which is similar or competitive to the business presently being carried on by Chelpark;
(b) to withdraw the advertisement which Advani had caused to be inserted in the issue of the Deccan Herald dated 12th January, 1972, by inserting at its own cost another advertisement in the same newspaper announcing such withdrawal in terms of the draft attached hereto as annexure I;
(c) to withdraw and cancel all; the arrangements which Advani has made with its banks for opening and (operating bank accounts and with various Government authorities for acquiring an industrial site and other facilities; and
(d) to make over to Chelpark all printed or other material containing advertisements, publicity matter letter-heads, labels and cartons which Advani has got ready for and in the course of carrying on the manufacture of writing inks and the sale thereof.”
2. A further provision in the agreement was that on the carrying out of the undertakings in clauses (b), (c) and (d) and without prejudice to the undertaking in clause (a), Advani may collect the cheque of the assessee for Rs. 1,00,000 by way of compensation from the solicitors of the assessee and pass on a receipt to the solicitors in full and final settlement of the compensation. Annexure I, earlier referred to, forming part of the agreement, stated that the advertisement inserted in the Deccan Herald dated January 12, 1972, calling for applications for the post of ink chemist was withdrawn as cancelled, since Advani decided to cancel the manufacture and sale of the ink. It is not now in dispute that the assessee paid a sum of Rs. 1,00,000 to the partnership as per the terms of the agreement referred to earlier. Later, some time in April, 1972, the partnership was dissolved. In the course of the assessment proceedings for the assessment year 1972-73, the assessee claimed that the payment of Rs. 1,00,000 should be subjected to tax treatment as an item of revenue expenditure in computing its taxable profits. The Income-tax Officer disallowed the claim made by the assessee as, according to him, the expenditure was incurred by the assessee once and for all to ward off competition in the business and also with a view to bring into existence an enduring benefit or advantage to the assessee with no connection whatever with the profits earned by the assessee.
3. Thus regarding the expenditure as anj item of capital expenditure, the Income-tax Officer added back this amount. On appeal by the assessee before the Appellate Assistant Commissioner, on a consideration of the terms of the agreement and the fact that Mr. Advani had also left the shores of India, he took the view that the assessee had obtained an advantage of enduring nature by preventing a potential competitor from continuing a business similar to the business activity of the assessee through the payment of compensation and that advantage or benefit was of an enduring nature. The disallowance was thus upheld. On further appeal before the Tribunal, it took into account the terrn of the agreement as well as the deed of dissolution and concluded that the payment of Rs. 1,00,000 by the assessee to the partnership secured to the assessee an enduring advantage to its business in that a powerful competitor had been eliminated for a period of five years by payment of this amount and, therefore, the departmental authorities were justified in disallowing the amount paid by the assessee as a capital expenditure. Under section 256(2) of the Income-tax Act, 1961 (hereinafter referred to as “the Act”), at the instance of the assessee, the following question of law has been referred to this court for its opinion:
“Whether, on the facts and circumstances of the case, the sum of Rs. 1,00,000 paid to Advani Inks Corporation under the agreement dated February 14, 1972, is a capital expenditure by reason of its having brought into existence an advantage of enduring nature or whether it is only revenue expenditure?”
4. Whether a particular item of expenditure incurred by the assessee is of capital or revenue nature is a vexed question always invariably presenting difficulties. Decisions of the highest court and other High Courts laying down tests for making a distinction between capital expenditure and revenue expenditure are legion. However, despite laying down the tests, a caution has also been administered by those decisions that the tests laid down are not exhaustive and that it is also not easy to reconcile the reasoning given in them. Even so, it has uniformly been emphasised in all the decisions that the character of the expenditure will have to be decided on the facts and circumstances of each case not by the application of rigid tests, but deriving support from many aspects of the whole lot of circumstances and the ultimate answer would depend upon a commonsense appreciation of the guiding features. With this approach in view, when we consider the terms of the agreement to ascertain its aim and object, we find that the assessee had established a good reputation and market for writing inks by the manufacture and sale of ink under the brand name “Quink”. In the agreement, there is a recognition of the formation and establishment of the partnership by Advani for the manufacture and sale of writing ink similar to those made and sold by the assessee and it being a powerful potential competitor. The desire of the assessee to avoid competition from the partnership is also clearly spelt out from the terms of the agreement. The negotiated settlement, under the terms and conditions set out in the agreement, is clearly relatable to the desire of the assessee to avoid competition from the partnership backed by the experience and expertise of the ex-managing director, whose wife and daughters were the partners, in the same line of business activity as that of the assessee. Undoubtedly, the activity of the partnership in setting up a competitive business was harmful to the assessee and the agreement was the outcome of the prospect of powerful competition from the partnership and a desire on the part of the assessee to protect itself against that disadvantage. Further, the departure of Mr. Advani from the assessee-company and the prospect of his making available his experience and expertise in the manufacture and marketing of ink to his wife and daughters who are the partners of the firm would have rendered the goodwill of the assessee-company vulnerable, as the assessee, when it commanded the benefit of the services of Mr. Advani, was in an advantageous position. There was thus a positive detriment to the assessee-company due to the, competition from he partnership and against such damaging competition, the assessee-company obtained the benefit of a restrictive covenant against such powerful competition. That resulted in the assessee buying the potential competitor which was a positive detriment owing to such competition and had also enabled the assessee not only to safeguard its goodwill but also to enhance it. The aim of the payment of Rs. 1,00,000 by the assessee to the partnership was to secure advantages resulting in the removal from the arena of a possible competitor and securing the elimination of a risk or detriment to the assessee due to the competition. Though, under the terms of the agreement, the benefit of the restrictive covenant was to enure only for a period of five years, from the facts stated in the order of the Tribunal and also the terms of the dissolution deed, it is seen that the partnership which was a potential competitor had also vanished and Mr. Advani had also left the shores of India. That would clearly establish that what the assessee had paid for was of permanent or enduring quality in the sense that competition had been totally eliminated and protection had been acquired for the business of the assessee as a whole. In other words, the amount paid the assessee was no part of the working or operational expenses of the company, but its aim and object was acquisition of an advantage of enduring nature, viz., freedom from competition from the partnership for the rest of the period of the business activities of the assessee. We, therefore, hold on a consideration of the terms of the agreement, the dissolution deed and the other facts and circumstances, that the assessee paid the amount to the partnership in order to ward off the damaging competition from a potential competitor resulting in the acquisition by the assessee of a right as well as protection to carry on its business activities as a whole for so long as the assessee carried on such business. We may observe that counsel on both sides invited our attention to several decisions in each of which, on the particular facts and circumstances, the nature of the expenditure, whether capital or revenue, had been considered. Earlier, we had stated that the question had to be considered and answered in the light of the facts and circumstances of each case and we, therefore, do not propose to make a detailed reference to the cases cited at the Bar. We may, however, refer to the decisions relied on by learned counsel for the assessee as throwing serious doubts on the concepts of enduring advantage and lump sum payment.
5. In Empire Jute Co. Ltd. v. CIT, [1980] 124 ITR 1 (SC), the character of the expenditure involved in purchasing loom hours came to be decided. Therein, with a view to protect he trade of the members of the Jute Mills Association, a working time agreement was entered into between the members, placing a restriction on the number of working hours per week for which the member-mills were entitled to work and it was also further provided that the allotment of hours of work per week would be transferable amongst the member-signatories. The assessee incurred an expenditure of Rs. 2,03,255 in purchasing the loom hours and claimed this amount as revenue expenditure which was upheld by the Tribunal, but viewed differently by the High Court on reference. The Supreme Court, on a consideration of the terms of the working time agreement, found that the effect of the purchase of loom hours by the assessee was to relax the restriction on the operation of the looms to the extent of the number of working hours per week transferred and the amount spent represented consideration to work the looms for a longer number of hours and that it was difficult to characterise such expenditure as one incurred on capital account. It has also been pointed out that the test of enduring benefit is not a certain or conclusive test and cannot be applied mechanically without reference to the facts and circumstances of the given case and that there may be cases where the expenditure, even if incurred for obtaining an advantage of enduring benefit may, none the less, be on revenue account and it may break down. We are unable to read these observations as implying that the test of enduring benefit is hopelessly outdated and would not be applicable, even if the facts and circumstances attract and justify its application. The reliance placed by learned counsel for the assessee upon the decision in CIT v. G.D Naidu, [1987] 165 ITR 63 (Mad) does not, in our view, assist the assessee. Amongst others, payments were made for a restrictive covenant and the Tribunal found that, by securing that covenant, no asset or advantage of enduring nature was acquired and that finding was accepted and on that footing, it was held that there was no acquisition of any business by payment of the amounts referable to the restrictive covenant and there was no benefit of any enduring nature acquired and, therefore, the payment should be regarded as a revenue outgoing. That decision cannot have any application whatever on the facts and circumstances of this case where we have held that the assessee did acquire an enduring benefit or advantage. Alembic Chemical Works Co. Ltd. v. CIT, [1989] 177 ITR 377 (SC), relied on by learned counsel for the assessee, also does not advance the case of the assessee, for, on a consideration of the terms of the agreement, it was found that the financial outlay thereunder was for the better conduct and improvement of the existing business and the expenditure was, therefore, held to be revenue expenditure. It is true that, in that case also, there is a reference to the test of enduring benefit breaking down in some cases but, as pointed out earlier, it has not been laid down that that test should not be considered for application, even if the facts and circumstances of the case warranted it. The court had also pointed out that the idea of a payment once and for all should not be regarded as a statutory condition, but that a solution should be found considering the nature of the outlay and its intended object and effect, considered in a commonsense way, having regard to the business activities. Even adopting that, on the facts and circumstances of this case, the character of the expenditure incurred by the assessee would be in the nature of a capital expenditure and not a revenue expenditure. Reference was also made to Commissioner Of Income-Tax v. Coal Shipments (Private) Ltd.*, [1971] 82 ITR 902 (SC). In that case, payments were mace to ward off competition in business to a rival dealer on the basis of a verbal agreement. The question arose whether such expenditure would be capital or revenue. While holding that a payment to ward off competition in business to a rival dealer would constitute capital expenditure, if the object is to derive an advantage by eliminating competition over some length of time, the same result would not follow if there is no certainty of the duration of the advantage and the same can be put an end to at any time. It was also laid down that the length of the period contemplated in order to constitute an advantage of enduring benefit would depend upon the circumstances and the facts of each case. This decision, far from supporting the stand of the assessee, assists the Revenue, when applied to the factual situation obtaining in this case. A payment made to ward off competition in business to a rival dealer would, according to the Supreme Court, constitute capital expenditure if the aim and object of such payment was to eliminate competition over some length of time. Admittedly, in this case, though the agreement stipulated a period of five years as the period during which the partnership would not engage itself in a business activity as a competitor to the assessee, subsequently the firm was dissolved and the principal person behind the firm, viz., Mr. Advani, had also left the shores of India, as stated by the assessee before the Appellate Assistant Commissioner. Under those circumstances, on the facts of this case, initially what was paid for by the assessee was of a permanent quality relatable to total absence of competition from the partnership for five years, though such permanence was conditioned by the short-lived length of the term, which later became permanent. We may also point out that, while accepting that the payment to ward off competition in business to a rival dealer would constitute a capital expenditure, the Supreme Court pointed out that, if there is no certainty of the duration of the advantage and that it can be put an end to at any time, then, it would not constitute capital expenditure. This was stated on the facts of that case, where the agreement was only verbal and it could have been put an end to at any time. That is not the situation in this case and, therefore, that decision also would be inapplicable on the facts of this case. Attention was also drawn by learned counsel for the assessee to the decision in Bikaner Gyp-sums Ltd. v. CIT, [1991] 187 ITR 39 (SC). The question that arose for consideration by the Supreme Court was whether the payment of Rs. 3,00,000 by the assessee to the Northern Railway was revenue expenditure allowable as a deduction under the Act. Under the terms of the lease deed, the asses-see was given the right to exploit the minerals in the entire area demised to it. The railway authorities laid a track providing for a siding and constructed quarters in the area covered by the lease without the permission of the assessee-lessee. The assessee paid a sum of Rs. 3,00,000 to the railway towards the cost of shifting the railway station and other constructions and the expenditure so incurred was claimed as revenue expenditure. The Tribunal, reversing the order of the lower authorities, held that the payment of Rs. 3,00,000 by the assessee, was revenue expenditure, but the High Court on a reference, held contra. The Supreme Court, after referring to the circumstances under which the payment was made by the assessee, pointed out that such payment was not for grant of permission to carry on mining operations, but was towards removal of constructions which obstructed the mining operations and the payment so made was for the purpose of enabling the assessee to carry on its business in the mining area already leased out to it and, therefore, there was no question of acquisition of any capital asset. We are of the view that this decision, based as it is on the terms of the lease and the factual position that there was no acquisition of any capital asset, is of no assistance to the assessee.
6. We may now make a reference to Associated Portland Cement Manufacturers Ltd. v. Kerr (H.M Inspector of Taxes), [1945] 27 TC 103 (CA), relied on by learned counsel for the Revenue. The assessee-company paid certain amounts to two of its retiring directors who had exceptional knowledge of the cement industry and important business contacts, on the basis of covenants entered into with them that they would not, after their retirement from the assessee-company, carry on or be concerned with, in the manufacture or sale of cement, in any part of the world. The assessee claimed that the amounts so paid by it were in the nature of revenue expenditure. Considering the claim so made in the light of the test propounded by Lord Viscount Cave in Atherton v. British Insulated and Helsby Cables Ltd., [1925] 10 TC. 155, 192 (HL), Lord Greene M.R held that the expenditure incurred was made once and for all and with a view to bringing into existence an advantage for the enduring benefit of a trade, viz., the buying off of two potential competitors having an effect on the value of the goodwill of the company which otherwise would have received a serious shock or jolt, which was not temporary, but was to last during the lives of the two retiring directors. On the facts of this case, by the buying off of the potential competitor, viz., the partnership, an imminent and serious danger to the goodwill of the business of the assessee had been warded off resulting in the enhancement of the value of an existing asset, viz., the goodwill of the assessee-company. We are of the view that the aforesaid considerations would be relevant on the facts and circumstances of this case and the principle of that decision would also be applicable.
7. In Assam Bengal Cement Co. Ltd. v. CIT, [1955] 27 ITR 34 (SC), the assessee-lessee agreed to pay to the lessor a sum of Rs. 5,000 annually as protection fee so that the lessor did not grant to any other person any licence or permit for limestone and Rs. 35,000 as further protection fee in respect of the entire district. In respect of the payments so made for two assessment years at the rate of Rs. 40,000 per year, the assessee claimed that the amounts paid constituted revenue expenditure and were deductible in the computation of its business profits. All the authorities below rejected the claim of the assessee and, ultimately, the Supreme Court, on a consideration of the terms of the lease, laid down that by the payment of Rs. 5,000 per annum by the assessee to the lessor during the whole period of the lease, the assessee secured a benefit to enure for the whole period of the lease, which was also an enduring benefit in respect of the whole business of the company. The Supreme Co art also observed that the aim and object of the expenditure would determine the character of the expenditure and if the expenditure is made for acquiring or bringing into existence an asset or advantage for the enduring benefit of the business, it is properly attributable to capital and is of the nature of capital expenditure, while, if it is made not for the purpose of bringing into existence any such asset or advantage, but for running the business or working it with a view to producing the profits, it is revenue expenditure and it is only in those cases where this test is of no avail, that the test of fixed or circulating capital and the consideration of the question whether the expenditure incurred was part of the fixed capital of the business or part of its circulating capital may be resorted to. The Supreme Court further observed that what has to be looked into is the character of the payment and not whether a payment is made in a lump sum or in instalments. With reference to the payments made towards the protection fee in respect of the entire district also, the Supreme Court took the view that, by such payment, the assessee secured protection against all competitors in the whole of the district and the capital asset which the company had acquired under the lease thereby appreciated and the expenditure was made for the purpose of acquiring an appreciated capital asset and the period of five years over which the payment spread did not make any difference to the nature of the acquisition which was none the less acquisition of an advantage of enduring nature which enured for the benefit of the whole business of the assessee for the full period. So holding, the Supreme Court upheld the capital nature of the expenditure incurred by the assessee as well as its disallowance under section 10(2)(xv) of the Indian Income-tax Act, 1922. Applying the aforesaid principles to the present ease, it follows that the expenditure incurred by the assessee was in the nature of capital expenditure. In Neel Kamal Talkies v. CIT, [1973] 87 ITR 691 (All), the assessee who was the owner of a cinema house entered into an agreement with a firm which was running another cinema house, under which the assessee agreed to pay Rs. 600 every month for a period of five years so that the latter would not exhibit any film in the theatre. The payment so made was claimed by the assessee as an item of revenue expenditure and it was held that the payment was made under an agreement extending for a period of five years and resulting in the elimination of competition and the payment was, therefore, of a capital nature and not deductible. Similar is the situation in this case also, where the assessee, by making the payment, had eliminated competition and had secured a benefit which extended initially for a period of five years and, later, the competitor totally disappeared from the scene. Commissioner Of Income-Tax, West Bengal-I v. Hindustan Pilkington Glass Works., [1983] 139 ITR 581 (Cal) dealt with the character of a payment made under the terms of a tripartite agreement entered into between the assessee and two other concerns which produced the same type of commodity as was produced by the assessee. On a consideration of the terms of the agreement which was to remain in force for a period of five years but could be brought to an end earlier by mutual consent, it was held that the object of the agreement was the elimination of competition in order to prevent possible annihilation of the business of the assessee and the expenditure incurred was with the declared intention of prevention of annihilation of the assessee from the business and the expenditure would, in all probability, secure a goodwill for the assessee in its field by sterilising the operation of a competitor for five years and the benefit would last beyond the period of five years, thereby vastly improving the profit-making apparatus of the assessee and the expenditure would, therefore, be of a capital nature. This decision also recognises that payments made by the assessee in order to ward off a rival competitor and thereby to secure protection from competition and self-preservation would amount to capital expenditure. We hold that this principle would equally apply to this case. In Gujarat Mineral Development Corporation Ltd. v. CIT, [1983] 143 ITR 822 (Guj), the assessee carried on the business of mineral development, extraction of ores, etc., after securing a mining lease from the Government in respect of certain land and with reference to the land situated adjacent to the land held by the assessee for mining purposes, another mining company had a prospecting licence and had made an application for granting of a mining lease in respect of the land adjacent to that of the assessee. Its attempts having failed, it filed a suit and also filed a writ petition and obtained certain orders by which the Government was restrained from granting the lease to any other party. Meanwhile, the assessee also applied for a mining lease in respect of the same land. However, the assessee, with a view to avoiding competition from the exploitation of the adjacent land, paid a sum of Rs. 3,00,000 to the other mining company on condition that that company should give up its claim to a mining lease in respect of the adjacent land. All the proceedings before the court were withdrawn with a view to facilitate the assessee in obtaining a lease of the adjacent land and the assessee-company claimed the amount spent by it as revenue expenditure in the computation of its total income. All the authorities below held that the expenditure incurred by the assessee was in the nature of capital expenditure. While affirming this view taken by the Tribunal, the court, after referring to the tests to be adopted to ascertain whether an item of expenditure is capital or revenue and the earlier decisions of the Supreme Court, held that the decision in Empire Jute Co. Ltd. v. CIT, [1980] 124 ITR 1 (SC), cannot be read as laying down a universal test that if a capital asset is not ultimately acquired, the expenditure initially incurred for acquisition of that capital asset would be on revenue account and that as the expenditure in that case was incurred with the twin objective of driving out a competitor and clearing the way for the acquisition of a capital asset, viz., mining lease and the capital asset was ultimately acquired, the expenditure incurred was on capital account and not on revenue account. We have earlier pointed out that, in this case also, by the payment made by the assessee, it had acquired an enduring right or advantage to carry on its business tree from potential and positively detrimental competition from the partnership for so long as the assessee carried on its business of manufacture and sale of ink. Thus, on a due consideration of the terms of the agreement, the deed of dissolution and the facts and circumstances of the case and the principles laid down in the decisions referred to above, we hold that the sum of Rs. 1,00,000 paid by the assessee is in the nature of capital expenditure and not revenue expenditure. We answer the question referred to us accordingly. The Revenue will be entitled to the costs of this reference. Counsel's fee Rs. 500.