Hardayal Hardy, J.:— The assessee in this case is the well-known concern of Edward Keventer (S) Private Limited and the year of assessment is 1958-59.

The assessee owned at one time (it is not known if it owns even today) 22.95 acres of land with buildings and machinery etc. in the vicinity of Kitchner Road, New Delhi. The Government proposed to acquire the land for inclusion in the Diplomatic Enclave. The assessee objected but its objection was over-ruled and the land was notified for acquisition on 5-10-1951. The Collector drew up an award whereby the assessee was offered a sum of Rs. 34,36,660/- as compensation.

According to the assessee the award was finalised on 13th October, 1952 but when the assessee applied for its copy and later for inspection the award had not yet been finalised by the office of the collector.

On 5-1-1953 the assessee filed a writ petition in the High Court of Punjab at Simla under Article 226 of the Constitution. The Collector made another award on 8-1-1953 under which a sum of Rs. 4,00,000/- only was to be given as compensation. The High Court accepted the petition holding that an award had already been made before the assessee had moved the Court and directed that the possession of the property be taken on payment of compensation in accordance with the earlier award or in the alternative proceedings for withdrawal from acquisition under Section 48 of the Land Acquisition Act might be taken

While the writ petition was still pending in the High Court the assessee entered into an agreement with Messrs Delhi Glass Works Limited on 19th September, 1953. The preamble of this agreement stated that in view of the fact that the dairy farm of the assessee company had been acquired by the Government under the Land Acquisition Act, it had requested the Delhi Glass Works Limited to give on lease for a period of thirty years, out of its factory premises, land measuring 30.56 acres together with officers' bungalows and staff and workmen's quarters etc. for the purpose of erecting and running a dairy farm and the Delhi Glass Works Limited had agreed to give the same to the assessee. According to the terms of this agreement, it was agreed between the assesses and the Delhi Glass Works Limited that the latter shall grant and the assessee shall accept lease of the land and bungalows standing thereon for a period of 30 years from 1-1-1954 on a monthly rent of Rs. 2,500/-. The agreement further provided that if the assessee vacated the premises before the expiry of the term of 30 years it shall be liable to pay rent for the entire un-expired period of the lease. Likewise if the assessee refused, neglected or otherwise failed to apply to the Delhi Glass Works Limited for granting the lease in its favour and occupy the premises within the period agreed upon or otherwise committed breach of any of the terms of the agreement, then too it shall be liable to pay rent by way of damages for the entire stipulated term of the lease i.e 30 years, to the Delhi Glass Works Limited.

Consequent upon the decision of the High Court the assessee's land was not acquired and, therefore, it did not take possession of the land with respect to which it had entered into an agreement with the Delhi Glass Works Limited. The latter thereupon laid claim to a sum of Rs. 9,00,000/- being 30 years' rent, as compensation for breach of the agreement. The assessee repudiated its liability and the dispute was referred to arbitration. The arbitrators' awarded a sum of Rs. 2,00,000/-as consolidated damages to Delhi Glass Works Limited payable by the assessee within two years. Ultimately by a compromise, the amount was reduced to Rs. 1,70,000/- which was to be paid before 31st July, 1956. Till then no interest was to be charged on the amount.

The assessee filed a suit for damages against the Government and eventually succeeded in recovering Rs. 1,70,000/- sometime in September 1962. In the profit and loss account of the assessee for the year under reference the sum of Rs. 1,70,000/- was debited as compensation paid by it. In the return of income filed by it on 16-7-1958 for the assessment year 1958-59 the assessee showed a loss of Rs. 67,797/-. Along with the return the assessee filed a statement of loss in which it was stated that the compensation of Rs. 1,70,000/- paid by it was not an allowable expenditure. But on 17-7-1961 a revised return declaring a loss of Rs. 2,37,340/- was filed and the sum of Rs. 1,70,000/- paid to Delhi Glass Works Limited was claimed as an allowable deduction under the Income-tax Act.

The Income-tax Officer rejected the assessee's claim regarding Rs. 1,70,000/- as an allowable deduction as according to him the payment of that amount was not an expenditure incurred for the normal conduct of the business but was in respect of acquisition of a fixed capital asset which the assessee intended to acquire on a long term lease from the Delhi Glass Works Limited.

The Income-tax Officer was also of the view that no expenditure was actually incurred by the assessee for it was able to recoup the same amount from the Government even though at a later date.

The assessee appealed to the Appellate Assistant Commissioner who up-held the assessee's claim on the ground that the payment of Rs. 1,70,000/- was for saving future recurring expenditure which the assessee would have been obliged to incur and as such it was covered by the term “commercial expediency.”

Against the order of the Appellate Assistant Commissioner an appeal was preferred by the Income-tax Officer before the Appellate Tribunal. The point raised before the Tribunal was whether the payment made by the assessee for the cancellation of the contract was a revenue expenditure or a capital expenditure. The Tribunal held that the payment was not an expenditure laid out or expended wholly and exclusively for the purpose of business and that it was a capital expenditure. As a result of the above finding the order of the Appellate Assistant Commissioner was reversed. At the request of the assessee the following question of law was referred for the opinion of this Court: —

“Whether in the facts and circumstances of the case the payment of Rs. 1,70,000/- made by the assessee is an admissible revenue deduction ?”

Though the question is widely-worded, it is common ground that the real controversy is whether the payment of Rs. 1,70,000/- made to Delhi Glass Works Limited by the assessee on account of compensation for cancellation of the contract to take up on lease for a period of thirty years was an admissible deduction under Section 10 (2) (xv) of the Indian Income-tax Act, 1922 (hereinafter to be referred to as the Act). As is well-known this is a residuary head of revenue expenditure and reads as under: —

“ (xv) any expenditure (not being an allowance of the nature described in any of the clauses (i) to (xiv) inclusive, and not being in the nature of capital expenditure or personal expenses of the assessee) laid out or expended wholly and exclusively for the purpose of such business, profession or vocation.”

The clause has come up again and again for construction and the number of decided cases, is legion. As an almost similar provision is to be found in English Income-tax law, judges in this country have freely drawn on English cases, despite occasional protests that too much reliance on those cases had its own limitations.

In the decision of the Supreme Court in Assam Bengal Cement Co. Ltd v. Commissioner of Income-tax, West Bengal (27 ITR 34), (1) N.H Bhagwati J. who spoke for the Court made an exhaustive survey of all such decisions English as well as Indian with the object of ascertaining the principles that might be applied to determine the nature of the expenditure. The facts of that case have, of course, no resemblance with the facts of the present case, but the principles laid down therein have an important bearing on the question before us. The question before the Court in that case was whether the annual sum of Rs. 40,000/- which the assessee company had agreed to pay to the lessor, the Government of Assam, in addition to the rent and royalties, as a consideration for the lessor not granting to any other person any lease, permit or prospecting licence for limestone throughout the Khasi and Jaintia Hills District, without imposing a condition that the limestone extracted therefrom should not be used for the manufacture of cement, was expenditure of a capital nature and therefore, not allowable under Section 10 (2) (xv) of the Act. The Calcutta High Court had answered the question in the affirmative and its decision was affirmed in appeal by the Supreme Court.

The Privy Council in Tata Hydro-Electric Agencies, Limited, Bombay v. Commissioner of Income-tax, Bombay Presidency and Aden (1937-64 I.A 215) (2) pronounced at page 226: —

“What is money wholly and exclusively laid out for the purposes of the trade” is a question which must be determined upon the principles of ordinary commercial trading. It is necessary, accordingly, to attend to the “true nature of the expenditure, and to ask oneself the question — Is it a part of the company's working expenses: is it expenditure laid out as part of the process of profit earning ?”

In the case before them they came to the conclusion that the obligation to make the payments was under taken by the appellant in consideration of their acquisition of the right and opportunity to earn profits, i.e of the right to conduct the business and not for the purpose of producing profits in the conduct of the business. The distinction was thus made between the acquisition of an income-earning asset and the process of the earning of income. Expenditure in the acquisition of that asset was capital expenditure and expenditure in the process of earning of the profits was revenue expenditure. The test really is akin to the one laid down by Bowen L.J in City of London Contract Corporation Ltd. v. Styles (1887-2 Cases 239). (8)

In support of the Revenue's contention a number of rulings have been cited. The first ruling is that of the King's Bench Division in the case of Cowcher v. Richard Mills and Company, Limited. (13 Tax Cases 216). (4) In this case the assessee-company carried on the business of fish-mongers. It took on lease certain premises for a term of 14 years in December 1909. The business carried on in these premises proved un-profitable. The company entered into a verbal arrangement with the lessor under which it was agreed that the company was to be allowed to surrender the said lease in consideration of the company agreeing to pay to the lessor the sum of £.1812.10 by instalments amounting to £.250 per annum. This agreement was duly carried out. The company surrendered the lease in December 1916 and the first instalment of £.1812.10 became payable on 25-12-1916. The company paid instalments upto 31st March, 1921 when a sum of £.687.10 was still remaining due. The company desiring to put an end to its liability for future instalments under the said debenture, approached the lessor who had in the mean time obtained debenture for the amount out-standing and offered to pay him £.600 in settlement of all further liability in respect of the said sum of £.1812.10 This offer was accepted and the company paid to the lessor the sum of £.600 in settlement of the then outstanding liability. The question for consideration before their Lordships was whether the sum of £.600 was a revenue deduction or not.

Rowlatt J. observed, that the question was whether this sum could be charged as an expense incurred in carrying on the business of fish-mongers as the company carried it on the year in question. It was not a question as to what some wise and prudent business-men in the position of directors of the company would provide for before they arrived at the profits to divide among their share-holders.

It was held that the expense was not incurred in the course of carrying on of the business of fish mongers which was the line of business of the company. It ceased to be a part of the business, but, it felt an un-pleasant legacy behind it. It was held that the payment had nothing to do with the business which was carried on by the company during the previous year.

Reference was also made to the case of Mallett v. The Staveley Coal & Iron Company, Limited (13 Tax Cases 772 (5) The respondent, a colliery company held the right to work certain beds of coal under mining leases obtained in 1882 and 1919. Under these leases the company contracted to pay a minimum rent and royalties, to work the coal according to approved practice and in one case to restore the surface of the land. After a few years the company agreed with the lessor for the surrender of a part of the seams demised by the lease of 1882 and the whole of those were demised by the lease of 1919. The consideration paid to the lessor was £.3500 in one case and £.3000 in the other. The General Commissioners held that the company was entitled to deduct the sum of £.6500 in computing their profits for income-tax purposes. It was held by the Court of Appeal that the payment for the surrender of the seams was an expenditure of capital and not an admissible deduction from profits for income-tax purposes.

Rowlatt J. observed that it was abundantly clear that when a colliery company acquired a lease, the expense of acquiring the lease was the expense of acquiring a capital asset and was a capital asset expenditure. If they sell the lease that they have acquired or part of it, at an advantage, that is a receipt on account of capital.

The judgment of Rowlatt J. was up-held by the Court of Appeal who observed that the payments made for surrendering the lease were getting rid of liability which would have hung round the neck of the assessee and by making this payment out and out they freed themselves from what was a capital liability. It was held that the payment being made for the purpose of getting rid of a permanent dis-advantage or onerous liability arising with regard to the lease, which was a permanent asset of the business, was a capital expenditure.

Another case to which our attention has been drawn is Union Cold Storage Co. Ltd. v. Simpson (22 Tax Cases 547). (6) In this case the company who were paying rent to London, Midland & Scottish Railway Company for the premises taken by it on lease came to the conclusion that as a cold storage business in Liverpool had decreased, retention of the said premises was not justified and that the company's Liverpool business could be adequately housed in other premises which the company had in Liverpool. The company approached the lessor and in the result a deed of surrender was made in October 1932, under the terms of which the lessor agreed to cancel the agreement existing between themselves and the company and the term of condition to surrender the premises in consideration of the sum of £.6000 paid to them by the company. The company claimed this sum of £.6000 as a deduction.

Following the judgment of Rowlatt. J. in the case of Mallet (13 Tax Cases 772) it was held by Macnaghten J. that the payment was a disbursement not laid out for the purpose of carrying on the trade but it was for the purpose of putting an end to pro tanto to the trade. It was also held that it was a capital payment and not a revenue payment.

Reference was also made to the ruling of the King's Bench Division in the case of Hyett v. Lennard (23 Tax Cases (346) (7). It was observed by Macnaghten J. that if the lessors had been willing to accept a surrender of the lease, the cases cited show that a sum paid by the respondent to obtain their consent to its surrender would not be money wholly and exclusively laid out for the purposes of the trade. If the assessee could not have found a person who had taken assignment of the lease, and he had paid to the assignors a sum of money in consideration of his doing so, that also would have been an expense which could not be deducted for the purposes of income-tax.

On the authority of the above judicial pronouncements, it must be held that the payment of Rs. 1,70,000/- made by the assessee-company was not an expense laid out or expended wholly and exclusively for the purpose of the business. The payment was a capital expenditure. The Income-tax Officer was, in the circumstances, justified in not allowing it.

There is also case of Benarsidas Jagannath (15) ITR 185) (8) which appears to have been approved by the Supreme Court in Assam Bengal Cement Co. Ltd. v. Commissioner of Income-tax, West. (1) What had happened in that case was that the main object of the agreement was the procuring of earth for manufacturing bricks and not the acquisition of an advantage of a permanent nature or of an enduring character, the payments made were the price of the raw material and the assessee was, therefore, entitled to claim them as business expenditure under section 10 (2) (xii). But it was held that sums spent for obtaining leases for a substantially long period varying from 10 to 20 years cannot be held to be valid deductions if they amount to an acquisition of an asset of an enduring advantage to the lessee. In the present case, the assessee has a sustained interest of 30 years of lease and has in order to get rid of that interest been made to pay Rs. 1,70,000/- it is obviously for a longer lease and is therefore, a payment in respect of a capital amount.

To the same effect is the decision in Pingle Industries Ltd. v. Commissioner of Income-tax Hyderabad (40 ITR 67) (9) where the assessee had acquired by his long term lease the right to win stones and the leases conveyed to him a part of the land. The stones in suit were not a stock-in-trade in a business sense but a capital asset from which after extraction he converted the stones into his stock-in-trade. The payment, though periodical in fact, was neither rent nor royalty, but a lump payment in instalments for acquiring a capital asset of an enduring benefit to his trade. The amounts were outgoings on capital account and were not allowable deductions.

In R.B Seth Moolchand v. Commissioner of Income-tax (70 ITR 245), (10) during the assessment year 1952-53, the assessee applied for certain new licences for working mines and incurred an expenditure, inter alia, of Rs. 3200/- being the prospecting licence fee paid to the Government at the time of procuring the licence. The departmental authorities and the Tribunal disallowed this expenditure on the ground that it was capital in nature. On a reference it was held that the prospecting licence fee was capital expenditure and not allowable as a revenue expenditure.

In Dalmia Dadri Cement Limited v. Commissioner of Income-tax (74 I.T.R 484) (11) the assessee had appointed D as its managing agents for a term which would end on May 1968. In December 1952, the company terminated the managing agency and paid Rs. 6,00,000/- as compensation for the pre-mature termination of the managing agency. The Income-tax Officer held that the payment was not a revenue expenditure, but the Appellate Commissioner took a different view. The Appellate Tribunal held that the advantage which the company had gained was of such an enduring nature that it amounted to capital expenditure. In the High Court it was held that the directors compounded a consolidated claim of the managing agents whose services were terminated apparently without any cause and a sum of Rs. 600,000/- was paid for the purpose which undoubtedly resulted in an enduring benefit, from an economic point of view for the assesee-company. In that view, the payment of Rs. 6,00,000/, was only a capital expenditure and was not a permissible deduction under section 10 (2) (xv) of the Income-tax Act, 1922.

On behalf of the assessee certain cases were cited. It however, seems to us that those cases have no reference to the point which is sought to be made in the present case.

The case of State of Madras v. G.J Coelho (53 ITR 186) (12) was a case of payment of interest on moneys borrowed for purposes of purchasing the plantation. It was held that the interest was not capital expenditure as no new asset was acquired or enduring benefit obtained as a result of payment of interest. The case of Kettlewell Bullen and Co. Ltd, v. Commissioner of Income-tax Calcutta (53 ITR 261) (13) was a case in which the appellant-company received a sum of Rs. 3,50,000/- from the managed company. The question was whether the amount received by the appellant to relinquish the managing agency was a revenue receipt liable to tax. It was held that the arrangement with Mugneeram Bangur and Co. was not in the nature of a trading transaction but was one in which the appellant parted with an asset of an enduring value. What the assessee was paid was to compensate it for loss of a capital asset and was not, therefore, in the nature of a revenue receipt.

In Bombay Steam Navigation Co. Pvt. Limited v. Commissioner of Income-tax, Bombay (56 ITR 52) (14) the interest was paid on Rs. 51,56,000/-. It was interest paid by the assessee which was available as deduction under Section 10 (2) (xv). The transaction of acquisition of assets was closely related to the commencement and carrying on of the assessee's business and interest paid on the un-paid balance of the consideration for the assets acquired had, in the normal course, to be regarded as expended for the purpose of the business which was carried on in the accounting periods.

Mr. Sharma invited our attention to a group of Indian cases on the subject commencing with Anglo-Persian Oil Company, Limited v. Dolmissioner of Income-tax (1 I.T.R 129) (15). It was held in that case that money pad by a company in lump sum as compensation for the loss of agency whereby the company relieved itself of future annual payments of commission was chargeable to revenue account is properly deductable as expenditure incurred for purposes of earning such profits or gains. It was pointed out by the Bench that an expenditure to qualify itself for deduction need not have been incurred for gaining profits or gains in the year of account.

One or two other cases, namely, P. Orr & Sons v. Commissioner of Income-tax, Madras (35 I.T.R 556) (16) and Cannanore Spinning & Weaving Mills Ltd. v. Commissioner of Income-tax (42 ITR 528 (17) were cited by Mr. Sharma before us. These cases do not have reference to land transaction and are all cases of compensation for premature termination of agency paid under settlement. We do not wish to say anything about those cases as none of them has any bearing on the question before us.

In the case before us the assessee had taken on an agreement to lease for a period of 30 years beginning from 1-1-1954 an area of land. The land was never utilized. The assesee did not take possession of the land. The company to whom the land belonged, laid claim to a sum of Rs. 9,00,00/-. The assessee repudiated the liability which was later referred to arbitration and was settled at Rs. 2,00,000/- and was subsequently reduced to Rs. 1,70,000/-. This has nothing to do with the liability of the assessee company. The payment was for the purpose of getting rid of a permanent dis-advantage or onerous liability arising with regard to the lease which were a permanent asset of the business.

The result is that the question is answered against the assessee who shall also pay Rs. 250/- as costs.

Reference answered in negative.