T.N. Chopra, A.M.

This appeal is filed by the assessed against the order of the Commissioner (Appeals) dated 21-10-1996 whereby payment of Rs. 70,00,000 made to M/s. Blue Star Limited for elimination of competition has been held to be capital expenditure and hence disallowed for assessment year 1990-91.

2. Briefly stated, the facts are that assessed-company was incorporated on 8-11-1988 and has been engaged in the business of selling, marketing and distribution of various products of Hewlett Packard (hereinafter referred to as "the HP") in India. The assessed-company is a representative agent of HP products in India in respect of the following products :

(a) Test and Measurement Instruments;

(b) Computer Systems including work stations;

(c) Computer Peripherals, and

(d) Parts.

Prior to the assessed acting as representative agent of the HP, M/s. Blue Star Limited (hereinafter referred to as "the M/s. BSL") was engaged in the selling/distribution and marketing of various products of HP in India. In order to ensure its monopoly status and eliminate any competition in its business, the assessed company entered into an agreement with M/s. BSI-on 7-8-1989. The assessed has filed a copy of the said agreement during the course of hearing before us. The relevant extract from the said agreement are reproduced hereunder :

"Whereas :

1. Blue Star is engaged in the selling, distribution and marketing of various products which inter alia include Test and Measurement product range.

2. HP India is also engaged/proposing to engage in the manufacture, selling and distribution of some products similar to those dealt with by Blue Star.

3. The parties desire to avoid competition with each other by limiting Blue Star from entering into any new business activities in respect of products directly competitive with the Test and Measurement (hereinafter referred to as "the T& M) product range manufactured or distributed by HP India, (such competitive products hereinafter referred to as the "said products") as of 1-11-1989 (hereinafter referred to as the "Effective Date") on mutually agreed terms and conditions.

4. At the request of HP India, Blue Star has released its employees solely engaged in handling business of "the said products" to HP India.

5. Blue Star and HP India are desirous of recording the said terms and condition.

Now this agreement witnesseth and it is hereby agreed by and between the parties hereto as follows :

1. Blue Star agrees and undertakes not to compete with HP India in respect of the said products by entering into any new business activities pertaining to, including but not limited :

(a) manufacture of the said products,

(b) selling directly or as an agent of any person in respect of the said products,

(c) carrying on any sales promotion activity for itself or for any other person which has an effect of promoting the sales of the said product, and

(d) ................... non-competitive covenant specified in clause.........shall be effective and binding for a period of two years commencing from the Effective Date as specified in clause 3 of preamble above.

HP India, in consideration of Blue Star agreeing not to compete with HP India in the said products specified in clause 3 of preamble above, shall pay Blue Star a sum in Indian Rupees equivalent to USD 2,000,000 as under :

(a) An Amount in Indian Rupees equivalent to USD 1,000,000 on or before the Effective Date.

(b) An amount in Indian Rupees equivalent to USD 1,000,000 on the first anniversary of the Effective Date.

The rupee equivalent shall be calculated at the then prevailing banks buying rate for USD vis-a-vis Indian Rupee published by the Reserve Bank of India when the respective Installments fall due for payment."

Under the aforesaid agreement, the assessed paid a consideration of Rs. 1.68 crores immediately and an equivalent amount was payable after one year. In the profit & loss account in the year under 31-3-1990, the assessed debited proportionate payment relating to the period of operation, i.e., for five months amounting to Rs. 70,00,000. The assessing officer, after detailed consideration of facts as well as the judicial pronouncements relied upon by the assessed, company, came to the conclusion that payment of Rs. 70,00,000 made by the assessed to M/s. BSL for purchasing monopoly rights under the agreement for a period of two years represented capital expenditure. In support of his conclusion, the assessing officer placed reliance on the Supreme Court decision in the case of Commissioner v. Coal Shipments (P) Ltd. (1971) 82 ITR 902 (SC) and the decision of the Gujarat High Court in the case of Gujarat Mineral Development Corpn. Ltd. v. CIT (1983) 143 ITR 822 (Guj).

3. In appeal, the learned Commissioner (Appeals) endorsed the reasoning and conclusion of the assessing officer and held that payments made to M/s. BSL for the purpose of eliminating competition over a period of two years resulted in the benefit of enduring nature to the assessed and represented capital expenditure.

4. The assessed is aggrieved and hence the appeal. Shri C.S. Aggarwal, Advocate assailed the impugned order of learned Commissioner (Appeals) on the issue and submitted brief synopsis of judicial authorities in support of his contention that the payments made to the competitor in the same line of business cannot be treated as capital expenditure and constitutes deductible business expenditure under section 37(1) of the Income Tax Act. The array of rulings cited by the learned counsel are as under :

(a) Coal Shipments (P) Ltd.s case (supra)

(b) Followed in,

(i) Devidas Vithaldas & Co. v. CIT (1972) 84 ITR 277 (SC)

(ii) Gujarat Mineral Development Corpns case (supra)

(iii) Coramandel Fertilizers Ltd. v. CIT (1984) 148 ITR 546 (AP)

(c) Imperial Chemical Industries (India) Ltd., In re (1935) 3 ITR 21 (Cal).

(d) R.S. Munshi Gulab Singh & Sons v. CIT (1946) 14 ITR 66 (Lah).

(e) CIT v. Piggot Chapman & Co. (1949) 17 ITR 317 (Cal).

(f) V. Damodran v. CIT (1967) 64 ITR 26 (Ker).

(g) CIT v. Bowrisankara Steam Ferry Co. (1973) 87 ITR 650 (AP).

(h) Morgan (Inspector of Taxes) v. Tata & Lyle Ltd. (1954) 26 ITR 195 (HL).

(i) Bikaner Gypsusms Ltd. v. CIT (1991) 187 ITR 391 (SC), CIT v. Sudhir Mandke & Co. (1991) 189 ITR 419 (Bom).

(j) CIT v. Lahoty Bros. Ltd. (1951) 19 ITR 425 (Cal).

(k) Empire Jute Co. Ltd. v. CIT (1980) 124 ITR 11 (SC).

(l) D.P. Chirania & Co. v. CIT (1978) 112 ITR 12 (Karn), Travancore Cochin Chemicals Ltd. v. CIT (1977) 106 ITR 900 (SC)

(m) Hindustan Machine Tools Ltd. v. CIT (1989) 175 ITR 200 (sic).

5. Shri D.K. Kar, learned Departmental Representative, on the other hand, argued that M/s. BSL were acting as distribution agent of HP for selling, distributing and marketing its product in India prior to August, 1989. After HP floated their own subsidiary in India, there was obviously no business sense in continuing with M/s. BSL as distributor of the products of HP in India. It was in the light of these facts and circumstances that M/s. BSL entered into an agreement with the assessed company whereunder its entire workforce engaged in handling of test and measurement products manufactured by HP was released and the said company further undertook to refrain from entering into any new business activities in respect of such products. Learned Departmental Representative argued that even though the duration of the agreement has been mentioned as two years, yet the agreement clearly brings out the intention and promise on the part of M/s. BSL to close its business in respect of test and measurement products. According to the learned Departmental Representative, the advantage the assessed has got under the agreement for which it has made the payment to M/s. BSL is of a permanent quality even if there is a false appearance of the period being two years only. The learned Departmental Representative submitted that since the assessed has secured an advantage of enduring nature under the agreement, the payment in question is clearly of capital nature.

6. We have carefully considered the rival submissions and also gone through the unending array of judicial authorities cited before us. The principles for determining whether a particular expenditure is revenue expenditure or capital expenditure are well-settled. In distinguishing between capital and revenue expenditure, the courts have applied in different cases different tests. Nonetheless, it is recognized that none of them by itself is recognized and the determination, one way or the other has to be made on the facts and circumstances of each case.

7. One of the tests so applied is whether the expenditure in question was for bringing into existence an asset or an advantage of "an enduring nature" and is made once and for all meaning thereby an expenditure made once for all for procuring and enduring benefit. The expressions "enduring benefit" and "rights of a permanent nature" are only descriptive and not definitive and are related in meaning not synonymous with perpetual or everlasting. In Commissioner of Taxes v. Nchanga Consolidated Copper Mines Ltd. (1965) 58 ITR 241 (PC), the assessed company, together with two other companies, namely, Bancroft and Rhokana Corporation formed a group carrying on the business of copper mines, each company being independent of the others but with overlapping directorates. There was a common sales department for handling the disposal of their output, the copper itself not being sold as the specific product of anyone of the three mines. Following steep fall in the price of copper in the world market, the group decided voluntarily to cut their production and it was agreed that Bancroft should cease production for one year and the assessed company as well a Rhokana Corporation should undertake between them for the whole procurement in the year and should pay a sum to Bancroft to compensate for the embankment of its production in the year. The Privy Council held that payment made by the assessed company to Bancroft to cease production over one year formed part of operating cost and is allowable as revenue expenditure. The Privy Council specifically noted the fact at page 255 of the report that Bancroft remained a potential producer of copper and in fact, as was intended, assumed production with enlarged capacity at the end of the year. There are thus two important facts to be noted in this decision. Firstly, payment made to Bancroft related to only one year and secondly, Bancroft resumed production in the subsequent year with enlarged capacity. On these facts, it was held that the expenditure cannot be treated as resulting in enduring benefit to the business of the assessed.

8. The next decision cited before us has been rendered by Supreme Court in the case of Coal Shipments (P) Ltd. (supra), In this decision, it has been held at page 910 of the report that,

"Although we agree that payment made to ward off competition in business to a rival dealer 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, the same result would not follow if there is no certainty of the duration of the advantage and the same can be put to an end at any time. How long the period of contemplated advantage should be in order to constitute enduring benefit would depend upon the circumstances and the facts of each individual case."

The Supreme Court further observed that although an enduring benefit need not be of an everlasting character, it should not be so transitory and ephemeral that it can be terminated at any time at the volition of any of the parties. The principle laid down by the Supreme Court, when applied in the backdrop of facts and circumstances of the instant case, clearly indicate that M/s. BSL, has released its entire workforce and the marketing establishment relating to test and measurement products and closed its business of dealing in the said products. We find substance in the contention of the learned Departmental Representative that even though the period of two years is mentioned in the agreement, the predominant intention and purpose, as discernible from the stipulations in the agreement, as reproduced hereinbefore, clearly indicate that the assessed company has obtained the monopoly rights on a permanent basis and M/s. BSL, went out of its business of dealing in test and measurement products of HP. During the course of hearing, a specific query was raised by the bench as to whether M/s. BSL, continued to operate any distribution agreement with HP, a foreign company for marketing its products in India after the period of two years of its agreement with HP India but the learned counsel expressed his inability to furnish any information.

9. In CIT v. Kalinga Otto (P) Ltd. (1983) 139 ITR 710 (Cal) cited before us, the High Court after a detailed review of the entire gamut of judicial authorities on the issue observed, Expenditure incurred for bringing into existence as asset or advantage of enduring benefit would be of a capital nature. However, the expression "enduring or abiding benefit" is not a static expression. An asset or advantage may endure for the duration of the business of the assessed or for the duration of a contract. The question whether the advantage was of an enduring or transient nature has to be decided on considering the nature of the asset or advantage in the context of the trade in question". The next decision cited before us in Gujarat Mineral Development Corpn. Ltd.s case (supra). In this decision, Gujarat High Court held that if an expenditure is incurred to ward off competition with a view to deriving an advantage of an enduring nature, the expenditure incurred is on capital account and not on revenue account.

10. We have gone through the various other judicial authorities which have been cited by the learned counsel and to which reference has been made before us. In our considered opinion, applying the well settled principles to the facts of the present case, we have no hesitation in holding that expenditure in question is clearly of a capital nature inasmuch as the assessed has obtained an enduring benefit of eliminating competition in its line of business not over a period of two years only but also for succeeding years.

11. Regarding the various judicial authorities cited before us, we feel that in considering the nature of the expenditure, one must avoid being caught in the maze of judicial decisions rendered on different facts and which always present distinguishing features for a comparison with the facts and circumstances of the case in hand. Nor it would be conducive for clarity or reaching a logical result if we were to concentrate on the facts of the decided case with a view to match the colour of that case with that of the case which requires determination. The surer way for arriving at a just conclusion would be to first ascertain by reference to the document under which the obligation for incurring the expenditure is created and thereafter to apply the principle embalmed in the decisions of those facts. What we must look at is the contract or the agreement in relation to its terms, the obligations imposed and the purpose for which the transaction was entered into. The aim and object of the expenditure and the surrounding facts of the case would determine the character of the expenditure whether it was a capital expenditure or revenue expenditure. We, therefore, do not consider it necessary to discuss in detail each and every decision cited before us though we have of course carefully perused these judgments and the principles enunciated therein.

12. In the case before us, there is no dispute that the expenditure was incurred for deriving an advantage by eliminating the competition and that even though the period over which the competition has been eliminated is mentioned as two years, the assessed has, in fact, obtained enduring benefit inasmuch as M/s. BSL, released its entire workforce connected with the line of business started by the assessed. The assessed has, therefore, got an advantage of enduring nature and the expenditure is, therefore, clearly capital in nature. The disallowance of Rs. 70 lakhs treating the same as capital expenditure is therefore justified.

13. For the aforesaid reasons, we are inclined to uphold the reasoning and finding of the learned Commissioner (Appeals) and dismiss the appeal of the assessed.