1985 PLP 121 (PTD)

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 the asses see‑company 5% of Rs.22.01 lakh, namely, Rs.1,10,U62. We are not concerned with the amount or the term of the contract pertaining to the same. In respect of the pending contracts the assessee‑company agreed to pay 5$ of the amount of Rs.10.59 lakh to the oil company as and by way of consideration for being allowed to execute the unfinished contracts. The amount comes to Rs.52,966, which is the amount with which we are concerned in this reference. The actual clauses have been set out in the statement of the case and need not be extracted. In the assessment order the assessee claimed this amount of Rs.52,966, namely, 5% of Rs.10.59 lakh, as a revenue payment. According to the I . T .O. , this was part of the purchase consideration of the assessee‑company's business, and, therefore a capital outlay. The assessee‑company carried the matter in appeal to the A.A. C. It was urged before the A. A. C. that the actual profit earned by the assessee‑company on fulfilling the pending contracts had been offered for assessment. The assessee‑company, according to the argument, would not have been in a position to execute the contracts and supply machinery of the value of Rs.10.59 lakh and earn these profits, unless it had paid the sum of Rs.52,966 to the oil company. Accordingly, it was submitted that this was an expenditure incurred in the course of the business carried on by them. The A.A.C. found substance in the contention, and directed that the claim of the assessee was required to be accepted. The Revenue carried the matter in appeal to the Tribunal. The Tribunal upheld the A. A .C's decision regarding allowance of Rs.52,966. The Tribunal observed as follows: "As regards the payment of Rs.52,966, we confess frankly as to' how it could be argued that it resulted in being into existence a right to the assessee of an enduring nature. The Appellate Assistant Commissioner in para. 5 of his order stated that one of the pending contracts of Rs.10.59 lakhs, contracts of the value of Rs.8.49 lakhs were already executed and the remaining part was completed in the immediately next year, which would only show that there was no enduring benefit that had been acquired. If the assessee had not paid the commission, the assessee would not have been able to get any profit. It will be seen from the clause extracted above that the payment of 5$ to the oil company was for the purpose of compensating the oil company for its agreeing to let the assessee‑company to execute the unfinished contracts. We are also unable to agree with the Income‑tax Officer that the payment was part and parcel of the sale consideration for the sale of the business as a going concern. There is absolutely no foundation to come to this conclusion. The true profit of the assessee‑company cannot be determined without deducting this payment. In our view, the payment made is on revenue account. It was rightly allowed by the Appellate Assistant Commissioner." In our opinion what was required to be said about the claim of the assessee and the true nature of the transaction and the payment has been said by the Tribunal in the afore said extracted portion. We are in total agreement with the approach of the Tribunal. If that be so, we must accept and concur with the final conclusion. In the result, the question referred to us is answered in the affirmative and in favour of the assessee. Parties, however, will bear their own costs of the reference. M. A. K. Question answered in the affirmative.