Difference between CE and RE

Assam Bengal cement co ltd v. CIT

By bhagwati J: the appellant company acquired from the government of Assam a lease of
certain limestone quarries for purpose of carrying on the manufacture of cement. This lease
was for 20 years starting from 1st nov 1938 to 31st oct 1958 with a clause for renewal for a
further term of 20 years. The rent reserved was a half yearly for rs 3000 for the first two years
and therefafter a half yearly rent of rs 6000 with provision for payment of further royalties.
Also protection fees were paid. Under clause 4 the protection was in respect of another group
of quarries called the Durgasil area, the lessor undertaking not to grant any lease, permit or
prospecting licence regarding the limestone to any other party therein without a condition that
no limestone should be used for the manufacture of cement in consideration of a sum of Rs.
5,000 payable annually during the whole period of the lease.

In the accounting years 1944-45 and 1945-46 the company paid its lessor sums of Rs. 40,000
in accordance with these two covenants and claimed to deduct the sums in the computation of
its business profits under the provisions of section 10(2) (xv) of the Income-tax Act in the
assessments for the assessment years 1945-46 and 1946-47.

Whether, in the circumstances of the case, the two sums of Rs. 5,000 and Rs. 35,000 paid under
clauses 4 and 5 of the deed of the 14th November, 1938, were rightly disallowed as being
expenditure of a capital nature and so not allowable under section 10(2) (xv) of the Indian
Income-tax Act ". The High Court answered the question in the affirmative and hence this
appeal.

The line of demarcation between CE and RE is very thin. certain broad tests have been
attempted to be laid down and the earliest was indicated in city of London contract v styles –
you do not use it for the purpose of your concern which means, for the purpose of carrying on
your concern but you use to acquire the concern.
The expenditure in the acquisition of the concern would be CE and the carrying on the
concern would be RE. CE is a thing that is going to be spent once and for all and RE is a
thing that is going to recur every year.

Viscount cave LC in british insulated and helsby cables ltd v atherton the enduring benefit test
was postulated
held that where payment made with a view to bringing into existence an asset or an advantage
for the enduring benefit of a trade, such expenditure not to be revenue but to capital.

Viscount Haldane in john smith and son v moore suggested another test and that was the test
of fixed or circulating capital.

Some broad principles from various decided cases.

- Outlay is deemed to be capital when it is made for the initiation of a business, for
extension of a business or for a substantial replacement of an equipment.
- Expenditure may be treated as properly attributable to capital when it is made not only
once and for all, but with a view to bringing into existence an asset or an advantage for
the enduring benefit of a trade: vide Viscount Cave L.C.
- It is to be seen whether the expenditure incurred was part of the fixed capital or part of
its circulating capital. Fixed capital is what the owner turns to profit by keepingit in his
own possession. Circulating or floating capital is what he makes profit of by parting
 with it or letting it change masters. Circulating capital is capital which is turned over
and in the process of being turned over yields profit or loss. Fixed capital, on the other
hand, is not involved directly in that process and remains unaffected by it
- This synthesis attempted by the Full Bench of the Lahore High Court truly enunciates
the principles which emerge from the authorities. In cases where the expenditure is
made for the initial outlay or for extension of a business or a substantial replacement of
the equipment, there is no doubt that it is capital expenditure. A capital asset of the
business is either acquired or extended or substantially replaced and that outlay
whatever be its source whether it is drawn from the capital or the income of the
concern is certainly in the nature of capital expenditure. The question however
arises for consideration where expenditure is incurred while the business is going on
and is not incurred either for extension of the business or for the substantial replacement
of its equipment. Such expenditure can be looked at either from the point of view of
what is acquired or from the point of view of what is the source from which the
expenditure is incurred. 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. If on the other hand 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 produce the profits it is a revenue
expenditure
- The aim and object of the expenditure would determine the character of the expenditure
whether it is a capital expenditure or a revenue expenditure. The source or the manner
of the payment would then be of no consequence. It is only in those cases where this
test is of no avail that one may go to the test of fixed or circulating capital and consider
whether the expenditure incurred was part of the fixed capital of the business or part of
its circulating capital. If it was part of the fixed capital of the business it would be of
the nature of capital expenditure and if it was part of its circulating capital it would be
of the nature of revenue expenditure. These tests are thus mutually exclusive and have
to be applied to the facts of each particular case in the manner above indicated.
- When the words 'permanent' or 'enduring' are used in this connection it is not meant
that the advantage which -will be obtained will last for ever. The distinction which is
drawn is that between more or less recurrent expenses involved in running a business
and an expenditure for the benefit of the business as a whole e.g -"enlargement of the
goodwill of a company permanent improvement in the material or immaterial assets of
the concern
- The consideration of Rs. 5,000 per annum was to be paid by the company to the
lessor during the whole period of the lease and this advantage or benefit was to
ensure for the whole period of the lease. It was an enduring benefit for the benefit
of the whole of the business of the company and came well within the test laid
down by Viscount Cave. It was not a lump sum payment but was spread over the
whole period of the lease and it could be urged that it was a recurring payment.
The fact however that it was a recurring payment was immaterial, because one
had got to look to the nature of the payment which in its turn was determined by
the nature of the asset which the company had acquired.
- The asset which the company had acquired in consideration of this recurring payment
was in the nature of a capital asset, the right to carry on its business unfettered by any
competition from outsiders within the area
- It was a protection acquired by the company for its business as a whole. It was not a
part of the working expenses of the business but went to appreciate the whole of the
capital asset and make it more profit yielding. The expenditure made by the company
 in acquiring this advantage which was certainly an enduring advantage was thus of the
nature of capital expenditure and was not an allowable deduction under section
10(2)(xv) of the Income-tax Act.
- The further protection fee which was paid by the company to the lessor under clause 5
of the deed was also of a similar nature. It was no doubt spread over a period of 5
years, but the advantage which the company got as a result of the payment was to
enure for its benefit for the whole of the period of the lease unless determined in the
manner provided in the last part of the clause. It provided protection to the company
against all competitors in the whole of the Khasi and Jaintia Hills District and the capital
asset which the company acquired under the lease was thereby appreciated to a
considerable extent.
- The period of 5 years over which the payments were spread did not make any difference
to the nature of the acquisition
- It was no part of the working or operational expenses of the company. It was an
expenditure made for the purpose of acquiring an appreciated capital asset which would
no doubt by reason of the undertaking given by the lessor make the capital asset more
profit yielding
- This again was the acquisition of an asset or advantage of an enduring nature for the
whole of the business and was of the nature of capital expenditure and thus was not an
allowable deduction under section 10(2)(xv) of the Act

IN RE BENARASI DAS JAGGARNATH 1947 section 37(1) corres 10(2) (xv)

GIVEN BY MEHR CHAND MAHAJAN
Facts: the assessee firm was into carrying business of manufacturing bricks. Ut obtained certain
lands on leases for the purposes of digging out earth which was utilized further to manufacture
bricks. The terms of the various leases varied from 6 months to 18 months. The lessee stipulated
to pay to the lessor a consolidated sum whereof the lessee was given right to dig earth up to
three to three and half feet for a fixed period. The assessee claimed that the payments made by
it to the lessors should be deducted as business expenditure under section 10(2)(xv) of 1922
act.
The only questions is whether under various agreements to the several owners of land for
purpose of digging for making bricks are in the nature of RE or CE?

- At very outset that if a manufacturer of bricks purchases land for starting his
concern or takes it on lease with the same object and utilizes the earth out of such
land the expenditure incurres for purchase of land or for acquisition of leaseright
could rightly be held to possess of CE.
- Question here is that when in the course of a business and in order to produce
bricks expeditiously and economically and not when the business starting for the
first time, a manufacturer makes certain of the supply of the earth( which would
be raw material for his product) by taking a plot of land on lease, either of short
or moderate duration but not such as to amount to conveyance of land can this be
capital in nature?
The agreements did not convey the property in favour of the assessee as the extent of
depth and breath have been given. In effect and substance, they are for the purchase of earth
with a privilege to enter upon the land for the purpose of digging and removing the earth. The
arrangements evidenced by these transactions are transitory in character and the whole
intention and purpose of these so-called leases was to procure raw material for the manufacture
of bricks
Once the earth was dug and removed, the right created by these agreements in the assessee had
automatically to come to an end. The arrangements evidenced by these documents can neither
be given the status of leases nor of permanent grants. All that may be reasonably suggested is
that they confer on the assessee temporary rights of easement, even if they are found to vest
some very limited and insignificant interest in the land out of which earth had to be dug.
But no advantage of a permanent nature or of an enduring character can be held to have been
gained by them. In short, the transactions evidenced by these leases were for the sale of earth
which had to be excavated with the labour employed by the so-called lessee and not by the
labour employed by the so-called lessor.
- In order to distinguish between CE and RE. (an exp which should form an item of
debit in the profit and loss account), one must consider the nature of the concern,
the ordinary course of business usually adopted by a manufacturer and object
with which an expense is incurred by him and then decide the category.
Here there was no confer any benefit of an enduring character. n the nature of things it
must be held to confer a transitory advantage and as the material so acquired is consumed in
the carrying on of the business it would be wrong to hold the expenditure incurred in purchasing
that material to be of a capital nature.
Had the transaction been of such a nature as would have conferred an advantage of an enduring
nature on the trade and the payment was made once and for all to avoid recurring expenditure
it may have been possible to infer that the expenditure incurred was of a capital nature but
when the expenditure incurred neither swells the capital nor improves it, but it only increases
or decreases the profit or loss it must be held to be a part of the profit and loss account of the
business.
The expressions "enduring benefit" or "of a permanent character" were introduced to
make it clear that the asset or the right acquired must have enough durability to justify
its being treated as a capital asset.
This is not an initial outlay as the co was already manufacturing bricks. The land is not used
for any other purpose apart from digging. The digging is also a controlled digging as they
cannot dig beyond 3 feet. Had they not entered this lease, they would have to buy the sand from
the market which would be expensive. It is essential for the running of the business and would
thus be revenue expenditure.
The arrangements made under the agreements in question will exhaust themselves in 6 months
to 3 years and the quantity of earth dug out would be consumed in the manufacture of bricks.
The assessee would have no interest whatsoever left in the land as soon as earth is dug out and
removed.

KTMTM ABDUL KAYOOM V CIT 1962 this case under section 37(1) corresponding to sec
10(2)xv
By hidayatullah and Kapoor JJ (majority view)
Facts: the assessee firm carried on the business in the purchase and sale of conch shells
called chanks. It took on lease from the state gov the exclusive right, liberty, authority to
fish, take and carry away all chank shells in the sea off the coast line. The lease was for 3
years and consideration of an yearly rent to be paid. Claiming deduction on the ground
that this expenditure laid out wholly and exclusively for the purpose of the business under
section 10(2)(xv) . he used to buy the wholesellers and sell it forward but now buying stock in
trade on his own by taking on lease from government.
In Assam Bengal Cement Co. Ltd. v. Commissioner of Income-tax [1955] 27 ITR 34
(SC), this court referred to the decision in Benarsidas Jagannath, In re [1947] 15 ITR 185
(Lah.) and accepted the following broad principles for the purpose of discriminating
between a capital and a revenue expenditure. Write this in paper.

1) The outlay is deemed to be capital when it is made for theinitiation of a business, for
extension of a business, or for a substantialreplacement of equipment.
(See Commissioners of Inland Revenue v. Granite City Steamship Company
Ltd [1927] 13 Tax Cas 1.). Such expenditure is regardedas on capital account, for it
is incurred not in earning profits but insetting the profit-earning machinery in motion.
In my opinion this test does not apply in the present case where no profit-earning
machinery was set in motion.

Expenditure may be
treated as properly
attributable to
capitalwhen it is made
not only once and for
all, but with a view to
bringinginto existence
an asset or an
advantage for the
enduring benefit of
atrade
(See Atherton v. Britis
h Insulated and Helsby
Cables Ltd. [1925] 10
Tax Cas 155 (HL.)). In
elucidation of this
principle it has been
laid down in several
decisionsthat by
"enduring" is meant
"enduring in the way
that fixed
capitalendures" and it
does not connote a
benefit that endures in
the sense that for a good
number of years it
relieves the assessee of
a revenue payment.
In Robert Addie and
Sons' Collieries
Ltd. v Commissioners
of Inland
Revenue [1924] 8 Tax
Cas 671Lord Clyde
 formulated the same
test in these words:
"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 one's self 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?—or, on the other hand, is it a capital
outlay?—is it expenditure necessary for the acquisition of
property or of rights of a permanent character, the
possession of which is a condition of carrying on its trade
at all?"

An analysis of the agreement shows that the respondent obtained an exlclusive right to fish for
chanks by the method of diving and nets and to appropriate them except those below 2 and i/4
inches in diameter, which had to be kept alive. Contract was for a fairly long period.

A trader may spend money to acquire his raw materials, or his stock-in-trade, and the
payment may often be on revenue account but not necessarily. A person selling goods by
retail may be said to be acquiring his stock-in-trade when he buys such goods from a
wholesaler. But the same cannot be said of another retailer who buys a monopoly right
over a long period from a producer of those goods. The amount, he pays to secure the
monopoly, though a part of the expenditure to secure his stock-in-trade is not of the same
character as the price he pays in the first illustration. By that payment, he secures an
enduring advantage and an asset which is a capital asset of his business. In the same way,
if a manufacturer buys his raw materials he makes a revenue expenditure, but when he
acquires a source from which he would derive his raw materials for the enduring benefit
of his business, he spends on the capital side. Thus, a manufacturer of woollen goods who
buys his wool buys his raw materials, but when he buys a sheep farm, he buys a capital
asset. There is then no difference between a purchase of a factory and the purchase of the
sheep farm, because both are capital assets of an enduring nature.

To determine on which side of the line the particular expenditure falls, one may often put
himself the question posed by Lord Clyde in Robert Addie & Sons Collieries
Ltd. v. Commissioners of Inland Revenue [1924] 5 Tax Cas 671 (C.Sess.):
"Is it part of the company's working expenses, is it expenditure laid out as part of
the process of profit earning?—or, on the other hand, is it capital outlay, is it
expenditure necessary for the acquisition of property or of rights of a permanent
character, the possession of which is a condition of carrying on its trade at all?"

We may now pass on to the facts of the case before us. The respondent carried on the business
of selling chanks. It obtained its supplies from divers, from whom it purchased the chanks, and
having got them, perhaps cheap, it resold them at a profit. This is one mode in which it carried
on its business. In this business, it was directly buying its stock-in-trade for resale. The other
method was to acquire exclusive right to fish for chanks by employing divers and nets. The
business then changed to something different. The sale was now of the product of another
business, in which divers and equipment were first employed to get the shells. It thus took
leases of extensive coastline with all the right to fish for chanks for some years. The shells
were not the subject of the bargain at all, as were the tendu leaves ; but the bargain was about
the right to fish. There can be no doubt that what it paid the divers when it bought chanks from
them with the view of reselling them was expenditure laid out wholly and exclusively for the
purpose of its business, which was not of a capital nature. That business was buying goods and
reselling them at a profit. But a different kind pf business was involved when it went in for
fishing for chanks. To be able to fish for chanks in reserved waters it had to obtain the right
first. It, therefore, took lease of that right

Under the lease which the respondent obtained, it had a right to take only chanks of particular
dimensions and shape; but it had to fish for them and obtain them first
The rest of the chanks were not its property. The smaller chanks had to be returned alive to the
sea, and Valampiri chanks had to be compulsorily sold to the State
the chanks were on the bed of the sea. Their exact existence was not known, till the divers
found them, or they got netted. Chanks which were there one day might have been washed
back into the deep sea, and might never be washed back into a place where they would be
within reach. Similarly, other chanks not there one day might come within reach on another
day. All these matters make the case entirely different from the case of a purchase from the
divers. In obtaining the lease, the respondent obtained a speculative right to fish for chanks
which it hoped to obtain and which might be in large quantities or small, according to its luck.
The respondent changed the nature of its business to fishing for chanks instead of buying
them.
But it would be a straining of the imagination to say that the amount paid for reserving the
coastline for future fishing was the price of chanks, with which the respondent did its business.
That amount was paid to obtain an enduring asset in the shape of an exclusive right to fish, and
the payment was not related to the chanks, which it might or might not have brought to the
surface in this speculative business as shells might be available today but may be not
tomorrow. He may not get the shell still he would get regular input of shells. It will provide
long and enduring benefit.

BOMBAY STEAM NAVIGATION CO PVT LTD V CIT 1964( THIS WAS CITED IN
BIKANER CASE)
FACTS: the assessee company was incorporated with the object of taking over certain
passenger and ferry services on the konkan coast. The assessee company purchased the assets
required for its business from scindia steam nav company and paid part of the consideration. it
was provided in the contract that interest of 6% per annum would be applicable until the whole
amount is paid.
The company urged that the payment of interest was revenue expenditure for the purpose
of the business.
A mere purchase of a capital asset on a long term credit with a stipulation for payment
of interest on the reduced balance did not amount to borrowing capital within 10(2)(iii)
An agreement to pay the balance of consideration due by the purchaser does not in trusth give
rise to a loan. A loan of money results in a debt, but every debt does not involve a loan. Liability
to pay a debt may arise from diverse sources and a loan is only one of such source. Every
creditor who is entitled to receive a debt cannot be regarded as a lender.
The leg has under clause iii permitted as an allowance interest paid on capital borrowed for the
purpose of the business. If interest be paid , bt not on capital borrowed, clause iii will have no
application.,
The expenditure was incurred after the commencement of the business. The expenditure is not
for any private purose of the assess company. It is in the capacity of a person carrying on
business that this interest is paid. Expend made under a transaction which is so closely related
to the business that it could be viewed as intergral part of the conduct of the business, may be
regarded as RE laid out wholly and exclusively for the purpose of the businesses. The assessee
comp was formed for the purpose of taking over the business which scinias had acquired and
for carrying on that business the assets with which the business was to be carried on were
required. For obtaining those assets the assessee company rendered itlsef liable for sum of rs
51 lakh and agreed to pay that sum with interest at rate stipulated. The transaction of
acquisition of the assets was closely related to the commencement and carrying on of the
business. Interest paid on the amount remaining due must in the normal course be
regarded as expended for the purpose of the business, which was carried on in the year.
If the principal or the interest accruing due was not paid, the scindias had undoubtedly a
right to enforce their lien against the assets of the assessee-company’s business, but that
cannot be regarded as a ground for holding that the expenditure fell within section
10(2)(xv).
Expenditure for satisfying liability unrelated to the business even if incurred for avoiding
danger apprehended or real to the conduct of the business cannot be said to be RE. nor
can it be said that because a liability has some relation to the business which is carried
on, expenditure incurred for satisfaction of such liability is always to be regarded as
falling under section 10(2)(xv)…..

The interest was however allowed as expenditure incurred in a transaction which was an
integral part of the conduct of the business.

CYANAMID AGRO LTD V. CIT(tomorrow)

SECTION 37(1)

https://www.taxmann.com/filecontent.aspx?Page=CASELAWS&isxml=Y&id=10101000000
0075011&search=CYANAMID+AGRO+LTD+V.+CIT&tophead=true

CIT V UPCOM CABLES LTD

Section 37(1)

Facts: The assessee-company entered into an agreement with a foreign company for
providing technical know-how in the manufacture of its products whereunder assessee
agreed to pay one time technical know-how fee and royalty at 2 per cent of net ex-factory
selling price of the product for period of five years from the date of commencement of
production. The assessee had claimed payment of royalty as 'revenue expenditure'.
The Assessing Authority did not accept it and treated the same as 'capital expenditure'.
Held: In the present case, a concurrent finding has been recorded by Commissioner (Appeals)
and Tribunal both that on termination of agreement, which was for a period of five years,
assessee would return all relevant material relating to know-how acquired through agreement.
This is one of the relevant consideration observed in Alembic Chemical Works Ltd. v. CIT
(Appeals) [1989] 177 ITR 377/43 Taxman 312 (SC) to hold that in such a case, payment
towards 'royalty' would be 'revenue expenditure' and not 'capital
The agreement also shows that it was not an exclusive right available to the assessee, inasmuch
in foreign collaboration agreement, approval accorded by the Government of India provides
that in case item of manufacture is one which is patented in India, payment of 'royalty'/lump
sum made by Indian company to foreign collaborator, during period of agreement, shall
constitute full compensation for use of patent right till expiry of life of patent and Indian
company shall be free to manufacture that item even after expiry of the collaboration agreement
without making any additional payments. Assessee claimed that royalty payment is part of
percentage of selling price of product and not for acquiring technical know-how of
manufactured licensed product having enduring benefit. These facts available on record have
not been disputed and this Court had not been shown any authority so as to justify to take a
different view than what has been taken by Tribunal
Assessee was granted non-exclusive right to manufacture, use and sell products in India
under rights of patent, owned or controlled by Foreign licensor company - On
termination of agreement, assessee would return all relevant material relating to know-
how acquired through agreement
Whether since royalty payment was part of percentage of selling price of product and not
for acquiring technical know-how of manufactured licensed product having enduring
benefit, payment of royalty was to be treated as revenue expenditure - Held, yes
The question as to whether a particular payment made towards technical know-how fee or
royalty to a Foreign Company in lieu of an Agreement will be a "capital expenditure" or
"revenue expenditure" would depend upon facts of individual case, and, in particular, various
terms of Agreement involved therein.

Capital gains
Cit v. Hh maharani usha devi 1998
Section 2(14)(ii) read with section 45

Facts: In 1949, the Ministry of States, New Delhi, had accepted certain heirloom jewellery as
private properties of late His Highness Maharaja Keshaw Rao Holkar of Indore. These included
a 'Sirpech' and a Ceremonial belt. All the listed jewellery and gold in the Huzur Jawahirkhana
at Indore in 1949 and used by the Ruler of Indore on ceremonial occasions as in the past,
were exempt under the provisions of section 5(1)(xiv) of the Wealth-tax Act, 1957.
During the accounting year relating to the assessment year 1972-73, the assessee sold two items
of heirloom jewellery for Rs. 13,80,001. The assessee claimed before the Tribunal that the
heirloom jewellery constituted personal effects of the assessee within the meaning of section
2(14) of the Income-tax Act, 1961, ('the Act'), and, therefore, the sale of this jewellery did not
give rise to any taxable capital gains
Under section 45 of the Act any profits or gains arising from the transfer of a capital asset
effected in the previous year is chargeable to income-tax under the head 'Capital gains'. Such
profits or gains shall be deemed to be the income of the previous year in which the transfer
took place. The term 'capital asset' has been defined in section 2(14). Section 2(14), as it stood
at the relevant time, was as follows :
"(14)'Capital asset' means property of any kind held by an assessee, whether or not
connected with his business or profession, but does not include—

( i) ** ** **
 ( ii)personal effects, that is to say, movable property (including wearing apparel, jewellery
and furniture) held for personal use by the assessee or any member of his family dependent
on him.
Personal effects which are excluded from capital assets include jewellery for personal use. We
have to consider whether jewellery held for personal use by the assessee would cover heirloom
jewellery of the assessee. Heirloom jewellery is also meant for the personal use of the assessee.
It is, however, not meant for daily use but for use on ceremonial occasions. This does not
deprive such jewellery of its character as jewellery meant for personal use. For example,
clothes meant for use at weddings or formal occasions are not used daily. Yet, they are stitched
for personal use of the wearer. As such, they would form a part of his personal effects.
Heirloom jewellery may be passed down from generation to generation. But it is nevertheless
for the personal use of the owner. The High Court has rightly held that the frequency of use of
the property must necessarily depend on the nature of the property. Merely because from the
nature of the property, it can be used on ceremonial occasions only, it does not follow that the
property is not held by the assessee for personal use.

H.H. Maharaja Rana Hemant Singhji v. CIT [1976] 103 ITR 61

In that case silver bars, sovereigns and rupee coins which were said to be used on special
occasions for worship were held not to be the personal effects of the assessee. This Court said
that only those articles which were "intimately and commonly used by the assessee" would be
considered as personal effects. The phrase 'intimately and commonly' should not be taken
literally. What was meant was property which is individually or personally used. One must
remember that even furniture is included in personal effects. Also this judgment does not deal
with jewellery which is meant to be worn personally by the assessee. It deals with gold
sovereigns, silver rupees and silver bars. This Court rightly held that these could not be
considered as personal effects of an assessee. It also observed that enumeration of articles like
wearing apparel, jewellery and furniture, mentioned by way of illustrations in the definition of
'personal effects', also showed that the Legislature intended only those articles to be included
in the definition which were intimately and commonly used by the assessee.

he Andhra Pradesh High Court, however, in the case of CIT v. Trustees of H.E.H. the Nizam's
Wedding Gifts Trusts [1985] 154 ITR 573/[1984] 18 Taxman 99 has held that jewellery which
was meant for use on ceremonial occasions was not jewellery meant for personal use and would
not be covered by the definition of 'capital asset' under section 2(14). In our view, this decision
of the Andhra Pradesh High Court does not appear to be correct. The occasion on which the
jewellery is used will depend upon the nature of the jewellery. But if it is meant for the
assessee's personal use, it will form a part of the assessee's personal effects.

n the case of G.S. Poddar v. CWT [1965] 57 ITR 207, the Bombay High Court considered a
case where certain gold articles made in the shape of utensils like cups, saucers, trays
were sold by the assessee. It was found that the articles were kept in a show-case in the
drawing room of the assessee. The Court, therefore, held that though the articles had the shape
of household articles, they were neither regarded as household utensils by the assessee nor were
they used or intended to be used as such. They were not personal effects of the assessee. It was
further held in this case that the use as a decoration in the drawing room which is only
calculated to give a pride of possession is not contemplated by the exemption and that the
personal use which is contemplated by the exemption is the use of like nature as the use of
other items mentioned in the clause, namely, furniture, household utensils, wearing apparel
and provisions. It was further held in that case that the expression "intended for personal or
household use" did not mean capable of being intended for personal or household use. It
meant normally, commonly or ordinarly intended for personal or household use.

In the present case, however, the jewellery is to be worn on the person of the assessee. It
would, in any event form a part of the personal effects of the assessee. In the premises,
since the definition of 'capital asset' in section 2(14) does not include personal effects
including jewellery, the High Court rightly came to the conclusion that on the facts found
by the Tribunal, the items of jewellery in question were the personal effects of the assessee
held for personal use by her and were, therefore, excluded from the definition of the term
'capital asset'. As such, profits and gains arising from the sale of these items were not
taxable under the provisions of section 45.
(Gold and silver coins, and utensils like plates and glasses, cannot be regarded as jewellery.
The status of such assets -- whether they are personal effects -- depends on the family status of
the assessee, and whether assets like utensils are intended for daily use. So, if in a royal family
(as in Rathore's case), silver utensils are used on a regular basis, the utensils will be regarded
as personal effects. However, if the utensils are used only on certain occasions, like for a puja
or a wedding, the courts have taken the view that such utensils are not personal effects, but
capital assets)

if jewellery used on regular basis for personal use that would not be included under
capital asset as per section 2(14)…

CIT V TRUSTEES OF heh CASE

By a single trust deed, the settlor created trusts in favour of his two grandsons in respect of
jewellery mentioned in the deed. The terms of trust for each beneficiary were identical. Each
of them was to wear the jewellery on marriages and ceremonial occasions. After the festivities
and ceremonies, the jewellery was to be returned to the trustees for safe custody. The jewellery
could not be sold prior to the marriage of the beneficiaries. Certain items of the jewellery could
be sold after their marriage but the sale proceeds were to be invested in Government securities
and the beneficiaries could enjoy only the interest thereon. In 1971, apart of the jewellery
belonging to each of the beneficiaries was sold. Two separate returns of income in respect of
the two beneficiaries were filed by the trustees claiming that no capital gains arose

The expression 'jewellery held for personal use' used in section 2(14)(ii), should be
understood to mean jewellery associated with the person of the possessor ; in other words,
normally, ordinarily and commonly used by the person. The jewellery under consideration
was intended for use only on certain occasions as a mark of status and pride and was not to be
used every day, ordinarily and commonly and hence was not covered under 'personal effects'
within the meaning of section 2(14)(ii). Since it was not exempt under section 2(14)(ii), it
constituted a capital asset, on the sale of which capital gains tax was attracted.

HH MAHARAJA RAANA HEMANT SIGNHJI

The assessee, a minor, having been recognised by the Government as successor of the former
Maharaja, certain assets consisting of gold sovereigns, silver coins and silver bars were
released by the Govt. and handed over to Rajmata being the adoptive mother and guardian of
the assessee. During the financial year 1957-58, the aforesaid sovereigns, silver coins and silver
bars were sold at the suggestion of the Government
they were held for personal use by the assessee and the members of his family as was evident
from the fact that they were used for the purpose of Maha Lakshmi puja and other religious
festivals and rituals in the family.

The expression "personal use" occurring in section 2(4A)(ii ) of the 1922 Act is very significant.
A close scrutiny of the context in which the expression occurs showed that only those effects
can legitimately be said to be personal which pertain to the assessee's person. In other words,
an intimate connection between the effects and the person of the assessee must be shown to
exist to render them "personal effects"
The enumeration of articles like wearing apparel, jewellery, and furniture mentioned by way
of illustrations in the above-quoted definition of "personal effects" also showed that the
legislature intended only those articles to be included in the definition which were intimately
and commonly used by the assessee.
The silver bars or bullion could by no stretch of imagination be deemed to be "effects" meant
for personal use. Even the sovereigns and the silver coins which were alleged to have been
customarily brought out of the iron safes and boxes on two special occasions, namely, the
Ashtami Day of "Sharadh Paksh" for Maha Lakshmi Puja and for worship on the occasion of
Diwali festival could not also be designated as effects meant for personal use. They might have
been used for puja of the deities as a matter of pride or ornamentation but it was difficult to
understand how such user could be characterised as personal use. If sanctity of puja were
considered so essential by the assessee, the aforesaid articles would not have been delivered
by his guardian to the banks for sale.
Therefore, the aforesaid articles were capital assets and not personal effects and as such could
not be excluded while computing the gains.

CIT V BC SRINIVASA SHETTY 1981 128 ITR 294

SECTION 45
WHETHER GOODWILL GENERated in a newly commenced business can be described
as an asset under section 45.
Whether transfer transfer of such goodwill is subject to the capital gain tax

Facts: The assessee, a registered firm, manufactured and sold agarbattis. Clause 13 of the
instrument of partnership executed on 28-7-1954 showed that the goodwill of the firm had not
been valued, and the valuation would be made on dissolution of the partnership. The period of
the partnership was extended by an instrument dated 31-3-1964, and it contained a similar
clause 13. Subsequently, the assessee-firm was dissolved by a deed dated 31-12-1965. At the
time of dissolution, it seems, the goodwill of the firm was valued at Rs. 1,50,000. A new
partnership by the same name was constituted under an instrument dated 2-12-1965 and it took
over all the assets, including the goodwill, and liabilities of the dissolved firm.
Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding
that no capital gains can arise under section 45 of the Income-tax Act, 1961 on the transfer by
the assessee-firm of its goodwill to the newly constituted firm ?"

45. Capital gains. - (1) Any profits or gains arising from the transfer of a capital asset effected
in the previous year shall, save as otherwise provided in sections 53 and 54, be chargeable to
income-tax under the head 'Capital gains', and shall be deemed to be the income of the previous
year in which the transfer took place."
The section operates if there is a transfer of a capital asset giving rise to a profit or gain. The
expression "capital asset" is defined in section 2 (14) to mean "property of any kind held by an
assessee". It is of the widest amplitude, and apparently covers all kinds of property except the
property expressly excluded by clauses (i) to (iv)of the sub-section which, it will be seen, does
not include good will. But the definitions in section 2 are subject to an overall restrictive clause.
That is expressed in the opening words of the section : "unless the context otherwise requires".
We must, therefore, enquire whether contextually section 45, in which the expression "capital
asset" is used, excludes goodwill.
Goodwill denotes the benefit arising from connection and reputation.
There can be no account in value of the factors producing it. It is also impossible' to predicate
the moment of its birth. It comes silently into the world, unheralded and, unproclaimed and its
impact may not be visibly felt for an undefined period. Imperceptible at birth it exists
enwrapped in a concept, growing or fluctuating with the numerous imponderables pouring into,
and affecting, the business. Undoubtedly, it is an asset of the business, but is it an asset
contemplated by section 45.
Section 45 is a charging section. For the purpose of imposing the charge, Parliament has
enacted detailed provisions in order to compute the profits or gains under that head.
All transactions encompassed by section 45 must fall under the governance of its
computation provisions

For purpose of computation under section 48(ii) there must be the cost of acquisition of the
capital asset.

None of the provisions pertaining to the head "Capital gains" suggests that they include an asset
in the acquisition of which no cost at all can be conceived
In the case of goodwill generated in a new business there is the further circumstance that it is
not possible to determine the date when it comes into existence. The date of acquisition of the
asset is a material factor in applying the computation provisions pertaining to capital gains
Having regard to the nature of the asset, it will be impossible to determine such cost of
acquisition… we are of opinion that the goodwill generated in a newly commenced
business cannot be described as an "asset" within the term of section 45, and, therefore,
its transfer is not subject to income-tax under the head "Capital gains".
W.r.t its future sale, it can be calculated when would be sold next time.
First time selling of goodwill will not have actual cost. Not buying from anyone. So there is no
capita; gains because of lack of actual cost. When the business was started, goodwill did not
exist. The first value is missing.

CIT V MITHLESH KUMARI 1973

https://www.taxmann.com/filecontent.aspx?Page=CASELAWS&isxml=Y&id=10101000000
0026173&search=92+ITR+9&tophead=true

section 55 f the INCOME TAX ACT

facts
The assessee purchased the perpetual leasehold rights in an open plot of land. She had raised a
loan from her mother-in-law for paying the price of land. The assessee paid certain amount to
her mother-in-law by way of interest on amount borrowed and also paid ground rent in respect
of land. Ultimately, she sold away the land to her mother-in-law and after including the amount
paid towards interest on loan and ground rent in the actual cost, disclosed remaining amount
as capital gain on sale of land. The ITO held that amount paid towards interest and ground rent
could not be added to the cost of the land. The AAC upheld the ITO's order. The Tribunal,
however, allowed the assessee's claim.
The relevant facts as can be gathered from the statement of the case may be briefly stated. On
December 6, 1957, Smt. Mithlesh Kumari (hereinafter referred to as "the assessee") purchased
the perpetual leasehold rights in an open plot of land from one H.R. Gandhi for a consideration
of Rs. 95,000. The sale deed, inter alia, provided that in addition to the payment of the price
of Rs. 95,000, the assessee shall deposit a sum of Rs. 5,000 either in cash or security on account
of building security in the Delhi Improvement Trust within 15 days of the sale deed and that
the vendor will be entitled to take back refund of Rs. 5,000 deposited by him with the said
authority as building security.
The assessee had raised a loan from her mother-in-law, Smt. Ramawati Sanghi, for paying the
price of the land. The assessee paid Rs. 16,878 to her mother-in-law by way of interest on the
amount borrowed by her. She also paid ground rent amounting to Rs. 3,793. Ultimately, in
November, 1960, the assessee sold away the land to her mother-in-law for Rs. 1,50,000

"Cost of plot purchased 95.000

on December 6, 1957
Interest from December, 1957, to November, 1960, on 16,878
the amount of loan taken for the purchase of the land
Ground rent from December 7, 1957, to November, 3,793
1960
Penalty paid to the Improvement Trust 5,000
Brokerage on the sale of land 1,500
Total 1,22,171."
Deducting this amount from the sale price of Rs. 1,50,000 the assessee disclosed a sum of Rs.
27,829 as capital gains resulting from the purchase and sale of the plot of land.
Therefore, the interest paid by the assessee was not an expenditure which was admissible under
any provision of sections 8, 9, 10 and 12 of the 1922 Act and was not excluded from the
computation of the actual cost of the capital asset to the assessee. The question, however, was
whether it could be included in the computation of the actual cost of the asset.
It would be reasonable, to include in the actual cost of the capital asset all expenses which
were incurred by the assessee in acquiring the capital asset as distinct from the items of
expenditure which were incurred by him for retaining or maintaining the capital asset.
In the instant case, the assessee in order to purchase the land had not only to borrow the
amount which was the consideration for the purchase of the land, but also had to pay interest
on the amount borrowed by her. The amount of loan plus the interest paid by the assessee
constituted the actual cost to the assessee of the land. The fact that the amount of loan was
paid by the assessee to the vendor and the amount of interest was paid to a different person,
namely, her mother-in-law, did not make any difference so far as the assessee was concerned
in respect of the actual cost of the land to her. It would not also make any difference whether
the interest was paid on the date of the purchase or whether it was paid subsequently.
Therefore, the Tribunal was right in adding the interest amount towards the actual cost of
the land.
As regards ground rent, the expenditure was not incurred by the assessee for the acquisition
of the capital asset. It was incurred by her for keeping the capital asset in her possession. It
was in the nature of any other expenditure that the assessee might have incurred to maintain
the capital asset. It was similar to the salary which the assessee might have paid to a chowkidar
engaged for keeping watch on the land. Such items of expenditure cannot be said to be
expenditure incurred by the assessee for the acquisition of the capital asset and they cannot,
therefore, be included in computing the actual cost to the assessee of the capital asset. The
Tribunal, was therefore, wrong in adding the amount of ground rent in computing the actual
cost of the capital asset.

Profession
CIT V. Abdul Gani Gurdeji
Whether the sum of rs 1,05,000 received by the assessee from shri abu sufian under a gift deed
was not taxable as assessee’s income from his profession/vocation?
Facts: assessee is khadim at the dargah of khwaja moinuddin chisti, ajmer, and derives
income by exercise of such profession. He received the above given sum from a non
resident pilgrim abu sufian, who was coming to the dargah for number of years.
the amount of Rs. 1,05,000 was considered as a gift out of natural love
the Commissioner of Income-tax exercised the power under Section 263 of the Income-tax Act
and cancelled the assessment order and was of the opinion that the payment has been
camouflaged as a gift out of natural love and affection

The real nature of the offerings or present to the Khadim is receipt by the assessee on account
of his Khadim profession. It was also found that Abu Sufian was visiting the Dargah since 1966
to pay obeisance at the Dargah and the Jiyarat through Khadim assessee. The services which
were rendered by the assessee to Abu Sufian from time to time were considered .to be the cause
on account of which the payment is made. According to the assessee, Abu Sufian has given an
interview to the Hindu Islamic Magazine 'Phukaru' where he stated that a bad debt due to the
grace of Allah was recovered and he decided to serve Khadim Abdul Gani Maullim (assessee)
by presenting this amount of Rs. 1,05,000, The Commissioner of Income-tax was also of the
view that there was nothing existing so far as natural love and affection between the assessee
and Abu Sufian is concerned and the only relationship was of profession which the assessee
has exercised

The Tribunal came to the conclusion that it is a case of voluntary payment made to the assessee
for his personal qualities and as a mark of the high esteem and regard in which the assessee
was held by the donor. It was further observed that there is not an iota of evidence to link the
impugned payment with the routine and ordinary services rendered by the assessee as Khadim
to the donor.

in order to constitute the receipt as income, it is necessary for the Revenue to establish the link
between the receipt and the service rendered, i.e., rendering of service was causa causans of
the receipt
In Moorhouse (Inspector of Taxes) v. Dooland [1955] 28 ITR 86 (CA), the following principles
were deduced
(i) The test of liability to tax on a voluntary payment made to the holder of an office or
employment is whether, from the standpoint of the person who receives it, it accrues to him by
virtue of his office or employment, or in other words by way of remuneration for his services

(ii) If the recipient's contract of employment entitles him to receive the voluntary payment,
whatever it may amount to, that is a ground, and I should say a strong ground, for holding that,
from the standpoint of the recipient, it does accrue to him by virtue of his employment, or in
other words, by way of remuneration for his services.

(iii) The fact that the voluntary payment is of a periodic or recurrent character affords a further,
but I should say a less cogent, ground for the same conclusion

On the other hand, a voluntary payment may be made in circumstances which show that it is
given by way of present or testimonial on grounds personal to the recipient, as, for example, a
collection made for the particular individual who is at the time vicar of a given parish because
he is in straitened circumstances, or a benefit held for a professional cricketer in recognition of
his long and successful career in first class cricket. In such cases the proper conclusion is likely
to be that the voluntary payment is not a profit accruing to the recipient by virtue of his office
or employment but a gift to him as an individual, paid and received by reason of his personal
needs in the former example and by reason of his personal qualities or attainments in the latter
example."

the apex court has considered the nature of receipt by a teacher of Vedanta who received an
amount from his disciples and came to the conclusion that the teaching of Vedanta by the
assessee was the carrying on of a vocation by him and that the imparting of the teaching was
the causa causans of the making of the gift. It was further observed that in order that an activity
might be called a vocation, it was not necessary to show that it was an organised activity and
that it was indulged in with a motive of making profits ; it was well established that it is not
the motive of a person doing an act which decides whether the act done by him was the carrying
on of a business, profession or vocation; and if any business, profession or vocation in fact
produced an income, that was taxable income, and was none the less so because it was carried
on without the motive of producing an income. In p Krishna menon v cit

The evidence which has come on record is that the assessee was performing his duties as
Khadim and this is his profession and it is not in dispute. The point which arises for
consideration is as to whether the payment by Abu Sufian of Rs. 1,05,000 was a gift to him out
of natural love and affection or was in respect of the service rendered by the assessee as Khadim
or was connected in any manner with such service. It has come on record that Abu Sufian was
coming from outside to the Dargah since 1966 and the assessee was rendering services as
Khadim. The Tribunal has proceeded on the basis that such a huge amount had never been paid
on any other occasion. We are afraid, the view which the Tribunal has taken that payments
have not been made in the past or not been paid on other occasions, will not change the nature
of the character of the receipt. It is also not necessary that persons who were given the amount
should be benefited by any of the qualities of the assessee by rendering of service as Khadim
which has not been denied. Even a voluntary payment which is given to a priest for his personal
qualities or high esteem in relation to the service rendered would only increase the amount and
would not take it out of the scope of the income. The payment was voluntary and in view of
the principles which have been laid down by the apex court in the case of P. Krishna Menon
[1959] 35 ITR 48, it has to be seen whether the income has arisen from the profession or
vocation which the assessee was carrying on as Khadim. The link of the service rendered by
the assessee as Khadim and the payment made has to be seen from the circumstance as to
whether it could be falling within the definition of gift which is alleged to be given out of
affection and love or it was in respect of the service performed by the assessee. In the press
release on which the reliance has been placed by the Income-tax Appellate Tribunal, the
amount has been stated to have been given out of the spiritual command of Khwaja Saheb and
not for any service rendered by the assessee for carrying the Abu Sufian to the Dargah of
Khwaja Moinnuddin Chisti of which the assessee was Khadim. The circumstance that it was
given on account of realisation of the bad debt which had been written off and was realised
because of the blessings of Khwaja Saheb shows the faith of the person in Khwaja Saheb. The
amount, which has been received by the assessee was not directly related to the exercise of the
profession/vocation but was incidentally connected with the profession as Khadim carried on
by him.

11. The finding which the Tribunal has recorded in this case is that it is not a case where the
donor was benefited from any preaching or discourse or any special service of the assessee, but
it is a case where the donor on his own noticed some supernatural power in the assessee and
being influenced by that he decided to earmark the pounds equivalent to the amount for making
the payment to the assessee. It was observed that it is a clear case of voluntary payment made
to the assessee for his personal qualities or as a mark of the high esteem and regard in which
the assessee was held by the donor. There is not an iota of evidence to link the impugned
payment with the routine and ordinary services rendered by the assessee as Khadim to the
donor. The finding which has been recorded is one of fact and has not been challenged. It was
open to the Revenue even to challenge the finding which has been recorded by the Tribunal on
any ground including that they are perverse. No such steps were taken to challenge the finding
of fact recorded by the Tribunal. It has nowhere been established that the gift had any relation
with the service rendered. It may be the basis of acquittance but cannot be considered as having
any link or reference, traceable to the vocation which the assessee was performing as Khadim

ALL SAINTS CHURCH V CIT 1984

The assessee, as the name implies, is a church. For the assessment year 1975-76, the assessee
claimed depreciation of Rs. 18,399 in respect of the church building. The ITO disallowed the
claim on the ground that the depreciation could be allowed while computing the income under
the head "Profits and gains of business or profession" and the church cannot be said to carry
on any business or activity for profit.

If the padre or parson in a church or a poojari in a temple or granthi in a gurudwara is employed,

he would be earning salary income. It is impossible to visualise that a church, a temple or a
gurudwara which ministers to the needs of the religious followers of those faiths itself is
running a business or vocation.—held by tribunal

contended that there is no dispute that the assessee-trust is the owner of the church building
and the church is engaged in a vocation like delivering sermons and preaching Bible which are
the integral part of the church although they are being conducted by the Chaplain or the
Presbyter-in-charge appointed by the Diocese whose head is the Bishop. He also contended
that, regard being had to the activities of the church, it can safely be said that the church is
engaged in the vocation.
Sub-section (36) of s. 2 defines "profession" as including "vocation". Even the dictionary
meaning of the word "vocation" is "person's trade or profession". The activities of the church
to which we have earlier adverted could, therefore, be properly considered as vocation.
In P. Krishna Menon v. CIT , the Supreme Court observed that the teaching of "Vedanta"
could be considered as a vocation. This decision has not been relied upon by the Tribunal, but
we see no reason why the ratio cannot be applied to the present case. The preaching of sermons
in the church by the representative of the church cannot be different from the teaching of
"Vedanta" or "any other teaching". The teaching or preaching may be done by a representative
or an employee of the church. No matter who dies it, so long as it is considered to be an integral
part of the church. The disciples go to the church and not to the person who teaches or preaches.
The activities of the church must, therefore, be considered as vocation. The assessee, is
therefore, entitled to depreciation in respect of the church building while computing the taxable
income.

NIRMALA P ATHAVALE V ITO 2008

FACTS: The assessee, a well known social reformer and philosopher and having lakhs of
followers spread all over the world had established a movement called 'Swadhyaya' for the
upliftment of the masses which was joined by great number of followers. The assessee had
devoted his whole life to the cause of this movement and had never charged any fee or
remuneration from his followers or the persons who attended his lectures at any point of time.
During the relevant previous year, the assessee had received voluntary gifts of certain sum on
his 80th birthday from his admirers and well wishers in recognition of his personal qualities
and noble thoughts and claimed the same to be exempt from taxation. The Assessing Officer
held that conducting spiritual discourses amounted to a vocation and, hence, the provisions of
section 28(iv) were squarely applicable to the instant case. The Assessing Officer, therefore,
treated the amount of gifts received by the assessee as his income from profession and brought
the same to tax
assessee was working tirelessly and restlessly over 50 years for the upliftment of the masses
both on economic as well as spiritual front.
It is also noted that the assessee has devoted his whole life to the cause of this movement. It is
also noted that assessee has never charged any fee or remuneration from his followers or the
persons who attended his lectures at any point of time. In this background, we find sufficient
force in the contention of the assessee that it was movement or campaign and not a vocation.
Having stated so, however, even if it is treated as vocation then, having regard to the fact that
assessee never charged any fee or remu-neration for his imparting of knowledge and practicing
of values based on "Shrimad Bhagawat Gita" and also the fact that the assessee did not have
any vested right to receive any kind of payment for these activities from his disciples/followers,
hence, the gift made by the followers, without being under any contractual or legal or
customary obligations, cannot be treated as a consideration arising out of carrying of vocation.
We would further like to add that as far as provisions of Income-tax Act is concerned every
receipt is not income though the term 'income' has been defined in an inclusive manner, hence,
such receipt must necessarily fall under the specific charging provisions. The Revenue
Authorities have applied the provisions of section 28(iv) of the Act wherein it is provided that
any benefit or perquisite arising out of exercise of business or profession would be treated as
income. These two words have been used in this provision i.e.,'benefit' or 'perquisite' and other
condition is that such benefit or perquisite should arise out of exercise of business or profession.
In the facts of the case, the Revenue has not established conclusively that the amount of gift
arose to the assessee as a consequence of exercise of vocation because such gifts have got no
element of consideration being paid for services obtained by the followers/disciples. It is also
noted that both the words 'benefit' and 'perquisite' refer to specific situations wherein, generally
receipt of revenue nature having attributes of income would be covered and such attribute
should exist from very beginning. To illustrate this aspect, we state that where a gift is made
in lieu of paying consider- ation for services obtained and this fact is established, then, such
amount of gift can fall within the provisions of section 28(iv) of the Act
From the perusal of above, it is clear that in the present case there is no intention of
circumvention of income on the part of assessee or receiving income in other forms, hence,
provisions of section 28(iv) of the Act cannot be applied. We would further like to add that the
term 'perquisite' as per Blacks Law Dictionary means "privilege or benefit given in addition to
one salary or regular wages" which means that it is an additional benefit and not a complete
substitution of one's income. As stated earlier that assessee has never charged any consideration
from his followers, hence, on the basis of above meaning it cannot be termed as 'benefit' or
'perquisite' within the meaning of section 28(iv) of the Act. There is one more reason which we
would like to specifically mention i.e., that the assessee has taken gift earlier only once and
that too some 25 years back and at that time, the department has not charged the same to tax in
completing the assessment proceedings under section 143(3) of the Act and during those
assessment proceedings, the then followers who made the gifts clearly stated that those gifts
had been given out of personal regard and respect to the qualities of the assessee. In this year
also, the same is the position and the Revenue has not brought on record any material to prove
otherwise. Thus, in view of above discussion, we hold that these gifts are not of the nature of
any benefit or perquisite as contemplated under section 28(iv) of the Act. Accordingly, we
delete the addition made by the Assessing Officer.

Ms subbulakshmi v CIT

Cit v. Lahore electric supply co ltd—section 37

Government acquired the electric supply undertaking belonging to the assessee-company. The
company delivered all assets to the Government. The company received a part of the moneys
payable to it, leaving a large amount due to be paid later after the listing valuation of its assets.
The Company invested these moneys in Government securities and shares, and, received
income from these investments.
for the assessment years 1948-49 and 1949-50, the company claimed deduction of various
amounts under section 10(2)(xv) on the basis that it had been carrying on business and the
expenses had been incurred solely for the purpose of that business
Whether, on the facts and in the circumstances of the case, the conclusion of the Appellate
Tribunal that the assessee-company had not ceased to carry on business during the relevant
accounting period is, in law, correct?
None of the above grounds led to the conclusion that the company intended to carry on
business. The mere fact that the company had not gone into liquidation would not establish
that it had the intention to do business. There was further no question of the company's
going into liquidation in the accounting years, for, during that time it had not received from
the Government the entire amount due to it as compensation for the said acquisition. At the
relevant time the company was not possessed of any commercial undertaking. It was
unnecessary to go into the question whether an expression of an intention to resume business
in vacuo would amount to carrying on business. It was sufficient for the purpose of this case
to state that even an intention to resume business had not been established.
Therefore, the business was closed and the company had not established an intention to resume
it. That would be enough to show that no business was carried on and it would be irrelevant to
enquire whether the business was permanently closed.
The facts that the company had to pay the Government half share of the profits between 27-11-
1942, and 5-9-1946 and that it had to return to the consumers the deposits made by them would
not indicate that it was carrying on a business. It would be laying down strange law to hold
that where a business had in fact ceased to be run, it must be deemed as continuing because
the outstanding liabilities of that business had not been liquidated. Business as contemplated
by section 10 is an activity capable of producing a profit which can be taxed. Payment of
outstanding liabilities was not an activity which could ever produce such a result. It could
not be said, therefore, that because liabilities of a closed business were outstanding, it had to
be held that either the business was continuing or that an intention to resume business must be
inferred. Hence, the company had ceased to carry on business, and the Tribunal's conclusion
to the contrary was incorrect.
There is a co which dealt with distribution of electricity. Government acquired it and paid them
compensation. The co opted for investment in govt securities sand shares and whatever amount
generated through this investment was utilized on carrying forward the staff.
The moment they file the return under b&p, AO refused it stating that there was no b&p in the
previous year.

What is business?
Coz co had no entered into insolvency therefore co is a co and they must file their return under
b&p is the argument put form by the co.

What is the test to identify b&p?

SC held that this is not a case of business coz there is no business happening in the previous
year and once the co closed itself the money received is not from business but from the
investments made in government shares and securities. There has to be a going concern with
profits made to amount to business.

In the previous assessment year, no business occurred. They received compensation and
income generated from investment is to carry forward the sales staff. It was not utilized in
business concern.

Voltech engineers v. deputy commissioner of income tax

The question therefore before us is whether the expenditure on ERP software is in the nature
of revenue expenditure or in the capital field, yielding an enduring benefit to the assessee
The law in the matter is trite, so that where the same forms a part of the profit making apparatus,
a tool of the business, or addition thereto, it would be a capital asset.
Clearly, therefore, ERP is, functionally speaking, a tool, a part of the profit- making apparatus,
of the business, for enabling it's management and operations in a manner not possible or
feasible otherwise, improving productivity in short. The assessee has not placed any material
on record at any stage to exhibit or substantiate its case, nor has in any manner rebutted the
findings by the Revenue or impugned the reliance/s made by it

Agra beverages corporation v cit 2011

the assessee is the franchisee of M/s. Pepsi Food (Pvt.) Ltd. (hereinafter referred to as 'Pepsi').
Under the franchisee agreement, the assessee was manufacturing Pepsi brand of soft drinks.
Pepsi had entered into a lease agreement with M/s. 20th Century Finance CorporationLtd. for
lease of visi coolers. Pepsi was paying the hire charges to the said 20th Century
Finance CorporationLtd. These coolers were installed with the various franchisees including
the assessee in the areas falling within the territory allocated to the assessee. For this purpose,
Pepsi claimed and received from the assessee its share of hire charges amounting to Rs.
3,45,177. This amount was, thus, paid by the assessee to Pepsi reimbursing Pepsi the lease
charges which Pepsi had paid to the 20th Century Finance Corporation Ltd. The assessee had
claimed the same as business expenditure under section 37 of the Income-tax Act (hereinafter
referred to as 'the Act'), which was disallowed by the Assessing Officer (Assessing Officer) as
well as CIT(A).
The ground of disallowance was that the assessee could not produce any agreement entered
into between it and Pepsi in order to substantiate the claim of these hire charges. The Income-
tax Appellate Tribunal (in short 'the Tribunal') reversed this decision of the Assessing Officer
and CIT(A), inter alia, recording that it was not disputed that the coolers were in fact hired by
Pepsi and as per the agreement with the 20th Century Finance Corporation Ltd., the coolers
were installed in the premises of various distributors including in the premises of the assessee.
It was also not in dispute that the amount of Rs. 3,45,177 in respect of coolers installed in the
territory assigned to the assessee, was, in fact, paid by the assessee to Pepsi. So much so, Pepsi
had given a certificate to this effect confirming that the aforesaid charges were recovered by it
from the assessee in respect of visi coolers.
3. In these circumstances, we are of the opinion that the Tribunal rightly allowed this claim as
business expenditure which could not be denied merely on the ground that there was no written
agreement between Pepsi and the assessee for payment of the aforesaid amount. The amount
is represented as hire charges for the coolers which were installed in the premises of the
assessee and it would be clearly business expenditure.
https://www.taxmann.com/filecontent.aspx?Page=CASELAWS&isxml=Y&id=10101000000
0029705&search=Agra+Beverages+Corporation&tophead=true

) Whether the claim of deduction under section 37(1) of the Act by the assessee for the
expenditure incurred in "advertisement and publicity" of the products of Pepsi, in spite of the
fact that the assessee was merely a bottle and had no right in the goodwill and trademark of
Pepsi and since the said expenditure was benefiting to Pepsi and not to the assessee was
correct?"
Referring to the judgment of Supreme Court in the case of Sassoon J. Davis & Co. (P.)
Ltd. v. CIT [1979] 118 ITR 261 / 1 Taxman 485 the Tribunal opined that by advertising the
product, the trademark and trade brand of Pepsi have been benefited and that would be of no
consideration to deny the assessee deduction of the expenditure incurred by it.
n Sassoon & J. Davis & Co. (P.) Ltd. case (supra), the Supreme Court categorically held that
when the expenditure is incurred for promoting the business to earn profits merely because
from the said expenditure, some third party has benefited, cannot be a reason to disallow the
expenditure. Instead of analyzing that judgment in detail, our purpose would be served by
referring to a Division Bench judgment of this Court in CIT v. Dalmia Cement (P.) Ltd. [2002]
254 ITR 377 / 121 Taxman 706 , wherein the judgment of Supreme Court in Sassoon case
(supra) and some other judgments are taken note of, analysed and the principles laid down
therein are succinctly culled out. Examining and interpreting the provisions of section 37 of
the Act, the Court expressed that the true import of the expression "wholly or exclusively"
appearing in section 37 of the Act would not mean "necessarily". Ordinarily, it was for the
assessee to decide whether any expenditure was incurred in the course of its business. Such
expenditure may be incurred voluntarily and without any necessity and if it is incurred for
promoting the business and to earn profits, the assessee can claim deduction under relevant
provision even if there was no compelling necessity to incur such expenditure. The fact that
somebody, other than the assessee is benefited by the expenditure should not come in the way
of an expenditure-being allowed by way of deduction under section 37 of the Act, if it otherwise
satisfies the tests laid down by law.
7. The Court went into the legislative history of section 37 of the Act and pointed out that
though in the Income-tax Bill, 1961, in the original section 37, as per the draft, the word
"necessity" appeared was ultimately omitted and instead replaced by the word "ordinarily".
Thus, for allowing the expenditure incurred under section 37(1) of the Act, the conditions
which are to be satisfied are :—

(a) there must be expenditure,

(b) such expenditure must not be of the nature described in sections 30 to 36 of the Act,
(c) the expenditure must not be in the nature of capital expenditure or personal expenses
of the assessee,
(d) The expenditure must have been laid out or exclusively for the purposes or
profession.
8. It was clarified by the Division Bench that the word "wholly" refers to quantum of
expenditure while the word "exclusively" refers to the motive, objective and purpose of the
expenditure
When we apply the aforesaid test to the facts of this case, it becomes manifest that all the
ingredients laid down in section 37(1) of the Act are satisfied. It is not in dispute that the
expenditure is, in fact, incurred. The Assessing Officer or the CIT(A) did not question the
amount incurred by the assessee on the advertisement. It is also not the case of the revenue that
the expenditure is of the nature described in sections 30 to 36 of the Act. The expenditure is
not capital expenditure or personal expenditure of the assessee either. It is also clear that the
entire quantum of expenditure was for the purpose of business and, therefore, it is wholly for
the purpose of business. We are also of the opinion that the expenditure was exclusively
incurred for the purpose of the business and promote the sales by the assessee. Therefore, it
was incurred wholly or exclusively for the purposes of business.
9. The agreement entered into between the assessee and Pepsi shows that the assessee was
given a particular territory in Haryana, boundaries whereof are specifically defined in the
agreement for the purposes of bottling, selling and distributing of the beverages. This entire
territory within which the assessee was to operate, the assessee was not only supposed to bottle
the beverages, it was also given rights to sell and distribute the project of the Pepsi in the
defined territory during the currency of the said agreement. Naturally, therefore, in order to
augment its profits in the said territory, it was the business decision of the assessee to advertise
and publicize the product for maximizing its sale. The expenditure was, thus, incurred by the
assessee for its own benefit. Clause 18 of the agreement authorized the assessee to undertake
appropriate advertising and sales promotion activity for the beverage. If in the process, Pepsi
or its trademark also benefited, that would not militate against the assessee as far as claiming
the deduction under section 37 of the Act is concerned, once all the characteristics of the said
provision stood satisfied.

he word ‘capital’ connotes permanent and capital expenditure is, therefore, closely akin to the
concept of securing something tangible or intangible property or for corporeal right so that
they could be of lasting or enduring benefit to the enterprise in issue. Revenue expenditure, on
the other hand, is operational in its perspective and solely intended for the furtherance of the
business of the enterprise. f the expenditure is so related to the carrying on or the conduct of
the business that it might be regarded as an integral part of the profit-making process, it should
be held to be revenue expenditure.

several tests laid down to draw a distinction netween capital or revenue expenditure
EASRLY TEST: fixed capital and circulating capital.
Fixed capital is what the owner turns to profit by keeping it in his own possession;
circulating capital is what he makes profit of by parting with it and letting it change masters.
While it is an easy test and may be applied in a number of cases, yet there are situations in
which the test cannot be applied without more
An attempt was made by Lore Dunedin in Vallambrosa Rubber Co. Ltd. v. Farmer 5 TC 529
to lay down a test. He said, "Now, I do not say that this consideration is absolutely final or
determinative, but in a rough way, I think, it is not a bad criterion of what
is capital expenditure, as against what is income expenditure, to say that capital expenditure is
a thing that is going to be spent once and for all, and income expenditure is that which is going
to recur every year".
But this test was also found to be deficient. Rowlatt, J. observed " I take it and indeed both
sides agree, that no stress is laid upon the words ‘ every year’, the real test is
between expenditure which is made to meet a continuous demand, as opposed
to expenditure which is made once and for all"; Ounsworth 6 TC 674.
The test was also criticized by Viscount Cave, LC in Atherton v. British Insulated & Helsby
Cables Ltd. 10 TC 155, where the Lord Chancellor said that the test of recurrence was not a
decisive one, for it was easy to imagine many cases in which a payment though made once and
for all would be properly chargeable against the receipts for the year, for
instance, expenditureon gratuity paid to a reporter on his retirement
New test: after saying this, Lord Cave himself laid down a new test which continues to hold
the field till today, but which again has not escaped criticism. Lord Cave said, "When
an expenditure is made not only once and for all, but with a view to bringing into existence an
asset or an advantage for the enduring benefit of a trade, I think, that there is very good reason
(in the absence of special circumstances leading to an opposite conclusion) for treating
an expenditure as properly attributable not torevenue but to capital.

Here, Lord Cape’s judgement was taken into consideration (it was not considered in
Travancore Cochin case). His test was that once a payment is made and its benefit is forever
then it would be a long and enduring benefit. It is presumed that it would be capital expenditure.
Empire Jute held that the economic realities of 1926 were different from the conditions in 1965.
The test of 1926 would not be sufficient. Therefore, long and enduring test was devised.
Till 1926, the only test was fixed/circulating capital. After that, long and enduring benefit has
also been added.

Ashaben rohitbhai v. CIT 1999

The assessee kwas working as MD in xxx companyand was getting salary for the same.

One of the questions, which arose for consideration, was as to whether the remuneration
received by her would be treated as her substantive income under the proviso to section
64(1)(ii) of the Income-tax Act, 1961 ('the Act') or that it should be considered as income
of her husband Rohitbhai.

Experience should include experience acquired in the course of technical or professional

qualifications.

In the instant case, it was the case of the assessee that even before she was appointed as
Managing Director in McGaw-Ravindra Laboratories (India) Ltd., she had worked as
Managing Director in two companies in the past, and that she had sufficient professional
qualifications and experience within the meaning of the proviso to clause (ii) of section 64(1).

From the above decisions, it is clear that before benefit of the proviso is claimed, certain
conditions must be fulfilled. A spouse must possess technical or professional qualifications and
the income must be derived by such spouse from the application of technical or professional
knowledge and experience, i.e., the income must be solely attributable to the application of
such knowledge and experience. The authorities and the Tribunal held that since the assessee
was not holding necessary qualifications, the case could not be said to have been covered by
the proviso and she was not entitled to benefits thereof. The contention on behalf of the assessee
is that to invoke the benefit of the proviso, it is not necessary that a person must hold a degree
or diploma, if such is not the requirement of law. In this connection, heavy reliance was placed
on Batta Kalyani's case (supra). In that case, the assessee was running a hardware and paint
shop. She employed her husband to manage the business and paid him salary.
It is also on record that she was having a Master's degree (M.A.). It is not even the case of the
revenue that any degree or diploma is required for the post of Managing Director either under
the Companies Act or under any other law.
in the light of all these facts, it cannot be said that the case does not fall under the proviso to
clause (ii) of sub-section (1) of section 64, particularly when the nature of work did not require
any statutory qualification and that she was having experience as Director, Chairperson and
also as Managing Director in the past in some companies and the CLB had also permitted
increase in her salary. In our opinion, therefore, the first part of the proviso can be said to have
been complied with.
So far as the second part is concerned, there is no finding against the assessee that the income
was not solely attributable to the application of her technical or professional knowledge and
experience.
Fllowed batta kalyani case

Shah e naaz judge v. additional director of income tax 2018 delhi high court
A search and seizure operations under section 132 was carried out at the residential and
business premises of one, KSJ who was the first cousin of assessee, SJ. During the search, keys
of three lockers in DSDCL in the joint names of the assessee and her sister was found and
seized.
Three petitioners are not mentioned and their involvement is not alluded to and alleged. The
petitioners have stated that they do not have any commercial, business or financial relation
with Karamjit Singh Jaiswal, Jaiswal Group or business entities managed by them.
On 27th June, 2014, search warrant was issued in the names of Nagina Judge, Shah-E-
Naaz Judge, her husband Sandeep Kohli and her daughter Sahyr Kohli in respect of three
lockers.
On opening, locker Nos. 7712-D and 7637-A were found to be empty. Accordingly, nothing
was seized and recovered. In locker No. 7325-A in the name of Nagina Judge and Shah-E-
Naaz Judge, jewellery worth Rs. 49,73,295/- was found. Nagina Judge was questioned and her
statement on oath under Section 132 (4) of the Act was recorded on 27th June, 2014.
Nagina Judge had confirmed that she was a Non-Resident Indian residing in the United
Kingdom. For the last 2-3 years, she had been filing her wealth tax and income tax returns in
India
In Pooran Mal v. Director of Inspection (Investigation) [1974] 93 ITR 505 (SC), constitutional
and legal validity of Section 132 was upheld relying on the inbuilt safeguards in the section
itself including the condition that exercise of this power of search and seizure can follow only
on a reasonable belief being entertained by an officer that any of the three conditions mentioned
in clauses (a), (b) and (c) to Section 132(1) are satisfied. These reasons have to be recorded in
writing before authorization is issued to the officer to conduct search and seizure. The Supreme
Court observed that the provisions were evidently directed against persons who are believed
on good grounds to have illegally evaded the payment of tax on their income and property.
Drastic measure to get at such income and property for recovery of government dues were
justified and required. The search and seizure provisions were reasonable restrictions and curbs
on the freedoms mentioned under Article 19 (1)(f) and (g) of the Constitution.
The aforesaid legal position, viz., on the statutory mandate to record "reasons to believe" and
their nexus with the three pre-conditions in clauses (a), (b) and (c) to Section 132 was thereafter
emphasized and elucidated by the Supreme Court in DGIT (Investigation) v. Spacewood
Furnishers (P.) Ltd. [2015] 57 taxmann.com 292/232 Taxman 131/374 ITR 545 which also
refers to an earlier decision of the Supreme Court in ITO v. Seth Bros. [1969] 74 ITR 836
The satisfaction note dismally ignores the statutory mandate and requirements of clauses (a),
(b) and (c) of Section 132(1) of the Act. Note begins by referring to the factum that residential
premise of Karamjit Singh Jaiswal was subjected to search on 10th June, 2014. Thereafter, it
states that information had been received that three bank lockers were being maintained in
Delhi Safe Deposit Co. Ltd. at Janpath, New Delhi. Without referring to any "information" in
the form of material and evidence, the note proceeds to imprudently and on pretence record "In
my opinion, the lockers may contain valuables such as cash, jewellery, FDRs and other
important documents, etc, which represent either wholly or partly income or property not
disclosed for the purpose of Income Tax Act, 1961, even if, summons u/s 131 of the I.T. Act,
are issued to them." The satisfaction note woefully forms the negative conclusion and finding
without referring to material and evidence that had led and prompted the author to reach the
denouncement. Use of the word "may" to presume presence of undisclosed assets in the locker,
given the absence of reference to even a single shred of evidence and material to justify the
inference, reflect and establishes supine indifference to the statute and constitutional guarantee
that "right to privacy" should not be impinged and violated on mere posturing and
pretentiousness. The first paragraph does not elucidate the information and details available
with the authorities
The satisfaction note is precipitously silent on any business connection, link and association
between the petitioners and the Jaiswal Group or Karamjit Singh Jaiswal, who had been subject
to search and seizure operations
Accordingly, we have no hesitation in holding that the three "consequential" warrants of
authorization issued in the name of persons and lockers for search/seizure, therefore, do not
meet the mandate and requirement of clauses (a), (b) and (c) of Section 132 of the Act
In the present case also, there was time gap between the date of search on 10th June, 2014, i.e.,
the date of the seizure of locker key, and the date of authorization i.e. 27th June, 2014.
No questions were asked with regard to the locker.

The warrants of authorization were struck down observing that the respondent authorities had
failed to disclose the material and information on the basis of which they had entertained the
belief recorded that the lockers contained money, jewellery, valuables and other articles
representing disclosed income.
Notwithstanding use of the expression "reason to suspect" in clause (i) to Section 132 (1) of
the Act, the Supreme Court in its earlier judgments in Seth Brothers (supra), Pooran
Mal (supra) and Spacewood Furnishers (P.) Ltd. (supra) has consciously emended to the effect
that satisfaction in the form of "reasons to believe" is required and mandated by law.
The expression "reasons to suspect" used in clause (i) and sub-section (1A) to Section 132 is
not to dilute the requirement of "reasons to believe" but to only clarify that on occasions
authorities will not know the exact location or the place where the offending books of account,
money, bullion etc., may be kept for which consequential warrant of authorization can be
issued.

We are conscious and aware that "such" documents, articles etc. can be hidden off and
kept with third parties and clandestinely concealed at different places and locations to
prevent seizure and hamper investigation. It is in this context that a Division Bench of
this Court in Strategic Credit Capital (P.) Ltd. v. Ratnakar Bank Ltd. [2017] 395 ITR 391/81
taxmann.com 408 had observed that Section 132 (1) of the Act envisages that a person
could be in possession of undisclosed income not only in his or her own bank account but
in the bank account of someone else. Thus, the legislature had deliberately used the word
"any" to preface safe, locker, place, books of accounts and not "his" "her" or "its".
Therefore, in a given case, the satisfaction note which records reasons to believe could
also record the reasons why a third person is being searched not for his own income,
books of account etc. but because he has in his custody the books of account, money,
bullion etc. belonging to a third person, who is subjected to search.