Commissioner of Excess Profits v. Sri Lakshmi

The expenditure incurred by a company carrying on the manu- facture and sale of textile goods in registering for the first time its trade. marks which were not in use prior to the 25th January,, 1951 .Commissioner of Income Tax, Bombay v • . Finlay Mills Ltd. 12 SUPREME COURT REPORTS [ 1952] Indian 1937, is revenue expenditure and an allowable deduction under Sec. 10 (2) (xv) of the Income-tax Act. The fact that a trade mark after registration could be separately assigned and not the business only, does not n1ake the as a part of the goodwill of expenditure for only an capital registration facility given to the owner of the trade additional and incidental mark; it adds nothing to the trade mark itself. expenditure. It Judgment of the Bombay High Court affirmed. Commissioner of lncome~tax, Bonibay v. The Century Spinning and Weaving and Manufacturing Co. Ltd. ([1947] 15 l.T.R. 105) approved. British Insulated and Helsby Cables Ltd. v. Atherton ([1926] A. C. 205), Southern v. Borax Consolidated Ltd. ([1942] 10 l.T.R. Supp. 1), Henriksen v. Grafton Hotel Ltd. ([1942] 2 K. B. 184) referred to. ' ' Civ1L APPELLATE JuR1smcTioN : Civil Appeal No. 103 of 1950. Appeal from a Judgment of the Bombay High Court (Chagla C. J. and Tendolkar J.) dated 25th March, 1949, in Income Tax Reference No. 31 of 1948. M. Attorney-General ( G. N. Joshi, with him) for the appellant. Setalvad, C. India R. /. Kolah, for the respondent.

#1951. Oct. 1. The Judgment of the Court was delivered by to it by KANIA C. J .-This is an appeal from a judgment of the High Court at Bombay and it arises out of the opinion expressed by the High Court in respect of a question submitted the Income-tax Tribunal. The material facts are these. The respondent is a tex- tile mills company carrying on the business of manufac- . For the assessment textile goods. turing and selling years 1943-44 and accounting 1944-45, covering periods ending with the calendar years 1941, 1942 and 1943, the respondent claimed the expenditure incurred by it in registering for the first time its trade marks which were not in use prior tp the 25th February, 1937, as revenue expenditure and an allowable deduction out of its income for the said periods, under section 10(2) (xv) of the Indian Income-tax Act. Following the in Commis decision of the Bombay H'igh Court $ioner of Income-tax, Bombay v. The Century Spinning ' t t - $.C.R. SUPREME COURT REPORTS 13 ,and Weaving and Manufacturing Co. Ltd.(1), the Tri- bunal allowed the claim of the assessee. At the desire :of the appellant, the Tribunal submitted the following ;.question for the opinion of the High Court :- incurred by "Whether, on the facts of the expendi- the case, the assessee company in Jegistering for the first time its trade marks which were not in use prior to the 25th February, 1937, is revenue expen- ;diture and an allowable deduction under section 10(2) ,{xv) of the Indian Income-tax Act?" The High Court, following its previous decision and finding that the fact of the trade marks having come the 25th of February, 1937, made no into use after ... d'ifference in the result, answered the question in the affirmative. The Commissioner of Income-tax, Bom- -·bay, has come on appeal to us. 1951 Commissioner of I ncorne Tax, Bombay v. Finluy Mills Ltd. Kania.C. f. a laid down in British the appellant · It was argued on behalf of _question whether certain disbursement was of a • capital or revenue nature, has to be decided according Insulated and -to the principle J Helsby Cables Ltd. v. Atherton(2). In that case the com- : pany which carried on the business of manufacturers of "' · 1nsulated cables established a pension fund for its clerical and technical salaries staff. The fund was constituted · by a trust deed which provided that members should _,contribute a percentage of their salaries the fond and that the company should contribute an amount ~equal to half the contributions of the members; and further that the company should contribute a sum of · ,£31,784 to form the nucleus of the fund and to prov~de the amount necessary in order that past years of service -+ _.of the then existing staff should rank for pension. That . sum was arrived at by an actuarial calculation on the ···basis that sum would ultimately be exhausted . when the object for which it was paid was attained. · The House of Lords held that this payment was in the therefore not an , .admissible deduction. Although the opinions ex- 1;Pressed by the different members of the House of Lords , . . nature of capital expenditure and was (1) [1?47] 15 I.T.R. 105. (2) [1926] A.C. 205. ~. ·. .;1- 1951 Commissioner of Income· Tax, Bombay v. Finlay Mills Ltd. Kania C. /. 14 SUPREME COURT REPORTS [1952t the purposes of the line of approach is not completely the same, the principle stated by Lord Cave in his speech has been accepted as a safe test to distinguish capital expendi- It was recognised that ture from revenue expenditure. a sum of money expended, not of necessity and with a view to a direct and immediate benefit to the trade, but voluntarily and on the grounds of commercial ex- pediency, and \n order indirectly to facilitate the carry- ing on of business, may yet be expended wholly and exclusively for the trade. The Lord Chancellor observed that the question appeared to be a question of fact which was proper to be decided by the evidence brought before the Commissioners upon them in each case. The test that capital expenditure is a thing that is going to be spent once and for all and income expendiure 1s a thing that is going to recur every year was considered an useful element in arriving the decision but was not certainly the decisive fact. The Lord Chancellor observed as follows :-"But when an expenditure is made, not only once and for all, but into existence an asset or an with a view to bringing advantage for the enduring benefit of the trade, I think that there is very good reason for treating such an ex- penditure as properly attributable not to revenue but to capital." ' ' In order to appreciate the true position here correctly it is next necessary to notice the relevant provisions of the Indian Trade Marks Act, 1940. It may be noted that before this Act there was no Trade Marks Act in India b'ut it was recognised that .an action lay for infringement of a trade mark independently of an action for passing off goods. The Act opens with the pream- ble "whereas it is expedient to provide for the regist- ration and more effective protection of trade marks ...... " Section 2(1) of the Act defines a trade mark as meaning "a mark used or proposed to be. used relation to goods for the purpose of indicating or so as to .indicate a connection in the course of trade between the goods and some person having the right to use the mark, whether with or without any indication of the identity of Section 14 permits that · person." • 1951 Commissioner of Income Tax, Bombay v. Finlay Mills Ltd. Kania C. f. S.C.R. SUPREME COURT REPORTS 15 proprietor of a trade mark to ·have the trade mark re- gistered. The Attorney-General, on behalf of the appel- lant, relied on sections 20, 21, 28 and 29 in support of his contention. He argued that before the Trade Marks the proprietor of a trade mark could Act, although maintain an action for infringement of his trade mark and the cause of action in such a case was quite differ - ent from the cause of action in an action for passing off goods, by the Trade Marks Act the right oif the owner of the trade mark is increased by section 21, and it is made assignable independently of the goodwill under sections 28 and 29 of the Trade Marks Act. The ques- tion thus resolves itself into whether by reason of these two incidents· the case falls within the principle down by Lord Chancellor Cave, as mentioned above. fail. expenditure. It was argued thereunder were In our opinion, the contention urged on behalf of the It is not contended that by the appellant must Trade Marks Act a new assets has come into existence. It was contended that an advantage of an enduring nature had come into existence. just as machinery may attain a higher value by an im- plementation causing greater productive · capacity, the present case the trade mark which existed before the Trade Marks Act acquired an advantage of an enduring nature by reason of the Trade Marks Act and in the ·the fees paid for registration nature of capital analogy is fallacious. The machinery which aquires a greater productive capacity by reason of its improve- ment by the inclusion of some new invention naturally becomes a new and altered asset by that process. So long as the machinery lasts, the improvement continue~ to the advantage of the owner of the machinery. The replacement of a dilapidated roof by a more substantial roof stands on the same footing. The result however of the Trade Marks Act is only two-fold. By regis- tration, the owner is absolved from the obligation to It is treated prove his ownership of the trade mark. as prim a f acie proved on production of the registra- tion certificate. It thus merely saves him the trouble of leading evidence, in the · e\rent of a· suit~ · in a court In our opinion, 2-2 S. C. india/71 • ,/ • 1951 C-ommissioner of Income Tax, Bombay v. Finlay Mills Ltd. Kania C. J. 16 SUPREME COURT REPORTS [1952] incurred by a that expenditure to make payment In this connection of law, to prove his title to the trade mark. It has been said that registration is in the nature of collateral security furnishing the trader with a cheaper and more direct remedy against inf ringers. Cancel the registra- tion and he has still his right enforceable at common In our law to restrain the p'iracy of his trade mark. opinion, this is neither such an asset nor an advantage registration a capital it may be useful expenditure. company notice is not considered expense defending title to property In Southern (H. M. Inspector of of a capital nature. Taxes) v. Borax Consolidated Limited('), it is stated that where a sum of money is laid out for the improvemer.t of a fixed capital asset ~cquisition or the to capital, but 'if no alteration 1t 1s attributable made in to revenue, being in sub- stance a matter of maintenance, the maintenance of the capital structure or the capital asset of the com- pany. In our opinion, the advantage derived by the the trade mark by registration falls within owner of this class of expenditure. The fact that a trade mark after registration could be separately assigned, and not as a pan of the goodwill of the business only, does not a capital the expenditure for registration also make expenditure. That is only an additional and incidental facility given to the owner of the trade mark. It adds nothing to the trade mark itself. the fixed capital asset by the payment, is properly attributable thus possess required of an expenditure In the judgment of the High Court some emphasis is laid on the fact that by reason of registration the duration of the tra<le mark is only for seven years, and that permanency which is it does not ordinarily to make it a capital expenditure and in order to prove the existence of a benefit of an enduring character. The learned Attorney-General contended that the view that as benefit of registration lasted for seven year., i.e., for a limited period, it prevented the expenses of registra- is unsound treated as capital expenditure, tion being (1) [1942] 10 I.T.R. Suppl. 1. i ,. 1951 Comtp/~sion.er .qf l11cpme T.ax, /)o,11J.b.ay .y. Finlay Mills Lt,d. ~m;i_a C. /. S.C.R. :SUP:RE,ME cou1rr REPORTS 17 ':the the licensing fofilows:-"Whenever j'ustices when gran11ling .and for that contention he relied on He?Jriksei:z (Ins pector of Taxes) v. Grafton Hotel Ltd.(1). In that case ten.ants .of licensing premises by agreement with the landlord paid by instalment the monopoly value fo:;ed licence under section 14 of of the Licensing (Consolidation) Act, 1910. These were sought to be deducted revenue the Court. Lord expenditure but were disall0wed by Greene M. R. first considered that the payment foll into the same class as the payment of a premium on the grant of a lease or the expenditure on improve- ments to the property which justices may require to be made as a conditiqn of granting a licence. Having reached that conclusion he rejected the argument that the payment not being made in one lump sum but -by instalments made a difference in the character of the payment. H~ observed a licence is granted for a term, the payment is made as on a purchase of a monopoly for that term. When a licence is granted for a subsequent term, the monopoly value must be paid in respect of that term and so on. The payments are recurrent if the licence is renewed, they are not periodical so as to give them the quality of payments which ought to be debited to revenue account. The thing that is paid for is of a permanent quality although its permanence, being conditioned by is shortlived. A payment of this character appears the same to fall the grant of a class as the payment of a premium on admittedly not deductible." The lease, which these observations to point Attorney-General relied on out tha~ the permanence of the advantage was thus not dependent · on the number of years for which it was to enure for the benefi~ of the proprietor of the trade In our opinion, these observations have to be mark. read in the context in which they have been made. the Rolls was discussing only The the quest. Ion of payment .being made by instalments in ,the nature of the as not making any length of the term, learned Master of d,i,ffere1~ce to me (I) [1942] 2 K. B. 184. ) 1951 Commi'ssWner of Income Tax, Bombay v. Finlay Mills Ltd. Kania.C. /. 18 SUPREME COURT REPORTS [1952] therefore necessarily of a capital It was first held by him that the pay- expenditure. ment in question was of a capital nature and of the same character as premium paid on the grant of a, lease and was nature. Having come to that conclusion, he only rejected the contention that because the premium was paid in more instalments than one it lost its character of a capital is an entirely dif- expenditure. ferent thing from stating that the 'fact of the advant- age being for a limited time altered the character of in any way. As observed by Viscount the payment Cave L. C. the question is always one of fact depend- ing on the circumstances of e~h case 'individually . In our opinion, • In our opinion, the decision of the High Court re- ported in Commissioner of Income-tax, Bombay v. The Century Spinning and Weaving and Manufacturing Co. Ltd.(') is correct and in the present case also the contention of the appellant must fail. The appeal therefore fails and is dismissed with costs. Appeal dismissed. Agent for the appellant : P. A. Mehta. Agent for the respondent : R. A. Govind. (1) [1947] 15 I.T.R. 105. 1951 Oct. 4 BHIM SEN for R. S. MALIK MATHRA DAS v. THE STATE OF PUNJAB UNION OF INDIA-Intervener. PREM NATH for CH. HARBANS LAL fl. THE STATE OF PUNJAB BHIM SEN for RA TT AN CHAND fl. THE STATE OF PUNJAB ..