Section 10(2)(xv) of the Indian Income-tax Act, 1922

Section 10(2)(xv) of the Indian Income-tax Act, 1922 — the law in short

What the courts have decided on section 10(2)(xv) of the Indian Income-tax Act, 1922, in one screen. Read this first; open an entry when you need the facts, the reasoning and the source.

• Prakash Cotton Mills P Ltd v CIT Supreme CourtCuts both ways
  The AO disallowed a payment because the statute calls it a penalty. Does the label decide it?
  No. Where a statutory impost paid as damages, penalty or interest is claimed under s.37(1), the officer has to examine the scheme of the statute that imposed it and decide whether it is compensatory or penal in substance, whatever it is called. If it is purely compensatory the deduction must be allowed; if the impost is composite, the compensatory and penal parts have to be separated and only the compensatory part allowed.
• Empire Jute Co Ltd v CIT Supreme CourtHelps taxpayer
  I paid another mill to take over part of its production quota so I could run my plant for longer. The benefit lasts a while - does that make it capital expenditure?
  No, not on this reasoning. The Supreme Court held that the payment for loom hours was revenue expenditure allowable as a deduction. No new asset was created and nothing was added to the profit-making apparatus; the assessee was merely enabled to operate the same machine for longer hours. The enduring benefit test is not conclusive - what matters is the nature of the advantage in a commercial sense, and only an advantage in the capital field makes the outlay capital. An advantage that merely facilitates trading operations or allows the business to be run more efficiently or profitably, leaving the fixed capital untouched, is on revenue account even if it endures.
• Kedarnath Jute Manufacturing Co Ltd v CIT Supreme CourtHelps taxpayer
  I never made a provision in my books for the demand, and I am disputing it in appeal. Can I still deduct it?
  Yes. Whether a deduction is available is decided by the Act, not by what the assessee wrote or failed to write in the books, and not by the view the assessee takes of his own liability. A sales tax liability that had accrued on the demand being raised was deductible under the mercantile system even though no entry had been made for it and the assessment was under appeal.
• CIT v Ciba of India Ltd Supreme CourtCuts both ways
  I pay my foreign parent a percentage of sales for the right to use its patents, trade marks and know-how while our agreement runs. Is that revenue expenditure or capital?
  Revenue. The Supreme Court held the contributions paid by Ciba of India to its Swiss parent were allowable under section 10(2)(xv) of the 1922 Act. The assessee acquired merely the right to draw on the Swiss company's technical knowledge for a limited period in running its business; the Swiss company parted with no asset and the assessee acquired no asset or advantage of an enduring nature. The claim under the scientific research provision failed, because money paid to recoup another's research spending is not expenditure laid out by the assessee on research relating to its own business. A separate claim for a share of patent litigation costs also failed.
• CIT v Gemini Cashew Sales Corporation Supreme CourtHelps department
  Our firm dissolved and the business passed to the surviving partner. Can the firm deduct the retrenchment compensation that became payable to the workmen on that transfer?
  No. The Supreme Court held that Rs 1,41,506 debited as gratuity payable to workers was not allowable, either as a deduction in computing business profits under section 10(1) or as expenditure under section 10(2)(xv) of the 1922 Act. Liability to pay retrenchment compensation on a transfer of an undertaking arises on the transfer and not before; while the business continues the workmen's right is contingent, since a workman may resign, die or retire. The liability therefore arose not in the course of the business nor for the purpose of carrying it on, but from the transfer, and was not of a revenue nature.
• CIT v Malayalam Plantations Ltd Supreme CourtHelps department
  The AO says my expenditure did not earn me any income, so it fails s.37(1). Is that the test?
  No. 'For the purpose of the business' is wider than 'for the purpose of earning profits', and expenditure does not have to produce income to qualify. But the width has a limit that the same case supplies: the expenditure must be incurred by the assessee in his capacity as a person carrying on the business. Estate duty the company paid on the deaths of its non-resident shareholders failed that limit — it was paid as a statutory agent for someone else — and was not deductible.
• CIT v Shoorji Vallabhdas & Co Supreme CourtHelps taxpayer
  I credited commission in my books at the contracted rate but agreed during the year to take a lower rate. Am I taxed on the higher figure?
  No, on these facts. The Supreme Court held that where the agreement itself is altered during the previous year so that the income which accrued and was received is the smaller amount, the larger figure never resulted as income at all, and a book entry cannot make it taxable. Income-tax is a levy on income; the Act fixes two points of time, accrual and receipt, but the substance is the income. The Court distinguished income actually received and later given up, which may still be taxed, from income that never resulted.
• Haji Aziz and Abdul Shakoor Bros v CIT Supreme CourtHelps department
  Customs confiscated my imported goods and I paid a fine to get them released. Can I deduct that fine as a business expense?
  No. The Supreme Court held that a payment made as a penalty for a breach of the law is not expenditure laid out wholly and exclusively for the purpose of the business. A deduction must be a commercial loss, something within commercial contemplation; infraction of the law is not a normal incident of business. The Court rejected the argument that a fine paid in lieu of confiscation of the goods is different because it is levied against the stock-in-trade rather than the person: the distinction between a personal liability and a liability on the goods is not sustainable.
• Badridas Daga v CIT Supreme CourtHelps taxpayer
  My employee embezzled money from the business bank account. Can I write that off for tax?
  Yes, as a trading loss, provided the loss springs from the way the business is carried on. The Court refused the claim as a bad debt and refused it as expenditure, and then allowed it under the charging provision itself, because profits of a business cannot be computed without taking account of losses incidental to that business. The route matters: this is a deduction in computing profits, not an item of expenditure under s.37(1).
• Assam Bengal Cement Co Ltd v CIT Supreme CourtHelps department
  I pay an annual fee to keep competitors out of my area. It recurs every year, so is it revenue expenditure?
  No, not on these facts, and recurrence does not decide it. The Supreme Court held that annual protection fees of Rs 5,000 and Rs 35,000 paid to the lessor of limestone quarries, in return for undertakings not to let anyone else use limestone in the area for cement, were capital expenditure. What the company acquired was the right to carry on its business free of competition in the area - an advantage of enduring benefit for the business as a whole, not a working expense. The aim and object of the expenditure determines its character; the source and the manner of payment are of no consequence.

Listed strongest first: Supreme Court, then High Court, then Tribunal, then CBDT. Nothing here has yet been read in full by a chartered accountant — open an entry to see where it came from.