The Commissioner of Income Tax vs The Minsara Rasam Co., Ltd.

Beasley, C.J.—The petitioners here, a limited company registered under the Indian Companies Act carrying on business in the manufacture

and sale of ""The Minsara Rasam"" a patent medicine, claimed a deduction from their income in the year of account of a sum of Rs. 13,000 odd as a

lawfully deductible item. They claimed to deduct that sum u/s 10 (2)(ix) of the Indian Income Tax Act as being expenditure incurred solely for the

purpose of earning profits or gains. It appears that one Dr. Varadarajulu Naidu had invented this patent medicine or at any rate was the owner of

its secret; and on the 29th March, 1923, the petitioners entered into an agreement with Dr. Varadarajulu Naidu for the purchase by them and for

the sale by him of all rights and privileges of manufacturing, selling and generally dealing in Minsararasam and covenanted that, if they successfully

promoted the company, Dr. Vsradarajulu Naidu should to them all such rights and privileges for manufacturing, gelling and generally dealing in the

medicine subject to the following conditions--it is neceesary to Bet rut only two of them.

(1) that the parties on the first part pay to the party on the second part the sum of Rs. 81,000 in five yearly instalments at not less than Rs. 16,000

a year with effect from 1st April, 1923, and (2) that after the expiry of five years a royalty of annas eight on every bottle of Minsararasam sold be

paid to the party on the second part as long as the said Minsararasam Company Ltd., is in existence.

With regard to the former clause, it is stated that the Rs. 81,000 have been paid by the company to Dr. Varadarajulu Naidu end with regard to the

second clause, that he was paid in the year of account Rs. 13,000 odd representing eight annas on every bottle of the medicine sold by the

company. In the Memorandum of Association of the company one of the objects of the company is

to buy the Minsararasam Company, Salem, its goodwill, rights and privileges from Dr. Varadara-jula Naidu, Salem, for Rs. 81,000 and thus

become the sole proprietors to manufacture, sell and generally deal in Minsararasam.

It is contended on behalf of the petitioners that this payment of Rs. 13,000 odd to Dr. Varadarajulu Naidu in pursuance of Clause (2) of the

agreement of the 29th March was a payment made by them solely for the purpose of earning the profits or gains of the business which in the year

of account amounted to Rs. 28,000. The question referred to us depends entirely upon how the agreement before mentioned is construed. It is the

petitioners'' contention that Clause (2) does not relate the consideration for the purchase of the right and privileges of manufacturing, Belling 2nd

generally dealing in the medicine but that the purchase price is that set out in Clause (1) namely, Rs. 81,000. It seems quite clear to me that Clauses

(1) and (2) must be taken together as between them providing the consideration for the purchase of this medicine. If that is so, then this clearly is,

as the Commissioner of Income Tax points out in his reference to up, taxable as capital expenditure. It was the amount of money expended for the

purchase by the company of this medicine and as such would be assessable and not a lawful deduction u/s 10(2)(ix) of the Indian Income Tax Act.

It is further contended that Clause (2) of the agreement cannot be said to be consideration for the purchase of the medicine because it provides for

something indefinite. It is quite true that it does provide for something indefinite to some extent. At the time of the agreement it could not be known

what quantity of medicine would be sold and what amount would be realised by that sale. But as soon as the company started selling the medicine

what was indefinite at the time of the agreement became definite and ascertainable at any time and the accounts of the company would show the

amount due to the Doctor under Clause (2) of the agreement. Therefore, that contention must fail.

The answer to the reference must, therefore, be that the payment of the royalty in accordance with Clause (2) of the agreement is not of a sum

lawfully deductable u/s 10 (2) (ix) of the Indian Income Tax Act. Costs of the Commissioner Rs. 250.

Ramesam, J.--I agree.

Cornish, J.--I agree.