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Issues:
1. Whether the payment of compensation amounting to Rs. 35,000 has been rightly disallowed as capital expenditure within the meaning of section 10(2)(xv) of the Income-tax Act, 1922? Detailed Analysis: The case involved a reference under section 66(1) of the Income-tax Act, concerning the disallowance of a compensation payment as capital expenditure. The assessee, a public limited company engaged in the textile business, had entered into contracts to purchase machinery but later decided to cancel the contracts due to changed circumstances. The suppliers demanded compensation, totaling Rs. 35,000, upon cancellation. The assessee claimed this amount as a deduction under section 10(2)(xv), which was disallowed by the income-tax authorities and upheld by the Income-tax Appellate Tribunal. The Tribunal considered the payments as capital in nature, as they avoided a liability and future loss, thus disallowing the claim based on established legal principles (Countess Warwick Steamship Co. Ltd. v. Ogg). The Tribunal's decision was supported by the principle that expenses related to the means of carrying on a business may be of a capital nature. The Tribunal's reliance on the Countess Warwick case was crucial in determining the nature of the compensation payments. In the referenced case, the payment made upon cancellation of a ship construction contract was deemed capital expenditure by Rowlatt J., as it was outside the scope of profits and gains, not directly linked to the business operation. Similarly, in Short Bros. Ltd. v. Commissioners of Inland Revenue, a payment for canceling a ship construction contract was considered revenue receipt as it pertained to the business of shipbuilding. The comparison of these cases highlighted the distinction between expenses related to the actual business operation and those related to the means of conducting the business, with the latter potentially being classified as capital expenditure. The Tribunal's decision was deemed correct by the High Court, affirming that the compensation payments were rightly disallowed as capital expenditure. The Court concurred with the Tribunal's interpretation that the payments avoided a liability and future loss, aligning with the principle that such expenses, not directly linked to business operation but to its means, could be categorized as capital. Therefore, the question posed in the reference was answered in the affirmative, supporting the Tribunal's disallowance of the claimed deduction. The reference was to be returned to the Income-tax Appellate Tribunal with this decision for further proceedings.
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