1969 (9) TMI 10 - HC - Income Tax

Sum paid by the assessee to the managing agents for the termination of their managing agency - not an admissible expenditure u/s 10(2)(xv)

Summary

Issues Involved:

1. Whether the sum of Rs. 2,50,000 paid by the assessee to the managing agents for the termination of their managing agency is an expenditure admissible under section 10(2)(xv) of the Indian Income-tax Act, 1922.

Issue-wise Detailed Analysis:

1. Admissibility of Expenditure under Section 10(2)(xv):

The assessee, a public limited company, terminated the managing agency of a firm and paid Rs. 2,50,000 as compensation. The assessee claimed this payment as a permissible deduction under section 10(2)(xv) of the Act, which allows for deduction of any expenditure "not being in the nature of capital expenditure or personal expenses of the assessee" laid out or expended wholly and exclusively for the purpose of such business.

a. Purpose of Business:

The Tribunal initially concluded that the expenditure was not incurred for the purpose of business but for extra-commercial reasons. The court found that the Tribunal's suggestion of "extra-commercial reasons" was ambiguous and not supported by clear evidence of fraud or improper motive. The court emphasized that the Tribunal was not called upon to judge the prudence of the transaction. The court concluded that the transaction was of commercial expediency and the expenditure was wholly and exclusively for the purpose of the assessee's business, thus satisfying the test laid down by section 10(2)(xv).

b. Nature of Expenditure - Capital vs. Revenue:

The court considered whether the payment was in the nature of capital expenditure. Various cases were discussed to elucidate the principles distinguishing capital expenditure from revenue expenditure. For instance, in P. Orr & Sons v. Commissioner of Income-tax, a similar payment for terminating a managing agency was held not to result in the acquisition of any capital assets and thus not capital expenditure. Conversely, in Godrej & Co v. Commissioner of Income-tax, a payment for reducing the rate of commission was considered capital expenditure as it secured an enduring benefit for the business.

The court noted that in the present case, the payment of Rs. 2,50,000 was made to terminate a managing agency agreement that had a term of 20 years, of which only 3 years had elapsed. This was similar to the Godrej & Co case, where the payment was deemed capital expenditure. The court concluded that the payment in question was also capital expenditure, as it secured an enduring benefit by releasing the company from a higher commission liability.

Conclusion:

The court held that while the expenditure was wholly and exclusively for the purpose of the assessee's business, it amounted to capital expenditure. Consequently, it was not covered by section 10(2)(xv) of the Act. The court answered question No. 4 in the negative, against the assessee, and ordered the assessee to pay Rs. 200 as costs of the reference to the Commissioner of Income-tax, U.P.