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TMI Blog1972 (10) TMI 1X X X X Extracts X X X X X X X X Extracts X X X X ..... ded a case to be stated for obtaining the opinion of the High Court on the question : Whether, on the facts and in the circumstances of the case, the payment of Rs. 2,50,000 made for the termination of managing agency is an allowable deduction in computing the total income of the assessee-company for 1956-57 ? The Tribunal refused to state the case taking the view that its findings are findings of fact. Thereafter, the Commissioner moved the High Court under section 66(2) and at the instance of the High Court, the Tribunal stated the case and submitted the aforementioned question of law to the High Court. But, the High Court answered that question in the affirmative and in favour of the company. Let us now have a look at the facts. The assessee was a public limited company, originally known as Ashok Motors Ltd. It was incorporated on September 7, 1948. The articles of association of the company authorised it to carry on various businesses, such as manufacturers, assemblers, dealers, hirers, repairers of motor cars, motor-cycles, motor-buses, lorries, trucks, etc. In particular it authorised the company "to import into India Austin cars and other Austin products, to assemble A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 55, by means of an agreement between the company and the managing agents, the managing agency agreement was terminated subject to the condition that the managing agents were to be paid compensation in a sum of Rs. 2,50,000. The company paid the said sum during the accounting year ended on December 31, 1955, relevant to the assessment year 1956-57. The company claimed deduction of the same in its assessment as revenue expenditure laid out wholly and exclusively for the purpose of the business in the relevant previous year. It may also be mentioned that at about this time the company entered into an agreement with Leyland Motors Ltd., Leyland, U. K., for participation of the said concern with the company for implementing its manufacturing programme. On the aforementioned facts, the question arises whether the compensation paid to the managing agents can be considered as an expenditure wholly or exclusively laid out for the purpose of the business or whether the same should be considered as a capital expense. There are numerous decisions of this court, of the High Courts in this country as well as of the courts in England dealing with the controversy whether an item of expenditure ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he company terminated the services of the managing agents on business considerations. It accepted the plea of the company that, in view of the change in its business activity, the continuance of the managing agents became superfluous. These are findings of fact which are not open to question before this court. There is no doubt that, as a result of the termination of the services of the managing agents, the company got rid of its liability to pay office allowance as well as the commission it was required to pay under the managing agency agreement not only during the accounting year but also for a few years more. The expenditure thus saved undoubtedly swelled the profits of the company. From the facts found, it is clear that the managing agency was terminated on business considerations and as a matter of commercial expediency. There is no basis for holding that by terminating the managing agency, the company acquired any enduring benefit or any income yielding asset It is true that by terminating the services of the managing agents, the company not only saved the expense that it would have had to incur in the relevant previous year but also for few more years to come. It will not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ideration for his shares) making together pound 19,500 (payable in five annual instalments) which he agreed to accept in full satisfaction of all claims against the company or the directors. The question was whether the payment of pound 19,200 was a deductible expenditure. The Special Commissioners decided against the company but the King's Bench Division as well as the Court of Appeal accepted the company's contention and held that the payment of pound 19,200 made was an admissible deduction in arriving at its profits for income-tax purposes. In the course of his judgment Rowlatt J., sitting on the King's Bench Division, relied on the observations of the Lord Chancellor in Atherton V. British Insulated and Helsby Cables Ltd. to the effect : " '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 expediency, and in order indirectly to facilitate the carrying on of the business, may yet be expended wholly and exclusively for the purposes of the trade. ' " These observations of the Lord Chancellor were again quoted with approval by Lord Hanworth M. R. when the matter was taken in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... secured an enduring benefit by getting rid of an onerous contract is not to state the material thing, and it is completely inconclusive" In G. Scammell & Nephew Ltd. v. Rowles, the Court of Appeal held that the expenditure incurred for the termination of a trading relationship in order to avoid losses occurring in the future through that relationship, whether pecuniary losses or commercial inconveniences, is just as much for the purposes of the trade as the making or the carrying into effect of a trading agreement. The case which can be said to be the nearest to the facts of the present case decided by any Indian court is that decided by the Calcutta High Court in Anglo-Persian Oil Co. (India) Ltd. v. Commissioner of Income-tax Therein, money was paid by an oil company in a lump sum as compensation for loss of agency whereby the company relieved itself of future annual payments of commission chargeable to revenue account. The question was whether the money paid as compensation was allowable as proper deduction from the business profits of the company. The court upheld the contention of the company that it was a revenue expenditure. Further, the court observed that the principl ..... X X X X Extracts X X X X X X X X Extracts X X X X
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