TMI Blog1967 (8) TMI 14X X X X Extracts X X X X X X X X Extracts X X X X ..... way related to the shareholders of the assessee-company, who mostly belong to the wealthy English family known as "Turner family ". During the assessment year 1952-53, the assessee-company paid to one of its directors, of the name of M. G. Robson, a sum of Rs. 1,00,000 by way of compensation for earlier termination of his contract service. Again, during the assessment year 1953-54, the assessee-company paid to two of its directors of the names of J. Morshead and W.L.A. Radcliffe, respectively, Rs. 1,50,000 and Rs. 1,00,000 for the same reason. The circumstances under which payment of compensation to M. G. Robson was decided upon appear from the minutes of two meetings of the directors of the assessee-company. At the meeting held on June 3, 1951, the chairman of the assessee-company reported that, while in the United Kingdom he and one Mr. Gloag had discussion with the beneficial shareholders of the assessee-company on the subject as to whether, for acceleration of promotion of newer members of the board of directors and for inclusion therein of persons who were qualified to become directors, senior people at the top rank of the assessee-company should retire earlier than the co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ees paid to an architect who valued the business premises of the assessee in connection with the revaluation of the said premises to municipal rates. The Income-tax Officer disallowed this expenditure also on the ground that the same was not a business expenditure. The assessee appealed against the two assessment orders before the Appellate Assistant Commissioner. The Appellate Assistant Commissioner dismissed both the appeals, being of the same view as expressed by the Income-tax Officer. Thereupon, the assessee preferred second appeals before the Appellate Tribunal against both the orders. The Tribunal allowed the appeals. The reasons which weighed with the Tribunal in allowing compensation paid to the three directors, as business expenditure, were : " We are unable to appreciate the soundness of the reason for making the disallowance. May be, that initially when the terminations were being effected, the company genuinely wanted to bring in fresh persons on the board of directors but actually having terminated their services they did not do so. This factor, in our opinion, cannot lead to the conclusion that the expenditure incurred for paying the compensation to the outgoin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt for opinion : " (1) Whether, on the facts and in the circumstances of the case, the compensations of Rs. 1,00,000 paid to Mr. M.G. Robson in the previous year relating to the assessment year 1952-53, Rs. 1,50,000 to Mr. J. Morshead and Rs. 1,00,000 to Mr. W.L.A. Radcliffe in the previous year relating to the assessment year 1953-54, were admissible deductions in law for the purpose of assessment under the Income-tax Act ? (2) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the sum of Rs. 2,074 being the fees paid to the architects was not a capital expenditure ? Mr. B. L. Pal, learned counsel for the revenue, submitted that the compensation was paid to the directors either, (a) for settling up consequences of wrongful breach of service contracts, by payment of damages, or (b) in pursuit of a policy, which was not an economic policy in the interest of trade, of removing senior officials, and replacing them by qualified junior officials, which again was not implemented by appointment of junior men to senior positions. Mr. Pal submitted that in either event the compensation paid to the directors would not be money wholly and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... usiness of the assessee but for the winding up of that business. The assessee was going to close down the business and wanted to get rid of the manager. Such riddance was not possible, earlier than the contracted period, except by payment of damages to the said manager. This payment was made not for the carriage of the business but to avoid payment of large damages, which might have befallen to the assessee if it had not succeeded in settling up the service agreement. In the instant case, the payment of compensation was made for more efficient carriage of business of the assessee as considered later in this judgment. This is the difference between the instant case and Godden's case relied on by Mr. Pal. Now, in Atherton v. British Insulated and Helsby Cables Ltd., Lord Cave observed : " . . . that 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 . . . " Following the view in Atherton's case the English Court of Appeal i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to be properly chargeable against the receipts for the year. ' Instances ', he says on page 213 (10 Tax Cases at page 192) ' of such payments may be found in the gratuity of pounds 1,500 paid to a reporter on his retirement (Smith v. Incorporated Council of Law Reporting) and, in the expenditure of pounds 4,494 in the purchase of an annuity for the benefit of an actuary who had retired, which in Hancock's case was allowed, and I think rightly allowed, to be deducted from profits '. Now I respectfully share the view of Lord Buckmaster that it is not easy to find much help from the particular facts of decided cases ; nor is it easy to define the limits of the principle upon which one is acting. At the same time I think in a concrete case it is possible to determine whether an expenditure is a capital expenditure or rightly to be attributed to revenue. I do not in the least wish to go back upon anything that I said myself in the British Insulated and Helsby Cables case, but it appears to me upon the facts of this case that this payment should be treated as a revenue item and not as a capital item." The observation of Viscount Cave was approved of by the Supreme Court in Commission ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of the remaining part of the service contract by the promisor, namely, the assessee, by acceptance of monetary satisfaction in lieu of performance. In making this submission, Mr. Palkhivala has no doubt the provisions of section 63 of the Contract Act in his mind, which section reads : " Every promisee may dispense with or remit, wholly or in part, the performance of the promise made to him, or may extend the time for such performance, or may accept instead of it any satisfaction which he thinks fit ". Now, if by getting rid of the three directors, the assessee-company was benefiting economically, that is to say, was reducing top-heavy administration costs, then, there is no reason why the payment of compensation, which enabled the assessee to effect such economy, should not be treated as expenditure wholly and exclusively for the purpose of its business. Mr. Pal argued that there was no economic object behind the payment of compensation---the only professed object being to open up the way for promotion of qualified junior men to senior positions, which object again was not followed up. In our opinion, Mr. Pal is not right in this submission. If we read the minutes of the b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... We are, therefore, of the view that the payment of compensation was by way of money saving device, in the interest of the business of the assessee, and, as such, was expenditure wholely and exclusively laid out for business purpose. Mr. Pal, by way of last desperate attempt, argued that even if business economy was the consideration in so far as payment of compensation to M. G. Robson was concerned, the payments of compensation to J. Morshead and W. L. A. Radcliffe were made on different considerations. He drew inspiration for this argument from the following passage in the judgment of the Appellate Assistant Commissioner for the year 1953-54 : " It may be stated that from the correspondence with the two directors and the minutes on records it is not true that the services were terminated in order to effect economy in the administration, but the two directors were asked to retire or their services were terminated in order to accelerate promotion of new members of the board of directors and this cannot be considered to be an expenditure for commercial expediency. Questioned by ourselves, Mr. Pal admitted that no new circumstance or consideration came into existence when the a ..... 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