TMI Blog1969 (3) TMI 10X X X X Extracts X X X X X X X X Extracts X X X X ..... Disputes between the company and the managing agents were to be settled by reference to arbitration. Subsequently, on 14th August, 1941, Dalmia Jain and Company (Jind State) Ltd., were appointed managing agents instead of Dalmia Jain and Company under the same terms and conditions for the residue of the thirtv years' term expiring on 25th May, 1968. The board of directors of the company decided on 14th November, 1952, to terminate the managing agency agreement and a resolution was passed to this effect by the extraordinary general meeting of the shareholders on 2nd December, 1952. The managing agents, after receiving the resolution on 3rd December, 1952, wrote back that the resolution constituted a breach of the contract of the managing agency and lodged a claim for Rs. 8,87,800 as compensation, out of which Rs. 8,22,168-13-3 was for premature termination of the agreement which was to subsist for another 15 years and 178 days, the amount being calculated at 61 times the average commission earned during the past three years. The comparatively small balance of Rs. 65,687-10-9 was claimed as compensation for loss of monthly remuneration of Rs. 1,000 for a period of 61 years. The bo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inancial sacrifice involved in forgoing sixteen years' commission, found that the sum of Rs. 6,00,000 was a revenue expenditure deductible under section 10(2)(xv) of the Act. In a further appeal to the Appellate Tribunal the finding with regard to the bona fide nature of the transaction reached by the Appellate Assistant Commissioner was affirmed, although a strong challenge was offered to it on behalf of the revenue. After a detailed examination of the attack the Tribunal reached the following conclusion : " In the circumstances, we hold that this expenditure was incurred wholly and exclusively for the purpose of the business of the company and answer the first issue against the revenue." In reaching the result that the settlement by payment of Rs. 6,00,000 was for business considerations and commercial expediency, the Tribunal took into reckoning the amount which the company was saving by permanently getting rid of the managing agents. It is common ground that no managing agent was appointed in place of the managing agents whose agency was terminated in 1952. With regard to the second issue whether the payment of Rs. 6,00,000 to the managing agents was " in the nature of ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... had no jurisdiction to embark upon a re-appraisal of the evidence before the Appellate Tribunal and interfere with the finding of fact that the termination of the managing agency agreement was not a bona fide transaction. No doubt, the Supreme Court in that case upset the judgment of the High Court, but it is to be borne in mind that the reference was made in that case at the instance of the Commissioner of Income-tax. In the present case, we are satisfied that the conclusion reached by the Appellate Tribunal is based on evidence and further that the revenue never having asked for a reference to challenge the validity of the finding, the question of fact cannot be agitated at this stage. The surviving question in the reference is one which has so often arisen in courts relating to the line of de-limitation between capital and revenue expenditure and on which elaborate arguments have been addressed by counsel for both the sides at great length. The concepts of capital and revenue expenditure are not defined anywhere in the statute, but there is no dearth of guidelines indicated by eminent judges in reported decisions both in England and in India. I can do no better than to make a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e expenditures is a thing that is going to recovery year. Looked in the perspective of this criterion, it assessee that the payment of Rs. 6,00,000 by way of lump sum amount to a capital expenditure However, it is now generally understood that the payment in lump sum is an immaterial consideration in answering this vexed question. As is said, there is no magic in the distinction between a lump sum and a periodic sum. A lump sum payment may be a revenue expenditure when it represents the computation of a series of annual revenue rent payment a recurring periodic payment of installments of a capital sum. The second test is furnished by a decision of the House of Lords in British Insulated and Helsby Cables Ltd. v. Atherton. The assessee-company in that case under its powers established a pension fund for its clerical and technical salaried staff, Both the beneficiaries and the company made contributions to this fund. A sum of pound 31,784 out of current profits was set aside by the company for this fund and was claimed as admissible deduction in computing its profits for the relevant assessment year. In rejecting the claim Viscount Cave L.C. stated at page 213 thus: " But whe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o come to them, but the agents did not agree to put any pressure upon the employees to come. A sum of 300,000 paid by the company was sought to be deducted from the computation of profits and Rowlatt J. held that Lord Cave in the test mentioned above meant that the benefit that endures should be in such a way that fixed capital endures. The "gloss", if I may say so, of Rowlatt J., to the test of Lord Cave, received approval of the Court of Appeal. Lawrence L,.J. said at page 269 : " It is not open to doubt that under ordinary circumstances where a trader, in order to effect a saving in his working expenses, dispenses with the services of a particular agent or servant, and makes a payment for the cancellation of the agency or service agreement, such a payment is properly chargeable to revenue ; it does not involve any addition to or withdrawal from fixed capital; it is purely a working expense. " While admitting that the change in the method of carrying on the company's business in Persia had, in fact, resulted in a more economical and efficient working of the company's trade, the Lord justice said that though in that sense it had proved to be advantageous to the company's busin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s a disbursement or expense wholly and exclusively laid out or expended for the purposes of the assessee's trade. Lord Davey in Strong and Co. of Romsey Ltd. v. Woodifield, at page 453, said with regard to damages which had been levied for the fall of a chimney on the assessee, to the expenses which could not be deducted and observed thus : " I think that the payment of these damages was not money expended for the purpose of the trade These words...... appear to me to mean for the purpose of enabling a person to carry on and earn profits in the trade, c...... It is not enough that the disbursement is made in the course of, or arises out of, or is connected with, the trade, or is made out of the profits of the trade. It must be made for the purpose of earning the profits. " Lord Loreburn L.C. in the same case said that the loss sustained by the assessee was not really incidental to its trade and therefore could not be deducted. Deductible losses must be such as are connected with, in the sense that they are really incidental to, the trade itself. In another House of Lords decision, Smith's Potato Estates Ltd. v. Bolland (Inspector of Taxes) s, Lord Porter, speaking for the m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on of the House of Lords in Atherton case, the decision seems to have been based on the authority of Dale's case . The next set of cases referred to by the learned counsel arose out of the situation created in the wake of the independence of the country in 1947. Companies owned substantially or exclusively by Europeans passed to Indian hands for pragmatic considerations of expediency, and comp pensation had to be paid to the retiring managing directors or managing agencies of the companies. In all these cases, it was held that such payments were in the nature of revenue expenditure. In P. Orr and Sons v. Commissioner of Income-tax , the assessee claimed the amount of Rs. 1,25,000 as an allowable deduction under section 10(2)(xv) of the Act paid as compensation to terminate the managing agency agreement. The sum so paid represented a commission paid to the managing agents for the last three years ending 31st March, 1948. It was held by Rajagopalan and Balakrishna Ayyar JJ. that the payment of Rs. 1,25,000 was made to secure the termination of the managing agency and its attendant recurring annual liability to the company and was not intended to bring in any capital asset, nor did ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m the Government of Assam lease of limestone quarries in the Khasi and Jaintia Hills for the purpose of carrying on the manufacture of cement from 1st November, 1938, for a period of twenty years. Heavy and substantial amount of lease money became payable in in the first five years amounting to Rs. 40,000. This sum the assessee-company sought to deduct in the accounting years 1944-45 and 1945-46, under the provisions fo section 10(2)(xv) of the Act and this was affirmed in the Supreme Court. Mr. Justice Bhagwati, speaking for the court, observed at page 48 : " The period of 5 years over which the payments were spread did not make any difference to the nature of the acquisition. It was none the less an acquisition of an advantage of an enduring nature which ensured for the benefit of the whole of the business for the full period of the lease unless terminated by the lessor by notice as prescribed in the last part of the clause. This gain was the acquisition of an asset or advantage of an enduring nature for the whole of the business..." " The asset which, in the opinion of the Supreme Court, the company had acquired in consideration of this recurring payment, was in the nature o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eration but was in reality paid and received as compensation for releasing the company from the onerous terms as to remuneration as it was in terms expressed to be. In other words, so far as the managed company was concerned, it was paid for securing immunity from the liability to pay higher remuneration to the assessee-firm for the rest of the term of the managing agency and, therefore, a capital expenditure and so far as the assessee-firm was concerned, it was received as compensation for the deterioration or injury to the managing agency by reason of the release of its rights to get higher remuneration and, therefore, a capital receipt within the decisions of this court in the earlier cases referred to above. " It is true that the assessee-firm in Godrej's case was the recipient of Rs. 7,50,000 and it was found that in its hands it was a revenue receipt assessable to income-tax. MT. Sharma, while conceding that the observation of the learned Chief justice with regard to the nature of this expenditure in the case of the managed company goes against the result contended for by him, it has to be disregarded, according to his submission, because the expression of opinion is merely ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The assessees, in all these cases, had to reach decisions, no doubt, of farreaching importance as matters of immediate and pressing interest. What we find in the present case is that the assessee-company was not faced with any immediate or present danger to be averted, neither any financial problem confronted the board of directors for terminating the managing agency agreement nor was any economic difficulty to be surmounted by adopting this course. Plainly, the directors compounded a consolidated claim of the managing agents whose services were terminated apparently without any cause and a sum of Rs. 6,00,000 was paid for this purpose which, undoubtedly, resulted in an enduring benefit, from the economic point of view, for the assessee-company. Considering that the agreement which was being terminated was assignable and no managing agents were appointed to succeed in place of Dalmia Jain and Company, there was brought into existence a clear advantage of an enduring nature, an advantage indistinguishable from a material or fixed asset for the assessee-company. In this view of the matter we think that the assessee's contention must fail and we will accordingly answer the question i ..... X X X X Extracts X X X X X X X X Extracts X X X X
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