TMI Blog1969 (9) TMI 10X X X X Extracts X X X X X X X X Extracts X X X X ..... order to compensate the firm, Messrs. Juggilal Kamlapat, the assessee-company paid the former managing agents Rs. 2,50,000 as compensation. The assesseecompany claimed this payment of Rs. 2,50,000 as permissible deduction under section 10(2)(xv) of the Act. This claim of the assessee was rejected by the Income-tax Officer on the ground that the payment amounted to capital expenditure. This view was upheld in appeal by the Appellate Assistant Commissioner. The ultimate decision of the taxing authorities was upheld by the Appellate Tribunal, but on another ground. The Tribunal held that the expenditure was not incurred for the purpose of business, but for extra commercial reasons. The assessee applied for a reference to this court under section 66(1) of the Act. That application was rejected. Upon an application under section 66(2) of the Act, this court directed the Tribunal to refer certain questions of law to this court. Accordingly, the Appellate Tribunal, Allahabad, has referred four questions of law to this court. Mr. C. S. P. Singh, appearing for the assessee, did not press questions. Nos. 1, 2 and 3. It is not, therefore, necessary to reproduce those questions or answer the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sumed to be fair and in good faith, unless fraud is alleged and proved. It was not fair to the assessee to suggest a case of fraud at such a late stage of the proceeding. In view of the history of the litigation, it is not possible to charge the assessee with some improper or oblique motive. The Tribunal enumerated various circumstances for reaching the conclusion that the payment was for extra-commercial reasons. The Tribunal noticed that both the managing agents (old and new) had constitutions in which Singhania family had major interests. The only benefit from the change was the small reduction in the rate of commission from 2 1/2per cent to 2 per cent. There was no indication on the record that the first managing agents were ever approached by the assessee to reduce the rate of commission from 2 1/2 per cent. to 2 per cent. The assessee was obliged to hypothecate its goods with the second managing agents, who charged interest at 3 per cent. on the advances made to the assessee. The circumstances enumerated by the Tribunal may lead to the inference that the transaction was not of prudent nature. But, as explained above, the Tribunal was not called upon to judge the wisdom of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t there should be any direct correlation in point of time between the expenditure and the earning of any profits. In Kettlewell Bullen Co. Ltd. v. Commissioner of Income-tax, it was explained by the Supreme Court that it cannot be said as a general rule that what is determinative of the nature of a receipt on the cancellation of a contract of agency or office is extinction or compulsory cessation of the agency or office. Where payment is made to compensate a person for concellation of a contract which does not affect the trading structure of his business or deprive him of what in substance is his source of income, termination of the contract being a normal incident of the business, and such cancellation leaves him free to carry on his trade, the receipt is revenue. Where by the cancellation of an agency the trading structure of assessee is impaired, or such cancellation results in loss of what may be regarded as the source of the assessee's income, the payment made to compensate for cancellation of the agency agreement is normally a capital receipt. In Gillanders Arbuthnot Co. Ltd. v. Commissioner of Income-tax, it was held by the Supreme Court that there is no immutable pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eir Lordships concluded on page 387 that, so far as the managed company was concerned, money was paid for securing immunity from the liability to pay higher remuneration to the assessee-firm for the rest of the period of the managing agency. Consequently, it was capital expenditure. The facts of the present case are similar to those in the case of Godrej Co. In the present case the assessee-company employed the firm " Juggilal Kamlapat " as managing agents under an agreement dated August 8, 1941. The term of the agreement was 20 years. After the expiry of about 3 years out of 20 years the assessee-company decided to terminate that contract of managing agency. The managing agents were paid a sum of Rs. 2,50,000 as compensation. It is true that in the case of Godrej Co. the court was primarily concerned with the question of the nature of the receipt in the hands of the managing agents. The court was not directly concerned with the nature of expenditure incurred by the managed company. But the court realised the close connection between the expenditure incurred by the managed company and the compensation received by the managing agents. The court, therefore, considered it conv ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
