TMI Blog1965 (7) TMI 64X X X X Extracts X X X X X X X X Extracts X X X X ..... ess of the company ; and (e)that the company gained nothing by terminating the managing agency agreement. 2. Whether the whole or any part of the sum of ₹ 18,90,000 was paid by the company to the managing agents having promoted the company? 3. What was the true nature of the payment of the sum of ₹ 18,90,000 by the company to the managing agents on a correct inter pretation of the managing agency agreement ? 4. Whether the sum of ₹ 18,90,000 together with the sum of ₹ 13,300 paid as expenses of litigation or any part thereof was an expenditure incurred wholly and exclusively by the company for purposes of its business and as such it was an allowable deduction? The statement arises out of an order passed by the Tribunal on April 25, 1951, holding that the sum of ₹ 19,03,300 paid by the assessee-company to the partners of the partnership, Beharilal Kailashpat, which was its managing agents, was not a revenue or business expenditure within the meaning of section 10(2)(xv) of the Income-tax Act, i.e., an expenditure not being in the nature of capital expenditure .... laid out or expended wholly and exclusively for the purpose of s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... defending actions and suits and generally doing all such other acts and things as are necessarily incidental or conducive to the attainment of all or any of the objects of the company. By article 143 the members for the time being of the firm of Beharilal Kailashpat were appointed agents of the company upon the terms, for the remuneration, and with the powers mentioned in the draft agreement attached as a schedule and it was expressly provided and declared that in consideration of the services rendered by them in promoting this company, the appointment of the said firm of Beharilal Kailashpat to the office of the agents of the company shall not be liable to be, at any time hereafter, revoked or cancelled on any ground or for any reasons whatever, save and except their being found guilty of fraud in the management and discharge of their duties as such agents of the company . On May 2, 1935, the managing agency agreement was executed by the company and the firm, M/s. Beharilal Kailashpat, as provided in the memorandum and the articles of association of the company. The relevant terms of the agreement are as follows: The firm will perform the office of the agents of the company f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shpavati Devi (wife of Sri Lakshmipat Singhania), (3) Vijaipat and Ajaikumar (minor sons of Sri Kailashpat Singhania), (4) Srimati Ram Devi (wife of Sri Beharilal Gupta), (5) Lala Ram Ratan Gupta, (6) Lala Ram Prasad Gupta and (7) Shrimati Keshobai (wife of Lala Ramgopal Gupta). The Singhanias held 8 annas share and the Guptas held the remaining 8 annas. In 1943 disputes arose between the members of the two families in respect of the businesses carried on under the names of the company and the firm and under other names and they were referred to the arbitration of Sri Kanhaya Singh. By his award dated January 18, 1944, he declared as follows: The company should go exclusively to the members of the Gupta family and the members of the Singhania family should part with all their rights and interests in it. Accordingly, the members of the Singhania family should transfer their shares to Lala Ram Ratan Gupta or his nominees at a certain price. On payment of the said price they will cease to be shareholders of the company and three of them who were directors shall resign and cease to be directors. As a necessary corollary the partners of the firm, Behari Lal Kailashpat, who belonged t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t a copy of this reply to the Singhanias in continuation of their interim reply. On July 18, 1944, the Singhanias, as representing Beharilal Kailashpat, wrote to the directors of the company contending that the award was not final and binding and they had filed an objection against it as also against the very reference to the arbitration, that if it still recognized Beharilal Ramcharan as its managing agents it would do so at its own risk and would continue to be responsible to Beharilal Kailashpat and its partners for all loss that may accrue to it or them and that Beharilal Ramcharan could not be treated as a continuation of Beharilal Kailashpat because no original partner of Beharilal Kailashpat was a partner of Beharilal Ramcharan. When the partnership, Beharilal Kailashpat, was formed in 1935, none of Ram Ratan Gupta, Ram Prasad, Ram Devi and Keshobai was its partner but that was immaterial. Partners of Beharilal Kailashpat kept on changing and the members of the Gupta family who were partners in 1935 ceased to be partners and in 1943 the partners representing the Gupta family were Lala Ram Ratan Lal, Ram Prasad, Srimati Ram Devi and Srimati Keshobai and under the award they w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ₹ 30,00,000 as compensation to the Singhanias for the wrongful termination of the agreement and removal of Beharilal Kailashpat from the office of managing agents. On October 9, 1944, the company informed (1) the Singhanias, and (2) Beharilal Ramcharan, refuting their claims to compensation and suggesting reference of the dispute to the arbitration of any of the five named persons including Sri K.M. Munshi. The Singhanias and the partners of Beharilal Ramcharan, jointly entered into an agreement on October 19, 1944, referring to the arbitration of Sri K.M. Munshi the dispute whether the termination of the agreement and the removal from the office of Beharilal Kailashpat or its alleged successor, Beharilal Ramcharan, was wrongful and, if it was wrongful, to what compensation, if any, were the ex-managing agents entitled. The ex-Singhania shareholders of the company brought a suit against the Gupta shareholders for a share in the goodwill of the company. The company itself was not a defendant to the suit and actually it was not a necessary party at all. The suit ended in a compromise between the parties on January 11, 1945. Under the compromise the company was added as a de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and the company must pay to Beharilal Kailashpat ₹ 18,90,000 as compensation for the wrongful removal. Under the compromise decree dated January 11, 1945, the amount of the compensation is to be paid to, and to be retained by, the Gupta partners; consequently, the company must pay to Lala Ram Ratan, Lala Ram Prasad, Srimati Ram Devi and Shrimati Keshobai the sum of ₹ 18,90,000 with interest. The company will pay the Singhania partners and the Gupta partners their costs of the reference and the arbitrator's fees and costs. The award contains only the directions referred to above and no narration of facts and no discussion of the law applicable to them. Though the aribitrator claimed to have heard arguments on behalf of the company, the Singhanias and the Guptas, there is no reference in the award to the contentions advanced on behalf of the three parties. The total amount of the costs to be paid by the company for the arbitration came to ₹ 13,300. In compliance with this award the company paid ₹ 18,90,000 compensation to the Guptas and ₹ 13,300 costs and the arbitrator's fees and expenses in the accounting year relevant to the assessment ye ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing agents of the company on a monthly remuneration of ₹ 7,500 plus 15% of the net profits, with a minimum of ₹ 1 lakh. A payment to a managing agent under the managing agency agreement is deductible not as such but under section 10(2)(xv) if it amounts to a revenue expenditure and if no services are rendered by him or if the payment exceeds the reasonable remuneration to be paid for whatever services are rendered by him, the payment, or part of it, cannot be said to be a revenue expenditure. The agreement in the instant case provided that part of the consideration paid to the managing agents was for promoting the company itself and this part could not be a revenue expenditure at all. No change took place in the carrying on of the company's business and there was no proof of any services rendered by Beharilal Kailashpat, besides nominating the two ex-officio directors. Beharilal Kailashpat rendered no services at all to the company and payment of the commission to it was not a revenue expenditure and the compensation for the wrongful termination of the managing agency agreement could not be a revenue expenditure. Hence, the claim for the deduction failed. The disput ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... producing evidence and about the existence of evidence in support of its finding that there was nothing to indicate that it rendered any services, question No. 5 was about the existence of evidence to support the finding that the letters exchanged between the Singhanias and the Guptas and the company were a made-up show, question No. 6 was about the company's claim for the deduction under section 10(2) being admissible, question No. 7 was about the existence of evidence to support the finding that the payment was not a revenue expenditure, question No. 8 was whether a payment made for the purpose of getting rid of an onerous managing agency agreement is a revenue expenditure, question No. 9 was whether a payment made for the purpose of getting rid of the managing agents who were quarrelling among themselves is a revenue expenditure and question No. 10 was about there being any or sufficient evidence to justify the findings that no services were rendered by Beharilal Kailashpat and that nothing was payable to it on account of wrongful termination of its agreement. The questions were very badly and unintelligently drafted and involved a good deal of overlapping. Question No. 1 wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s; as I explained earlier, there was no question of there being any evidence in support of the Tribunal's finding that the payment was not a revenue expenditure. The Tribunal never found that the agreement between the company and Beharilal Kailashpat was onerous and that the company terminated it on account of its being onerous. Therefore, question No. 8 did not arise out of its order; it could have arisen only if it had been found as a matter of fact that the agreement was onerous and that the payment was made for getting rid of it on account of its being onerous. Similarly, question No. 9 did not arise out of the Tribunal's order because it never found as a matter of fact that the payment was made to get rid of Beharilal Kailashpat because its partners were quarrelling between themselves. Question No. 10 is practically same as question No. 3. The Tribunal rejected the application under section 66(1) but its order is not placed before us. The assessee then applied to this court under section 66(2) and proposed only the following two questions on which a statement should be demanded from the Tribuna l: Q. 1. Whether, in the circumstances of the case, the expenditure ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unal could have come to the conclusion that ₹ 19,03,300 were not spent by the assessee-company wholly and exclusively for the purpose of its business. The assessee then made an application under section 66(4) to this court praying that it should decide not only the question formulated by the Tribunal but also nin e more questions or direct the Tribunal to amend the statement and refer those questions also. It did not find any fault with the facts stated by the Tribunal in its statement; it did not allege that it was incomplete or incorrect in any respect. Its criticism was confined only to its failure to formulate the nine questions. Most of the questions proposed by it were about there being no evidence in support of the various findings recorded by the Tribunal, the remaining questions were about the interpretation of the managing agency agreement and about the whole payment being liable to be held to be not a revenue expenditure if the whole was not laid out exclusively for the purpose of carrying on its business. On this application this court on December 4, 1957, passed another order. It blamed the Tribunal for not appreciating the true scope and nature of the duty ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o an applicant whose application has been rejected in toto or in part. It is to be availed of only when the High Court is not satisfied that the statement is sufficient to enable it to determine the question raised thereby. If the statement is incomplete so that whatever questions are raised by it cannot be answered satisfactorily by the High Court, the High Court is empowered to refer the statement back to the Tribunal and to ask it to make additions or alterations to it. It is obvious that it cannot ask it to frame additional questions or refer other disputes; asking it to do so cannot be said to be making the statement sufficient to enable it to determine the questions already raised by it. The insufficiency must be in the narration of facts in order to attract the applicability of sub-section (4); the High Court must find it difficult to answer whatever questions are raised by it without further material from the Tribunal. The law has been explained by the Supreme Court in Kamlapat Motilal v. Commissioner of Income-tax [1962] 45 ITR 266 . The law laid down by this court in Juggilal Kamlapat v. Commissioner of Income-tax [1961] 41 ITR 257 is no longer good law, having been impli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al did not go into that matter and question No. 3 could not be said to arise out of its order. The assessee in order to discharge the onus placed before the Tribunal the managing agency agreement, the correspondence between it and the managing agents and the partners of the managing agents, its articles of association etc. ; the Tribunal held that all this material did not prove that the payment was of the nature referred to in section 10(2) (xv) and gave reasons in support of its finding. For its disbelieving a statement of fact or rejecting a contention of law it did not have to be in possession of any material; what is needed was only reasons or arguments which would appeal to a reasonable person. It could not disbelieve a statement of fact arbitrarily or without any intelligible reasons; but it could ' disbelieve it even though it had not in its possession any facts proving it to be false. The law regarding onus of proof is that the party on whom the onus of proving that a fact exists lies must produce sufficient evidence and only then the other party has the onus of rebuttal, i.e., that of producing evidence to prove that the fact does not exist. If the former party does n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting the assessee's claim for deduction under section 10(2)( xv) but the assessee challenged, through question No. 2 proposed by it, only a particular reason on the ground that there was no sufficient evidence to justify it. The assessee in its application under section 66(2) did not challenge the other reasons on the ground that they were not supported by fac ts. Consequently, this court, as was contended at the bar, went beyond its jurisdiction when it directed the Tribunal to frame question No. 1(b), (c), (d ) and (e). The result is that on the assessee's application under section 66(2), the only question that this court could call upon the Tribunal to refer to it was question No. 1(a) of the second statement of case. If the onus lay upon the assessee to prove that the managing agents rendered services to it, the Tribunal's disbelieving its evidence on this point does not raise any question of law referable to this court because, as I explained earlier, no facts are required for disbelieving the statement of fact. So even question No. 1(a) might not be said to be a question which this court could call upon the Tribunal to refer to it but in any case it was the only q ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the compromise decree dated January 11, 1945. Though the payees were also partners, belonging to the Gupta family of Beharilal Kailashpat, the payment was made to them not on account of their being partners of Beharilal Kailashpat but on account of their being partners of Beharilal Ramcharan. The compromise decree made it clear that the payment was to be made to the continuing partners, e.g., the partners of Beharilal Ramcharan. The award of Sri K.M. Munshi directed the payment to be made in accordance with the compromise decree, i.e., to the partners of Beharilal Ramcharan. The Singhanias ceased to be the partners of Beharilal Kailashpat on account of their interest in the partnership having been transferred to the Gupta partners under Sri Kanhaya Singh's award. The Singhanias acquiesced in the transfer of their interest to the Guptas by voluntarily accepting the price of their shares in the assessee-company. The managing agency agreement permitted the transfer of interest by some partners of Beharilal Kailashpat to others and made it clear that in the event of such transfer the reconstituted partnership would be deemed to be the managing agency; consequently, Beharilal Ramc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sed to exist on January 27, 1944, and there was no question of its being the assessee's managing agents thereafter. Beharilal Ramcharan became the managing agents with effect from January 27, 1944, and the assessee wrongly terminated the managing agency agreement and refused to recognize it as the managing agents, but this was done by the assessee consisting entirely of the Guptas. There was consequently no sense in saying that the Guptas as directors of the company terminated the agreement with themselves as constituting Beharilal Ramcharan for managing the assessee's affairs. There was no question of the Guptas paying any compensation to themselves and, therefore, no question of the assessee's paying any compensation to Beharilal Ramcharan for the wrongful termination of the agreement. There could not be any genuine dispute between the Guptas as representing the assessee and the Guptas as representing Beharilal Ramcharan and the proceedings for arbitration before Sri K.M. Munshi were undertaken with an oblique motive. The compromise decree of January 11, 1945, anticipated a direction by Sri K.M. Munshi in the award that the assessee should pay compensation to Beharila ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t all and also when there is some evidence but it is all disbelieved. In neither circumstance does a question of law arise out of it (unless by the authority's illegal refusal to receive evidence there has been absence of it). Further this court had no jurisdiction under section 66(4) to direct the Tribunal to submit another statement and this question could not have legally come before us. If still it must be answered, it has to be answered in the affirmative. It must be noticed that the question is whether there was any material for the finding that the managing agents rendered no service and neither whether there is any material for the finding that they rendered service nor whether they rendered service. This court could not be, and has not been, called upon to answer whether they rendered service; this being a pure question of fact was within the exclusive jurisdiction of the Tribunal. What the question means is whether there was some justification for the finding that the managing agents rendered no service or it was an arbitrary finding. The learned Advocate-General has not referred to us any direct evidence produced by the assessee to show that they rendered service to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rilal Kailashpat included minors and females. One more material is that there was no real distinction between the company and the managing agents. Even when Beharilal Kailashpat was the managing agents there was nothing to distinguish it from the company; the shareholders of the company were the Singhanias and the Guptas half and half and the same Singhanias and the same Guptas in equal shares were the partners of Beharilal Kailashpat. It was meaningless to talk of the Singhania-Gupta combination rendering service (as managing agents) to the same combination (as the company). Then there is the evidence that no change took place in the carrying on of the company's business after the termination of the agreement. Question No. 1(b ).-This question was not mentioned in the applications under section 66(1) and (2). This court had no jurisdiction to call for it from the Tribunal under section 66(4). If still it must be answered, it must be answered in the affirmative. The statement of the assessee's counsel before the Tribunal that no change took place in the carrying on of the assessee business other than that Lala Ram Ratan and Lala Ram Prasad became ordinary directors inste ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hemselves (as partners of Beharilal Ramcharan) for termination of the agreement. These facts supplied enough material for the Tribunal's theory that the Guptas had to pay the Singhanias ₹ 8 lakhs on account of some other consideration and that the so-called payment by the assessee to them of the sum of ₹ 18,90,000 was given the form of compensation so that they could discharge their liability and at the same time reduce the assessee's taxable income. Question No. 1(d). -The question was not mentioned in the application under section 66(2), did not arise out of the Tribunal's order and could not have been called for by this court under section 66(4). Once it was found that the managing agents rendered no service to the assessee and that consequently they were not entitled to any compensation, it was immaterial whether the disputes between the partners could have affected the carrying on of the business of the assessee or not. The onus lay upon the assessee to prove that the disputes would have affected the carrying on of its normal business and, if it placed no material before the. Tribunal, it could not but hold that the disputes did not affect the carryi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion or not. We have to take all our facts from the statement of the case submitted to us by the Tribunal. Question No. 1(e).-This question does not arise out of the Tribunal's order, was not mentioned in the applications under section 66(1) and (2) and could not have been called for by this court under section 66(4). It was for the assessee to show that it gained by terminating the agreement and if it placed no material to justify such a finding, the Tribunal could not but say that it had not gained by the termination. It could not possibly have gained by terminating the agreement with its own self. So if the question must be answered, it must be answered in the affirmative. Question No. 2.-This question is of fact and was not mentioned in the applications under section 66(1) and (2) and could not have, been called for by this court either under section 66(2) or under section 66(4). It should, therefore, be left unanswered. It was not disputed that if the remuneration fixed under the managing agency agreement was partly for the managing agents' promoting the company, part of the payment made to them for wrongful termination of the agreement would be for their promotin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ailashpat's promoting the company. It is equally irrelevant that the income-tax authorities had year after year deducted the whole of the remuneration paid by the company to Beharilal Kailashpat as a revenue expenditure from its income because the principle of res judicata does not apply in taxation matters and it is open to the Commissioner of Income-tax to show that part of it was not a revenue expenditure. Whatever this court said in respect of this matter in Commissioner of Income-tax v. Ram Ratan Gupta [1963] 48 ITR 531 did not bar the Tribunal's finding that part of the payment was for promoting the company. This court did not find that the promotion of the company by Beharilal Kailashpat was consideration only for the term of 99 years and not for other promises made to it. The question whether part of the remuneration fixed for it was not in consideration of its promoting the company was not discussed by it at all. Question No. 3.-This question is irrelevant and does not arise out of the Tribunal's order, as already explained. It was not mentioned in the applications under section 66(1) and (2). It is, therefore, left unanswered. Question No. 4.-I shall tak ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... finding. If the evidence is direct there would be no difficulty and the question of law would be answered in the affirmative (provided no procedural irregularity was committed by the authority in receiving the evidence). The answer would be in the affirmative howsoever unworthy of belief the evidence was or howsoever strong the evidence in rebuttal was because, as I said earlier, believing or disbelieving a piece of evidence is not a matter governed by any law. In the case of indirect or circumstantial evidence the finding about the existence of the fact involves two findings, one of the existence of certain relevant facts and the other of inferring from them the existence of the fact in issue. In respect of the former finding (about the existence of relevant facts) the only questions of law that can possibly arise are, as explained earlier, (1) of the evidence or material to prove the relevant facts, and (2) of the procedure followed in receiving the evidence or material to prove their existence. In respect of the other finding, e.g., of the inference, the only question of law that can arise is whether from the relevant facts the existence of the fact in issue could be inferred at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... though the question whether a payment is deductible under section 10(2)(xv) must be decided on the facts of each case, the final conclusion is one of law . Similarly, in the case of James Snook Co . Ltd. [1952] 33 Tax Cas 244 it was held that whether the expenditure was or was not made wholly and exclusively for the purpose of the trade is one of fact. In Indian Copper Corporation Ltd. v. Commissioner of Income-tax [1960] 38 ITR 544 the Patna High Court said that the question is a mixed question of fact and law, the question of law being whether the payment comes within the ambit of section 10(2)(xv). In Commissioner of Income-tax v. Chandulal Keshavlal Co. [1960] 38 ITR 601 (SC), Kapur J. said at page 610 : It is a question of fact in each case whether the amount... was laid out wholly and exclusively for the purpose of such business and if the fact-finding tribunal comes to the conclusion on evidence which would justify that conclusion. ... then it will be an admissible deduction. Whether an assessee should be allowed to deduct a certain expenditure is a question of fact and law both. It is a pure question of fact for what purpose or object the payment was made by him and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inding of fact and law they mean the finding that the payment was of a non-capital natura made wholly and exclusively for the purpose of the business and that consequently it is deductible. The above discussion makes it clear that the first limb of the question is a pure question of fact and cannot be answered by us and, if it cannot be answered by us, the second limb does not arise. Even if we were to reduce the question to the question, whether there is any material for the finding that the payment was not an expenditure incurred wholly and exclusively for the purpose of the company's business, the answer would be against the assessee. An expenditure incurred in promoting a company can never be said to be an expenditure incurred for its purpose; the question of a company's incurring an expenditure for its purpose arises only after it has been promoted and constituted. An expenditure incurred earlier cannot be said to be for the purpose of its business. It is a finding of fact that a part of the expenditure was for promoting the company; this means that the expenditure was not wholly and exclusively incurred for the purpose of the company's business. Further, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... greement was not found to be connected with the carrying on of the company's business. In G. Scammell Nephew Ltd. v. Rowles [1939] 22 Tax Cas 479; 8 ITR (Suppl.) 41 a payment made to get rid of an agreement of an onerous nature of a servant whose continuance in service was undesirable was said to be for the company's business. In P. Orr Sons v. Commissioner of Income-tax [1959] 35 ITR 55 a payment made to get rid of a managing agent, who was working satisfactorily, was found to be for the purpose of the assessee's business because it was found necessary to get rid of him in a particular situation which arose in the course of the accounting year. Similarly, in Indian Copper Corporation Ltd. v. Commissioner of Income-tax [1960] 38 ITR 544 compensation paid to directors for their vacating office was held to be deductible. In Commissioner of Income-tax v. Chandulal Keshavlal Co. [1960] 38 ITR 601 (SC) an assessee's remitting a part of i ts commission from m anaged company, the financial position of which was not satisfactory, was held to be an allowable deduction. The test applied by the Supreme Court was of commercial expediency. Fines or penalties paid for infri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the business of standing security for others. It is not enough that a payment was made wholly and exclusively for the purpose of the business; it is also essential that the payment is not of a capital nature. A rough criterion laid down by Viscount Cave L.C. in Atherton v. British Insulated and Helsby Cables Ltd. [1925] 10 Tax Cas 155 and adopted in many cases subsequently for distinguishing between capital expenditure and income expenditure is that the former is a thing which is going to be spent once and for all, an income expenditure is a thing which is going to recur every year. The test, however, is not decisive as pointed out by the Lord Chancellor himself. If a payment is made once and for all and with a view to bringing into existence an asset or an advantage for the enduring benefit of the trade, in the absence of special circumstances, it is a capital expenditure; for instance, money spent by a brewer for acquiring new licensed premises or by a ship-builder for creating a deep water berth for the facility of vessels. A lump sum payment can be a revenue expenditure and is not necessarily a capital expenditure, as pointed out by Rowlatt J. in the case of Anglo-Persia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gh Court said that an expenditure is deemed to be capital when it was made for the initiation of a business, or for extension of a business, or for a sub-stantial replacement of equipment. A payment made to get rid of a servant is a business expenditure appointed out in the case of Associated Portland Cement Manufacturers Ltd. v. Kerrjf [1945] 27 Tax Cas 103, and B.W. Noble Ltd. v. Mit chell [1926] 11 Tax Cas 372, but payment made to a retiring director in consideration of his not carrying on similar business after retirement is a capital expenditure as held in the case of Associated Portland Cement Manufactures Ltd. v. Kerr [1935] 3 ITR (Eng.Cas) 17 In the latter lease, Lord Greene M.R. distinguished between getting rid of an unsatisfactory servant and buying off a potential outside competitor and between defending assets against the claim of somebody who has no title to them and acquiring a new asset or adding to an existing asset. In the case of Van den Berghs Ltd. v. Clark [1935] 3 ITR (Eng.Cas) 17 the payment was made for termination of an agreement, but it was held to be of a capital nature because the agreement was not an ordinary commercial contract made in the course of bu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ongful; he was not concerned with the question whether their removal was in the interest of the company's business or not and whether it was necessary to pay them anything in order to induce them to retire. Consequently, the award was irrelevant to the question whether it was in the interest of the company to remove the managing agents and whether it was necessary to pay them the money to induce them to retire or to agree to their removal. Damages paid for wrongful removal of managing agents stands on the same footing as a fine or penalty paid and cannot be said to be an expenditure incurred wholly and exclusively for the purpose of the business. If it is necessary to remove the managing agents in the interest of the business, it may be done with their consent after paying compensation to them and the payment of compensation can be said to be an expenditure wholly and solely incurred for the purpose of the business, but wrongful removal, i.e., removal against the law, cannot be said to be for the purpose of the business. For these reasons, I must hold that the payment in question was not made wholly and exclusively for the purpose of the company's business. The facts sug ..... X X X X Extracts X X X X X X X X Extracts X X X X
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