TMI Blog1949 (9) TMI 32X X X X Extracts X X X X X X X X Extracts X X X X ..... subscribed capital exceeded ₹ 5,00,000, then for every ₹ 2,00,000 of the increase the managing agents were to get an additional monthly allowance of ₹ 150. It appears that Nath Bank Ltd. instituted four suits against the Basanti Cotton Mills Ltd. In two out of the said four suits the Calcutta Agency Ltd. was impleaded as the co-defendant. The claim of the Nath Bank Ltd. was on certain hundis drawn by one Mr. S.C. Mitter purporting to act on behalf of the Calcutta Agency Ltd. These suits were decreed for ₹ 31,593-9-3 and ₹ 21,054-2-9. These decrees were passed by consent of the parties. In the other two suits in which the applicant company was not a party decrees were passed for ₹ 1,15,735-12-5 and for ₹ 21,593-8-3. An agreement was entered into between the applicant company and the Basanti Cotton Mills Ltd. Inasmuch as a good deal of argument has been advanced on the language of this agreement, the same is set out below :- Memorandum of agreement made between the Calcutta Agency Limited of the one part and Basanti Cotton Mills Limited of the other part Whereas the Nath Bank Limited demanded from the mills the payment of the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see under the head salaries in respect of any salary or wages, any annuity, pension or gratuity, and any fees, commissions, perquisites or profits in lieu of, or in addition to, any salary or wages, which are due to him from an employer. The first proviso to Section 7 runs as follows :- Provided that the tax shall not be payable in respect of any sum which the assessee by the conditions of his employment is required to spend out of his remuneration wholly, necessarily and exclusively in the performance of his duties. Mr. Mitra urges that payment out of the commission of the sum aforesaid was made by the applicant company wholly, necessarily and exclusively in the performance of its duties. Mr. Mitra's argument was that unless the company agreed to pay the amount aforesaid, its managing agency would have been terminated by the mills and therefore such, payment came within the said proviso to Section 7. The Tribunal held that the proviso to Section 7 was not intended to cover payment of this nature. It is difficult to bring this payment within the first proviso to Section 7. The expenditure must be made wholly, necessarily and exclusively in the performance of it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 373 A company, which carried on an insurance business, wanted in the interest of its business to get rid of one of its directors. The company entered into an agreement with him under which in consideration of a payment to him by the company of 19,200 the director undertook to retire from the company, to sell and transfer the 300 1 shares held by him in the company to the remaining directors at par, and to abandon all claims that he might have against the company, or its directors. The other directors were parties to this agreement. 19,200 was payable in five annual instalments. The company paid the first instalment of 5,200 and sought to deduct it for income-tax purposes from the profits in the year of paymentas being money wholly and exclusively laid out for the purposes of the business. The Commissioners allowed the claim. Rowlatt, J., held that inasmuch as the directors were satisfied that in order to save the company from scandal it was necessary to get rid of the director and to pay him the sum in question, that sum must be regarded as money wholly and exclusively laid out and expended for the purposes of the trade of the company within the meaning of Rule 3 of the Rul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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. Atherton's case (supra ) was discussed at some length before the Court of Appeal in Mitchell's case (supra). Lord Hanworth, M.R., held that when payment is made in the course of business, with reference to a particular difficulty and is made not in order to secure an actual asset to the company, but to enable the company to continue to carry on, as it had done in the past, the same type and quality of business, it is not a capital expenditure. Sargant, L.J., took the same view and pointed out that the payment was being made to the director in order to get rid of him and to preserve the status and dividend earning power of the company and that was within the ordinary purposes of the trade, profession or vocation of the company. The learned Lord Justice observed : It is quite impossible to put against the capital account of the company, as I conceive it, a payment of this nature. It seems to me that the payment, though large and though exceptional, was not of such a nature; it certainly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income. The Privy Council observed : It is not a case of the application by the appellant of part of his income in a particular way ; it is rather the allocation of a sum out of his revenue before it becomes income in his hands. Really in charging the income of an individual the Income-tax Act intends to charge what reaches the individual as income. It was pointed out by Dr. Gupta that in Jagadish Chandra v. Dhanpati Singh [1945] 13 ITR 64, a Division Bench of the Patna High Court has held that where a testator has bequeathed his properties to another creating a charge for an annuity for maintenance the principle laid down in Dudhuria's case (supra) will apply and the annuity will not become income of the legatee, but where the legatee himself creates a charge for a debt payable to him that principle will not apply. In Dudhuria's case (supra), however, the decree had been passed by consent of parties and there was no testamentary disposition by the Raja's father creating any charge. Dr. Gupta drew our attention to Commissioner of Income-tax v. Manager, Katras Encumbered Estate [1934] 13 Pat ; ITR 100 . In that case the proprietor of a coal mine owed monies to a co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eement was to enable the company to remove a difficulty in carrying on the business of the company and to earn profits in its business. Therefore, this case is covered by the judgment of the Court of Appeal in Mitchell's case (supra) and the payment should be treated as expenditure from revenue and not from capital and is a proper deduction in the computation of profits or gains. The payment here cannot be attributed to capital inasmuch as it was not made with a view to bringing a tangible asset or advantage into existence. It is also to be noted that in order to make it a capital payment the asset or advantage is to be for the enduring benefit of the trade. As Rowlatt, J., said by enduring is meant enduring the way that fixed capital endures. Romer, L.J., approved of this view in Dale's case (supra). Therefore, the payment or expenditure in question was made or incurred in the conduct of the business of the company and it is not a capital expense. I answer the question framed in the statement of case in the negative and I hold that in the facts of this case the sum of ₹ 22,500 is not taxable in the hands of the applicant company. Harries, C.J.-I agree. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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