TMI Blog1934 (7) TMI 15X X X X Extracts X X X X X X X X Extracts X X X X ..... pete with the assessees ' business after the termination of the agency-are or are not expenditure allowable in charge under Section 10 (2) (ix) of the Act. Section 10 (2) deals with the manner in which profits or gains are to be computed for the purpose of assessment of income tax, and it contains an enumeration of the allowances which the asses-sees shall be entitled to make or, to put it more accurately perhaps, the deductions which the assessees are entitled to make before a net sum is arrived at upon which income tax becomes payable, and in sub-paragraph (ix) we find as a permissible allowance or deduction any expenditure, not being in the nature of capital expenditure, incurred solely for the purpose of earning such profits or gains. The Court is, therefore, asked by the Commissioner of Income Tax to decide in effect whether the payment of ₹ 10,000 was one which could be taken into account by way of deduction for the purpose of arriving at the net sum upon which income tax would be payable in respect of the tax year 1931-32. This matter originally came before the Court on the 12th February, 1934. Some question was then raised by learned Counsel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Commissioner of Income Tax, solely with reference to the provisions of sub-Section (ix) of Section 10 (2) of the Act. In order to make it quite clear what the point is which has been submitted for determination by the Court, it is necessary that I should recite the relevant facts which show the circumstances in which, and the conditions under which, the payment in question came to be made by the assessees. The Commissioner points out that the payments in issue relate to two agencies of the assessees, that is, of the Imperial Chemical Industries (India), Ltd., one at Madras and the other at Colombo. It appears that the assessees succeeded a company known as Messrs. Brunner Mond and Company (India), Ltd., in the tax-year 1928-29. I presume the Commissioner of Income Tax means that the business of Messrs. Brunner Mond Co., was taken over by or absorbed into the undertaking known as Imperial Chemical Industries (India), Ltd. Messrs. BrunneriMond Co., on 9th February, 1923, had entered into what is described as a del credere commission agency with a firm known as Parry and Company, Madras. That agreement contained inter alia the following clause : Either party may, by noti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... On 8th February, 1927, the agents replied accepting the proposals (in the letter copied as Annexure B), including their appreciation of the friendly and generous attitude which has guided these negotiations. By a letter of 14th June, 1927 (copied as Annexure C), the assessee gave due formal notice of termination of the agreement with effect from 31st December, 1927. By agreement with the assessee the agents debited in their running account of 28th December, 1927, the lump sum of ₹ 30,000 ; but the assessee distributed the charge in his revenue accounts, passing ₹ 4,500 through the books on 30th September, 1928, and ₹ 6,000 annually since then : so that ₹ 6,000 falls in the accounts for the year ending 30th September, 1930, under the present assessment; that is of course the assessment for the tax-year 1931-32. Then the Commissioner of Income Tax says : It may be noted for information that the commission (gross) payable to Messrs. Parry and Company had been approximately 1925 26,300. 126 31,000. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... commission (gross) were approximately :- Rs. 1928 9,300. 1929 9,600. 1930 4,070. the latter sum being allowed for 4 months of the year after the formlal expiration of the agency. Then comes the material statement in the case with regard to the total sum of Rs, 10,000. In paragraph 5 the Commissioner says : The amount thus charged in this period in respect of the two agencies.totalled ₹ 10,000. It appears that the Agents held and kept stocks of the assessee's goods: and in the course of the change-over of the business, transferred the stocks to the assessee as convenient. Then in paragraph 5 (b) the Commissioner says: The assessee's case throughout the assessment and in his application to the Commissioner for revision was as follows (quoted from his letter of 5th October, 1931 ):- We still contend that this compensation is from our point of view an allowable business expense. The payment of the compensation d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he letters which passed between the assessees or rather Messrs. Brunner Mond Co., their predecessors and Messrs. Parry Co., of Madras, and the corres- pondence between Messrs. Brunner Mond Co., and Messrs. Hayley and Kenny of Colombo. As regards what I will call the Madras Agency correspondence, we find in the letter of 4th February, 1927, which is Annexure A the result of the negotiations between the company and their Madras agent, summarised as follows:- (1) You will allow any members of our European staff, whom we may detail for the purpose, to work on our business in your office during the continuance of the agency. (2) As the time approaches when we consider that our staff will shortly be in a position to run the business independently, we shall give you the six months' notice required under your Agency agreement. (3) You will not oppose the opening of our office or offices in Madras or elsewhere during the period of the notice. This will, of course, not affect your position as regards commission, which will be payable until the notice expires. Paragraphs (4) and (5) are not very material, but in paragraph ((3) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d render us every possible assistance in establishing our own office in Colombo and it was agreed that you would permit one of our European Assistants to work in your office for such period as we desire, probably 6 months, in order to become thoroughly acquainted with the buyers of our products and with depots that have been opened. It was also agreed at your special request that the amount fixed as compensation should be paid to you when our European Assistant was attached to your office. Those proposals were accepted by the Colombo Agents in their letter of the 21st March, 1929. It will be seen from that correspondence that the real position was that Messrs. Brunner Mond Co., as predecessors of Imperial Chemical Industries (India), Ltd., were making an arrangement whereby instead of conducting their business and providing for the sale of their products through agency firms in Madras and Colombo, they would in future conduct their business through their own officers and their own staff in those two centres respectively. In brief, the position was that although Messrs. Brunner Mond Co., were entitled to put an end to the agency agreement upon a bare six months' n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble to discover anything which would warrant the splitting up of this sum into difinite aliquot parts as the Commissioner had done, or even to warrant its being split up and designated as being referable to the three matters which the Commissioner described as payments as ex gratia rewards, for restraint of future competition and towards facilitating the transfer. In our opinion, there was absolutely no evidence at all upon which the Commissioner of Income Tax could have come to that conclusion. But what is far more important for the purpose of the determination of the case now before us, is that there was nothing in the pure facts of the case as set out by the Commissioner in the paragraph headed Facts which justified him in taking the view that any part whatever of the ₹ 10,000 was payment in the nature of an ex gratia gift made in recognition of past services. On the contrary, the assessees, or rather their predecessors say quite definitely and categorically in paragraph (6) of their letter of the 4th February, 1927, that the sum which they were willing to pay was as compensation to a certain extent for the loss of the agency, that is to say, they were prepared to pay th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Court must take the finding of fact as they are stated by the Commissioner, and either express an opinion upon those findings or say that it is impossible to express any opinion, because the findings of fact are not warranted by the evidence upon which they were based, and it is not competent to us to look at the real situation and to give a decision or judgment founded upon what appears to us to be the real position, having regard to all the circumstances and all the facts as revealed by the evidence which the Commissioner has put before us. I have already stated that in our opinion there was no justification for what the Commissioner says he has found as a fact, namely, the splitting up of the sum of ₹ 10,000 or the finding that it was made in part as an ex gratia gift in recognition of past services. The learned Advocate-General says that nevertheless we must answer such part, of the question as we can upon those findings, and reject the rest, or else say that it is impossible to deal with this reference at all. The learned Advocate-General has quoted a number of authorities. Notably the case of The Tata Iron and Steel Company Limited v. The Chief Revenue Autho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the statement of facts, if only for the reason that there would be no material upon which it was possible for it to do so. But in the present instance what the Commissioner of Income Tax says he has found as facts is actually a series of conclusions which are founded partly on pure facts and partly on inferences which he has drawn from those facts The pure facts in the present instance are the matters set out in paragraphs 3 and 4 of the case and what he has stated in the opening paragraph as having been found as a fact specially as regards item (a), is really the inferences which the Commissioner has drawn from the bare facts which he has stated in paragraphs 3 and 4. In those circumstances, it seems to me that we ought to deal with this case upon the principles which are contained in a passage in the judgment of the Master of the Rolls in the case of The Gramophone and Typewriter Ltd. v. Stanley [1908] 2 K.B. 89 , where his Lordship said : The question arises on a case stated by the Commissioners. It is undoubtedly true that, if the Commissioners find a fact, it is not open to this Court to question that finding unless there is no evidence to support it. If, however, the Commis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing of is a benefit which endures, in the way that fixed capital endures; not a benefit which endures in the sense that for a good number of years it relieves you of a revenue payment. It means a thing which endures in the way that fixed capital endures. It is not always an actual asset, but it endures, in the way that getting rid of a lease or getting rid of onerous capital assets or something of that sort as we have had in the cases, endures. I think that the Commissioners, with great respect, have been misled by the way in which they have taken 'enduring' to mean merely something that extends over a number of years. I do not quite understand how the view that they appear to have taken is consistent which the numerous cases. Then the learned Judge proceeded to deal with the case almost as if the whole matter was at large and he was in a position to form his own judgment upon the whole of the materials then before him. All these cases to which I have just referred and certain ether cases are collected and discussed in SUNDARAM'S book on the Law of Income Tax at p. 1037 (et seq.) . In the light of all those authorities, I think what we ought to do in the prese ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r to facilitate their own future operations. In those circumstances, it seems to me unarguable to suggest that the assesees were doing; anything else than making payment for the purpose of acquiring for themselves an enduring benefit which would result in increased profits or gains. The real question which has been canvassed before us in this case and the actual point upon which we have to express our opinion is, whether or not the expenditure was of the kind which ' falls within the proviso contained in the words within the parenthesis in sub-section (ix). Those words are not being in the nature of capital expenditure. Paraphrasing the whole of sub-Section (ix), a proposition can be formulated thus: It is permissible that an allowance shall be made for an expenditure which has been incurred solely for the purpose of earning profits or gains of any business, provided that such expenditure is not an expenditure in the nature of a capital expenditure. Stated in a different form, the problem which we have to solve is whether or not the payment of the sum of ₹ 10,000 was a payment which ought to be charged to capital account in the books of the assessees or could p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... before the Court and in regard to that particular test, VISCOUNT CAVE, who was then LORD CHANCELLOR, in the case of British Insulated and Helsby Cable' s case (supra ) made this comment: In Vallambrosa Rubber Co.' s case (supra ) Lord Dunedin, as President of the Court of Session, expressed the opinion that 'in a rough way' it was not a bad criterion of what is capital expenditure'-as against what is income expenditure-to say that capital expenditure is a thing that is not going to recur every year; and no doubt this is often a material consideration. But the criterion suggested is not, and was obviously not intended by Lord Dunedin to be, a decisive one in every case; for it is easy to imagine many cases in which a payment, though made 'once and for all would be properly chargeable against the receipts for the year, Instances of such payments may be found in the gratuity of l,5O0 paid to a reporter on his retirement, which was the subject of the decision in Smith v. Incorporated Council of Law Reporting for England and Wales [1914] 3 K.B. 674 and in the expenditure of 4,994 in the purchase of an annuity for the benefit of an actuary who had retired, whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. In that state of things it has occured to me, my Lords, that the existence or nonexistence of this so-called asset might fairly be submitted to the prosaic test of asking what in a liquidation would be forthcoming in respect of it- when a liquidator essayed his statutory duty to realise the company's assets and divide the proceeds amongst his constituents. Certainly no part of the fund. That in its entirety is completely alienated. And I can myself think of nothing else. Moreover, my Lords, a reference to the authorities shows, it seems to me, clearly that it is by reference to no such shadowy conceptions that the words of the statute employed as capital have to be interpreted. Such things as a purchase of goodwill involving a capital expenditure might come within them: Smith Son v. Moore [1921] 2 A.C. 13, an excess profits duty case. Then he quotes various other instances. Now, the passage which I have quoted from Lord Blanes-Burgh's judgment suggests two further tests in addition to those indicated by LORD DUNEDIN And Lord Cave. The first test is this : Did the expenditure involve any withdrawal of capital? It would seem that in the case with which we are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Nor is it surprising that learned Judges should have applied tests which, however satisfactory for the purpose of solving the particular problem before them, should turn out to be inconclusive or insufficient when applied to the facts of another case. The law applicable to such cases as the present was, it seems to me, placed beyond the realms of controversy. The boundary line between deductions that were permissible and those that were not, had previously been uncertain and difficult to follow. As regards the large majority of deductions, there was, and could be, no conceivable doubt. They were clearly on one side of the line or the other. But as regards a comparatively small number, it was difficult to say on which side of the line they fell. This was particularly the case where, as in the present one, an expenditure, is not a recurring one, but is made once and for all. It was pointed out by Lord Cave in Atherton's Case ( supra), that an expenditure, though made once and for all, may nevertheless be treated as a revenue expenditure. And he then added this: But when an expenditure is made, not only once and for all, but with a view to bringing into existence an aseet or an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... so with respect, by the Commissioners of Income Tax in this country. If the Commissioner in the present case had contended himself merely with a finding of fact on the lines suggested by LORD JUSTICE ROMER, what he has decided could not have been open to questions by this or any other Court. I have already expressed my opinion that in the present case there was no evidence on which the learned Commissioner of Income Tax could have come to the conclusion he did on matters which were really questions of mixed law and fact. In our judgment the principles laid down in the case of The Anglo-Persian Oil Co. Ltd's case (supra) , (the applicability of which to the present case the Commissioner of Income Tax disputes) are quite wide enough to provide the answer to the real and paramount question which is before us. In that case the facts were that in 1914 the Anglo-Persian Oil Co. entered into an agreement with a firm called Strick, Scott and Co., Ltd., under which the latter were appointed agents of the company to manage its business in Persia and the East for a term of ten years. It appears that the remuneration paid to these agents proved larger and more onerous than had be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ould not compete without paying them out-I understand it was suggested that there was something of that sort in this case, perhaps-or you might, as I say, expend money in the way of capital to get your service on its feet. What I feel here is that there is not a trace of any such thing. There is no evidence of it-none. There is not any evidence, and it was not suggested before the Commissioners as I understand it, that any part of this sum was paid for the purpose of acquiring anything analogous to goodwill on the part of these people. Of course they had to be paid for the value of their rights for ten years to receive this money. Now the Advocate-General has argued before us that that passage of Mr. Justice Rowlatt, so far from being of assistance to the assessees, really tells in favour of the income tax authorities, because, said the Advocate-General, what Messrs. Brunner Mond and Co., or Imperial Chemical Industries (India), Limited, were doing was to acquire a new business or, at any rate, to acquire the goodwill of somebody else's business, I have already expressed the opinion that upon the facts-just as Mr. Justice Rowlatt felt in the case of Anglo-Persian Oil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gold, and by some new process of treatment some of this gold was recoverd and sold by the company. It was held by the Court of Appeal, reversing the decision of Mr. Justice Finlay , that as the tailings were raw material already won and gotten, the amount expended in acquiring them was in the nature of an expenditure on the raw material of the company's trade and therefore that for the purpose of assessing the company's profits or gains, the eost of the tailings treated during the period of assessment was a proper deduction from the proceeds realized by the sale of the gold extracted. Lord Justice Romer said:- The question to be decided in this case is whether the dumps are to be regarded as fixed capital or as circulating capital. If they are the former, it is conceded by the appellants that the assessment made on them is correct. If on the other hand, they are floating or circulating capital, it is conceded that the cost of them to the appellants must be debited in the profit and loss account, the account being credited with the cost price of what was left of the dumps at the end of the year of assessment. The dumps, in other words, must be dealt with in the pro ..... X X X X Extracts X X X X X X X X Extracts X X X X
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