TMI Blog1994 (11) TMI 38X X X X Extracts X X X X X X X X Extracts X X X X ..... he termination of the agency in accordance with the provisions of the Companies Act, 1956, as amended on August 1, 1975, was an allowable deduction for the assessment year 1977-78? 2. Whether, on the facts and in the circumstances of the case, in the case of a director who is also an employee of the assessee-company, the provisions of section 40(c) of the Income-tax Act, 1961, are applicable and not the provisions of section 40A(5) of the said Act? Counsel for the parties are agreed that the controversy in the second question is covered by the decision of this court in CIT v. Hico Products Pvt. Ltd. (No. 1) [1993] 201 ITR 567, where it has been held that the provisions of section 40(c) of the Income-tax Act, 1961, would be applicable in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reviously approved by the Central Government. Moreover, though, according to the provisions of the Income-tax Act, the sole selling agent cannot be treated as a person having a substantial interest, the sole selling agent in the present case was liable to be so treated under the provisions of the Companies Act and as the prior approval of the Central Government was not taken, the sole selling agency stood terminated as on August 1, 1975. By a letter dated July 14, 1976, the sole selling agents claimed compensation for the loss of office of sole selling agency. There was an exchange of letters on the subject between the assessee and the sole selling agents. The assessee also obtained the opinion of its solicitors who opined that the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uld have easily avoided the payment of compensation. He, therefore, held that the payment was not governed or dictated by commercial expediency. The assessee went in further appeal to the Income-tax Appellate Tribunal. The Tribunal considered the case of the assessee and observed that compensation had been given by the assessee in the light of its solicitor's opinion and the provisions of the Companies Act. The Tribunal also observed that there was nothing to say that the payment made by the assessee was illusory or mala fide. It was also noted by the Tribunal that no evidence had been brought on record by the Revenue to show that the transaction in question was a got-up affair in order to hoodwink the Revenue and that the claim made by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld that the claim of the assessee was not allowable as a business deduction. The principles governing the allowance of deduction in respect of such expenditure are well-settled by now by a catena of decisions of the Supreme Court and the various High Courts. Such deductions are ordinarily claimed and allowed under section 37 of the Act which is a residuary section extending the allowance of deduction to items of business expenditure not covered by any of the preceding sections (sections 30 to 36) and section 80VV. The only conditions are that : (i) it is not an expenditure, (a) in the nature of capital expenditure, or (b) personal expenses of the assessee, and (ii) it is laid out or expended wholly and exclusively for the purposes of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly so in view of the following findings of fact arrived at by the Tribunal which are not the subject-matter of challenge in this reference application : (i) The factum of payment is proved ; (ii) There is nothing on record to show that the payment was illusory or that the assessee's claim was mala fide ; (iii) There is no evidence on record to show that the transaction was a got-up affair to hoodwink the Revenue ; (iv) The claim of the sole selling agents is not sham ; (v) The compensation has been given in the light of the opinion of the solicitors, who advised the assessee to pay the same ; (vi) The amount paid by way of compensation more or less corresponds to the amount of remuneration that would have been payable for the un ..... X X X X Extracts X X X X X X X X Extracts X X X X
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