TMI Blog1958 (10) TMI 63X X X X Extracts X X X X X X X X Extracts X X X X ..... t provided: The said private company, namely, Smith Ltd. and its assigns and successors in business notwithstanding any change in the name, style or constitution of the said private company, hereinafter called also the said managing agents, shall be managing agents of the company for a period of twenty years certain from the date of P. Orr and Sons Ltd. becoming a public limited company, i.e., from the twenty-fourth day of December, one thousand nine hundred and thirty-six until the twenty-third day of December one thousand nine hundred and fifty-six, and thereafter unless and until the said managing agents shall resign of their own accord or be removed from office by a special resolution of the company..........it being expressly agreed that no question of removal from office of the said managing agents before the expiry of the period of twenty years aforesaid shall arise under any circumstances whatsoever save and except on the said managing agents being found guilty in a competent court of law of fraud in the management of the business of the company or in the discharge of their duties as the managing agents of the company. In addition clause 9 of the agreement provided: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... quired of Smith was (1) the termination of the managing agency with the retrospective effect from April 1, 1948, which necessarily involved the loss of the managing agents' remuneration and commission payable for the year which commenced with April 1, 1948, and (2) waiver of the right to the be 25 per cent. commission earned during the year that ended with 31st March, 1948: In return Smith was offered a lump sum of ₹ 1,25,000. Smith was further offered a life directorship of the company, with charge of the London office on a remuneration of 1,200 per year. By the time this letter was sent, the commission payable to Smith for 1947-48 had not been ascertained. It was estimated at ₹ 31,000 but eventually it was found that ₹ 89,214 would have been payable under this head. Smith accepted the terms offered to him (annexure B1). The directors thereupon informed the shareholders of the proposal to terminate the managing agency (annexure-B-2 dated August 26, 1948). There was no reference in that letter, B-2, to any proposal to convert the company into a public company. The relevant portion of that letter ran: Subject to the approval of the members, your directors ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der section 66(1) came up first before this court, it directed by its order dated April 17, 1956, the submission of a further statement of the case with a specific finding on the second of the questions mentioned above. In the further statement of the case submitted by the Tribunal it recorded: In the ultimate analysis we find that the reasons for the payment of the compensation in question are not business reasons motivated by any commercial consideration that was the urge to the transaction. The amount in question cannot therefore...................be said to have been wholly and exclusively laid out for the purpose of the assessee's business for the year ended 31st March, 1949................ Apparently the Tribunal was of the view that no portion of this sum of ₹ 1,25,000 was expended wholly and exclusively for the business of the assessee. Had even a portion of that expenditure been incurred out of business considerations alone, an apportionment would have had to follow, on which the Tribunal did not embark. In our opinion neither of the findings of the Tribunal was justified by the material it had to consider. The approach to a problem of this kind is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... osal was that Smith should serve as managing director up to the end of March, 1949, on a monthly salary of ₹ 3,000. He would have had the same amount as Smith Ltd., if the managing agency were not terminated with retrospective effect from April 1, 1948. No doubt Smith actually continued as managing director for a year more, up to March 1950, but that was not, and could not have been contemplated in August, 1948. Yet another item of the arrangement was that when Smith quitted India after ceasing to be the managing director, he should be employed by the assessee company as a director in charge of the London office and its buying organisation on an annual salary of 1,200. The Tribunal appears to have misconstrued the scope of the expression retire . Smith did not intend to retire altogether from the business of the assessee company. He was to continue in the service of the company, but at London and not in India. That this arrangement benefited him did not alter the fact, that from the point of view of the assessee company it was an arrangement to its considerable advantage. Ultimately the shareholders decided to grant a pension to Mrs. Smith after the lifetime of Mr. S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... same account. In my opinion the answer to this contention is to be found in a recognition of the fact that it is necessary for income-tax purposes, to look at a business as a whole set of operations directed towards producing income. No expenditure, strictly and narrowly considered, in itself actually gains or produces income. It is an outgoing, not an incoming. Its character can be determined only in relation to the object which the person making the expenditure has in view. If the actual object is the conduct of the business on a profitable basis with that due regard to economy which is essential in any well conducted business, then the expenditure (if not a capital expenditure) is an expenditure incurred in gaining or producing the assessable income. If it is not a capital expenditure it should be deducted in ascertaining the taxable income of the taxpayer. In Noble Ltd. v. Mitchell [1926-27] 11 Tax Cas. 372, a sum of 19,200 was paid to a retiring director. The company claimed that as a deduction from its profits for income-tax purposes. In upholding that claim Lord Hanworth, M.R., observed at pages 420-421: It is a payment made in the course of business, dealing with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpany agreeing to pay to the agents 300,000 in cash. This sum was in fact paid and the company contended.....................that it was an admissible deduction in computing the company's profits.................... That claim was upheld by Rowlatt, J., and his decision was confirmed on appeal. Lord Hanworth, M.R., said this at page 268: The company had appointed Messrs. Strick, Scott Co. as their agents. They have now withdrawn that agency and are doing the business themselves. It seems difficult to accept the view that the appointment of an agent, or the withdrawal of an agency, in the very business belonging to the principals, creates or destroys a business of a separate nature or an asset which is to be added to the capital account..............where, as in this case, the expenditure is to bring back into the hands of the company a necessary ingredient of their existing business-important, but still ancillary and necessary to the business which they carry on--the expenditure ought to be debited to the circulating capital rather than to the fixed capital, which is employed in and sunk in the permanent--even if wasting--assets of the business. Lawrence, L.J., ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the parties to the transaction was ever in doubt. All of them acted in the best interests of the company. The shareholders approved of the proposals made by the directors. Judged by the test of business expediency, it seems clear to us that the amount was expended wholly and exclusively for the business of the assessee company. What we have stated earlier should suffice to answer this question also in favour of the assessee. In paragraph 30 of its further statement of the case the Tribunal recorded: ........it is not unreasonable to infer that the directors in making the proposals for termination were fully conscious of Smith's independent intention to retire from India whether with or without compensation. What the Tribunal appears to have overlooked is that there was no indication that no quitting India Smith intended to throw away the valuable rights he could claim under the managing agency agreement. He could assign those rights; he could appoint some one to carry on the managing agency on behalf of Smith Ltd. Quitting India did not mean quitting business. We are unable to find on what basis the Tribunal came to the conclusion, that Smith, contemplated complete r ..... X X X X Extracts X X X X X X X X Extracts X X X X
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