1962 (7) TMI 56 - HC - Income Tax

Summary

Issues Involved:
1. Admissibility of Rs. 18 lakhs as a deduction under Section 10(2)(xv) of the Indian Income-tax Act.
2. Evidence supporting the Tribunal's conclusion regarding the nature of the payment.
3. Commercial expediency and bona fides of the transaction.

Issue-wise Detailed Analysis:

1. Admissibility of Rs. 18 lakhs as a Deduction under Section 10(2)(xv) of the Indian Income-tax Act:
The primary issue was whether the Rs. 18 lakhs paid by the assessee company to the managing agents upon termination of their managing agency agreement was an admissible deduction under Section 10(2)(xv) of the Indian Income-tax Act. The assessee claimed this amount as a business expenditure, arguing it was laid out wholly and exclusively for the purpose of the business. The Income-tax Officer, Appellate Assistant Commissioner, and the Tribunal rejected this claim, suggesting the transaction was not conducted on strictly business considerations but was a scheme to provide a capital receipt to the managing agents while claiming a revenue deduction.

2. Evidence Supporting the Tribunal's Conclusion Regarding the Nature of the Payment:
The Tribunal concluded that the Rs. 18 lakhs paid was not solely for compensating the managing agents for the loss of employment but was an arrangement to benefit the managing agents financially. The Tribunal's decision was based on the observation that the termination of the managing agency and the subsequent payment appeared to be a "made-up show" rather than a genuine business transaction. The Tribunal cited the lack of any substantial evidence showing that the payment was made solely for business purposes.

3. Commercial Expediency and Bona Fides of the Transaction:
The assessee argued that the termination of the managing agency was a bona fide business decision aimed at improving the company's management and instilling greater public confidence. The sub-committee report suggested that the termination would benefit the shareholders and was not detrimental to the company's business. The Tribunal, however, questioned the bona fides of the transaction, noting that the managing agency agreement was terminated shortly after its execution, and the decision was taken without any significant change in circumstances that would justify such a termination. The Tribunal also noted that the sub-committee members were employees of the assessee company, potentially influenced by the managing agents.

Conclusion:
The High Court concluded that the transaction of terminating the managing agency agreement and paying Rs. 18 lakhs as compensation was a legitimate business decision made on grounds of commercial expediency. The Court noted that the compensation paid was reasonable and that the termination was in the interest of the company's business. The Court found no evidence to suggest that the transaction was a scheme to distribute profits or was motivated by any oblique purpose. Consequently, the Court held that the Rs. 18 lakhs was an admissible deduction under Section 10(2)(xv) of the Indian Income-tax Act.

Final Judgment:
The Court answered the referred question in the affirmative, in favor of the assessee, stating that the Rs. 18 lakhs paid was a permissible deduction. The Commissioner was ordered to pay the costs of the assessee.