1949 (9) TMI 32 - HC - Income Tax

Summary

Issues Involved:
1. Whether the sum of Rs. 22,500 was taxable in the hands of the applicant company.
2. Applicability of Section 7 of the Income-tax Act.
3. Applicability of Section 10(2)(xv) of the Income-tax Act.
4. Consideration of the payment as a capital or revenue expenditure.

Detailed Analysis:

1. Whether the sum of Rs. 22,500 was taxable in the hands of the applicant company:
The primary issue was whether the sum of Rs. 22,500, which was deducted from the commission payable to the applicant company (Calcutta Agency Ltd.) by Basanti Cotton Mills Ltd., was taxable. The deduction was made under an agreement to settle decrees passed in favor of Nath Bank Ltd. The court had to determine if this sum constituted taxable income for the applicant company.

2. Applicability of Section 7 of the Income-tax Act:
The applicant company argued that the sum should not be taxed under Section 7, which deals with salaries and commissions. Section 7 states that tax is payable on any salary, wages, annuity, pension, gratuity, fees, commissions, perquisites, or profits in lieu of or in addition to any salary or wages. The first proviso to Section 7 exempts sums which the assessee is required to spend out of his remuneration wholly, necessarily, and exclusively in the performance of his duties. The court held that the payment made by the managing agents under the agreement did not qualify for deduction under this proviso, as it was not a necessary expenditure for the performance of duties.

3. Applicability of Section 10(2)(xv) of the Income-tax Act:
The applicant company also contended that the expenditure should be deductible under Section 10(2)(xv), which allows deductions for any expenditure laid out wholly and exclusively for the purpose of business, profession, or vocation. The court referred to the case of Mitchell v. B.W. Noble Ltd., where a payment made to remove a director for the benefit of the company's business was considered a revenue expenditure. The court found similarities with the present case, where the payment was made to avoid litigation and scandal, thus enabling the company to continue its business. Therefore, the expenditure was considered to be laid out wholly and exclusively for business purposes and was deductible under Section 10(2)(xv).

4. Consideration of the payment as a capital or revenue expenditure:
The court examined whether the payment was a capital expenditure, which is not deductible, or a revenue expenditure, which is deductible. Citing the principles from Mitchell's case and Atherton's case, the court concluded that the payment did not bring any new assets into existence nor an advantage for the enduring benefit of the company's trade. It was made to remove a difficulty in carrying on the business, thus qualifying as a revenue expenditure. The court emphasized that the payment was not made to secure an actual asset but to continue the business as it had been conducted before, making it a proper deduction in computing profits or gains.

Conclusion:
The court answered the referred question in the negative, holding that the sum of Rs. 22,500 was not taxable in the hands of the applicant company. The payment was considered a revenue expenditure deductible under Section 10(2)(xv) of the Income-tax Act, and not a capital expenditure.