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Issues Involved:
1. Whether the payment of Rs. 10,000 described as compensation to ex-agents is allowable as a deduction under Section 10(2)(ix) of the Income Tax Act, 1922. 2. Whether the payment can be considered as capital expenditure or revenue expenditure. Issue-wise Detailed Analysis: 1. Allowability of Payment as Deduction under Section 10(2)(ix): The primary issue revolves around whether the payment of Rs. 10,000 made by Imperial Chemical Industries (India) Ltd. to its ex-agents can be deducted under Section 10(2)(ix) of the Income Tax Act, 1922. This section allows for the deduction of any expenditure incurred solely for the purpose of earning profits or gains, provided it is not in the nature of capital expenditure. The Court examined the facts and determined that the payment was made to secure certain business advantages, such as non-competition from ex-agents and assistance in transitioning the business operations. The Court found that these payments were made to facilitate and promote the business interests of the assessees in Madras and Ceylon, thereby qualifying as expenditures incurred solely for the purpose of earning profits or gains. The Court rejected the Commissioner's division of the payment into three parts: ex gratia gift, payment for cooperation, and payment for non-competition. It held that there was no evidence to justify this tripartite division. The payment was made to secure business advantages, which were highly valuable for the assessees' future operations. 2. Nature of the Expenditure: Capital or Revenue: The Court had to determine whether the payment was capital expenditure, which is not deductible, or revenue expenditure, which is deductible. The Court referred to various precedents, including the case of Anglo-Persian Oil Co. Ltd., where a payment made to terminate an agency agreement was considered a revenue expenditure. The Court applied several tests to determine the nature of the expenditure: - Withdrawal of Capital: The payment did not involve any withdrawal of capital; it was debited to the revenue account. - Enduring Benefit: The payment did not result in the acquisition of any new asset or enduring benefit in the way that fixed capital endures. It was made to facilitate the assessees' future business operations, not to acquire a new business or goodwill. - Liquidation Test: In a liquidation scenario, the expenditure would not result in any tangible asset that could be realized. The Court concluded that the payment was made to secure business advantages and facilitate future operations, making it a revenue expenditure. Therefore, it was deductible under Section 10(2)(ix) of the Income Tax Act, 1922. Conclusion: The Court held that the payment of Rs. 10,000 made by Imperial Chemical Industries (India) Ltd. to its ex-agents was an allowable deduction under Section 10(2)(ix) of the Income Tax Act, 1922. The payment was deemed to be revenue expenditure incurred solely for the purpose of earning profits or gains, and not in the nature of capital expenditure. The assessees were entitled to deduct this payment in their revenue accounts for the tax year 1931-32. The assessees were also awarded the costs of the reference.
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