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1. Interpretation of whether a payment made by a company is an expenditure in the nature of capital or revenue under section 10(2)(xv) of the Income-tax Act. Analysis: The judgment pertains to a reference under section 66(1) of the Income-tax Act, involving the question of whether a payment of a specific sum by a company should be considered an expenditure in the nature of capital and thus not admissible under section 10(2)(xv) of the Act. The facts of the case revolve around a private limited company that succeeded a partnership business, with the company incorporating on June 26, 1948, but virtually undertaking the business from July 1, 1947. The payment in question was a gratuity of &8377; 38,509 to the widow of a former general manager of the partnership business. The company claimed this payment as a deduction under section 10(2)(xv), which was denied by the income-tax authorities and the Tribunal, deeming it a capital expenditure made under an agreement transferring liabilities from the predecessor firm to the company. The primary argument raised by the company's counsel was that the payment was made by the company independently and not solely under the agreement, emphasizing the company's assumption of liabilities from July 1, 1947. However, the court rejected this argument on the grounds that it was not raised before the Tribunal and lacked evidentiary support. The court highlighted the distinction between a payment being part of salary or remuneration, making it a revenue expenditure, and being an ex gratia payment, which does not qualify as a business expense. The burden of proof regarding the nature of the payment lay with the company, which failed to provide evidence or advance this argument before the Tribunal. Drawing parallels with a Madras case affirmed by the Supreme Court, where a gratuity payment was disallowed as a deduction due to lack of evidence of a scheme or commercial expediency, the court concluded that the present case mirrored the Madras case. The judgment affirmed that if the payment was made under the agreement transferring liabilities, it would still be considered a capital payment, not deductible under section 10(2)(xv). Consequently, the court answered the question in the affirmative, upholding the department's decision and awarding costs to the department. In summary, the judgment underscores the importance of substantiating the nature of payments claimed as deductions under tax laws, emphasizing the distinction between revenue and capital expenditures and the necessity of providing evidence to support such claims.
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