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Issues Involved:
1. Whether the payment of Rs. 1,25,000 to the managing agents constituted an item of capital expenditure. 2. If it was an item of revenue expenditure, whether it was incurred wholly and exclusively for the purposes of the assessee's business. Issue-wise Detailed Analysis: 1. Capital Expenditure vs. Revenue Expenditure: The primary issue was whether the payment of Rs. 1,25,000 to the managing agents was a capital expenditure or a revenue expenditure. The court referred to the Supreme Court's approach in Assam Bengal Cement Co. Ltd. v. Commissioner of Income-tax, stating, "The aim and object of the expenditure would determine the character of the expenditure whether it is a capital expenditure or a revenue expenditure." The court emphasized that the payment was made to secure the termination of a recurring liability, specifically the managing agency's remuneration and commission, and not to bring in any capital asset. The judgment noted, "It was not intended to bring in any capital asset; nor did it result in the acquisition of any capital asset. It was not an item of capital expenditure which section 10(2)(xv) of the Act excludes." The court cited several precedents, including Nevill and Co., Ltd. v. Federal Commissioner of Taxation and Noble Ltd. v. Mitchell, to support the view that payments made to terminate a disadvantageous trading relationship or to continue business operations unfettered by previous obligations are considered revenue expenditures. The judgment concluded, "To adapt the words of the learned Master of the Rolls it was a payment made in the course of business, dealing with a particular situation which arose in the course of the year, and was made not in order to secure a capital asset to the company but to enable them to continue as they had in the past, carry on the same type and high quality of business." 2. Expenditure Incurred Wholly and Exclusively for Business Purposes: The second issue was whether the expenditure was incurred wholly and exclusively for the business purposes of the assessee. The Tribunal initially found that the reasons for the payment were not motivated by commercial considerations and thus were not wholly and exclusively for business purposes. However, the High Court disagreed, stating, "The viewpoint is that of business expediency, what a normally prudent businessman could be expected to do in good faith." The court highlighted that the arrangement was made to benefit the company by freeing it from the managing agency's financial obligations, which was in the company's best interests. The judgment emphasized, "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." The court also addressed the Tribunal's inference that Smith intended to retire from India without compensation, stating, "We are unable to find on what basis the Tribunal came to the conclusion, that Smith, contemplated complete retirement from business and without compensation." The court found that the payment was reasonable and necessary for the company's business operations, concluding, "In our opinion the only conclusion possible on the material on record is that this amount of Rs. 1,25,000 was expended by the assessee company in the relevant year of account wholly and exclusively for its business." Conclusion: The court answered the reference in favor of the assessee, stating, "Our answer to the question is that the payment is deductible under the provisions of section 10(2)(xv) of the Act." The assessee was entitled to the costs of the reference, with counsel's fee fixed at Rs. 250. The judgment provided a comprehensive analysis of the legal principles involved, ensuring that the expenditure was correctly classified and justified as a deductible business expense.
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