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Issues:
1. Allowability of Rs. 50,000 paid to retiring directors as revenue expenditure on grounds of commercial expediency. 2. Deductibility of the liability to pay the sum during the relevant accounting year for assessment year 1964-65. Analysis: Issue 1: The assessee, a private limited company, claimed Rs. 50,000 paid to two retiring directors as deductible in the assessment for the year 1964-65. The ITO disallowed the claim as the services of the directors were terminated before the payment agreement was executed. The AAC upheld the decision. The assessee argued before the Tribunal that the payment was made for commercial expediency to remove undesirable directors, saving recurring costs. The Tribunal found the payment justified for termination compensation, allowing the claim based on commercial expediency and business purpose, citing relevant precedents. Issue 2: The liability to pay the sum arose during the accounting year relevant to the assessment year 1964-65. The board resolution authorizing the payment was passed on the last day of the accounting year, with the agreement executed later. The first payment installment was due after the accounting year. The authorities found that the liability did not arise during the relevant accounting year. Citing the Supreme Court's decision in a similar case, the Court held that the liability did not arise in the relevant accounting year, ruling in favor of the revenue on this issue. In conclusion, the Court allowed the deduction for the payment to retiring directors based on commercial expediency but denied the deductibility of the liability arising in the relevant accounting year. The judgment highlights the importance of timing and purpose in determining the deductibility of expenses in business transactions.
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