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Issues involved: Determination of deductibility of payment to terminated agent u/s 10(2)(xv) of Indian Income-tax Act, 1922.
Summary: The High Court of BOMBAY considered the deductibility of a payment made to a terminated agent by an assessee-company under section 10(2)(xv) of the Indian Income-tax Act, 1922. The agreement between the company and the agent allowed for termination with one month's notice. After terminating the agreement, the company paid the agent an amount equivalent to three times the largest agency commission paid in 1957, along with other expenses. The Tribunal allowed the deduction, citing reasons such as past precedent, reasonableness of payment, and maintaining goodwill. The revenue challenged this decision, relying on legal precedents. The Court referred to the Supreme Court's principles in Eastern Investments Ltd. v. Commissioner of Income-tax [1951] and Gordon Woodroffe Leather Mfg. Co. v. Commissioner of Income-tax [1962] to determine the deductibility of the payment. It emphasized that the expenditure must be justified by commercial expediency and indirectly facilitate the business. The Court found that the payment to the terminated agent was necessary for a smooth transition to direct distribution by the company, preventing disruptions from the agent. The Court distinguished a Kerala High Court case involving an ex gratia payment, highlighting the broader scope of commercial expediency under section 10(2)(xv) compared to other tax laws. Ultimately, the Court ruled in favor of the assessee, affirming the Tribunal's decision to allow the deduction. The payment to the terminated agent was deemed justifiable on the grounds of commercial expediency and facilitating business operations. The revenue was directed to pay the costs of the assessee.
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