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Issues Involved:
1. Whether payments made to Lady Chandavarkar under clause 14 of the agreement were allowable as deductions under section 10(2)(xv) of the Indian Income-tax Act, 1922, and section 37 of the Income-tax Act, 1961. 2. Whether the payments were made out of commercial expediency and for legitimate purposes of the company. Detailed Analysis: Issue 1: Allowability of Deductions under Income-tax Acts The primary issue was whether the payments made to Lady Chandavarkar by way of pension and other amounts under clause 14 of the agreement were allowable as deductions under section 10(2)(xv) of the Indian Income-tax Act, 1922, and section 37 of the Income-tax Act, 1961. The court noted that the payments were made in accordance with the agreement between the assessee-company and Sir Vithal Narayan Chandavarkar, who was the managing director until his death. The Income-tax Officer initially allowed these payments as deductions. However, the Commissioner of Income-tax later disallowed these payments, citing the decision in Commissioner of Income-tax v. Anderson Wright Ltd. [1962] 46 ITR 715 (Cal), which held that such payments were not allowable as deductions. Issue 2: Commercial Expediency and Legitimate Purpose The court examined whether the payments were made out of commercial expediency. The Tribunal had found that there was no evidence to show that the services of Sir Chandavarkar would not have been available to the company but for this provision. The Tribunal emphasized that the mere fact that the payment was justified under the terms of the agreement was insufficient to show that it was motivated by commercial expediency. The court agreed, noting that no evidence was led to show that commercial expediency required payment of a pension to Lady Chandavarkar, who had rendered no services to the company. The court referenced several cases to establish the test for commercial expediency. In Andrew Yule & Co. Ltd v. Commissioner of Income-tax [1963] 49 ITR 57 (Cal), it was held that to merit exemption under section 10(2)(xv), the expenditure should be laid out or expended wholly or exclusively for the purposes of the business. The court found that there was no evidence to suggest that the business would be adversely affected if the payment was not made, nor was its interest likely to be promoted by making such payment. The court also referenced the decision in Alexander Howard & Co. Ltd. v. Bentley [1948] 30 TC 334 (KB), where it was held that an annuity to the widow of the managing director was not an allowable deduction as it was not money wholly or exclusively laid out or expended for the purpose of trade. The court further cited the decision in Andrew Yule & Co. Ltd. v. Commissioner of Income-tax [1963] 49 ITR 57 (Cal), where it was held that compensation to the widow of an employee who died while not on the company's business was not an allowable expense. Conclusion: The court concluded that the payments made to Lady Chandavarkar could not be regarded as expenditure laid out wholly and exclusively for the purpose of business. Therefore, these payments were not allowable as deductions under section 10(2)(xv) of the Indian Income-tax Act, 1922, or section 37 of the Income-tax Act, 1961. The court answered the referred question in the negative and ordered the assessee to pay the costs of the revenue.
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