1975 (9) TMI 1 - SC - Income Tax

In all cases where compensation is paid to the managing agents whose agency is terminated it would amount to capital expenditure - assessee s appeal is dismissed

Summary

Issues Involved:
1. Whether the compensation of Rs. 2,50,000 paid to the outgoing managing agents was a capital or revenue expenditure.
2. Whether the High Court correctly applied the decision in Godrej & Co. v. Commissioner of Income-tax.
3. Whether the termination of the managing agency was for commercial expediency or extra-commercial reasons.

Detailed Analysis:

Issue 1: Nature of Compensation Paid
The primary issue was whether the compensation of Rs. 2,50,000 paid to the outgoing managing agents, Juggilal Kamlapat, was a capital or revenue expenditure. The appellant argued that the expenditure was incurred wholly and exclusively for the purpose of carrying on the business, and thus should be deductible under section 10(2)(xv) of the Income-tax Act, 1922. However, the Income-tax Officer, the Appellate Assistant Commissioner, and the Tribunal all rejected this claim, categorizing the expenditure as capital in nature. The High Court affirmed this view, holding that although the expenditure was incurred for business purposes, it was capital in nature and thus not deductible.

Issue 2: Application of Godrej & Co. Case
The appellant contended that the High Court misapplied the decision in Godrej & Co. v. Commissioner of Income-tax. The appellant's counsel presented four propositions to support their case, arguing that the payment should not be considered capital expenditure merely because it was made for business purposes. However, the court found that the facts of the present case aligned closely with the Godrej & Co. case, which held that compensation paid for terminating a managing agency was a capital expenditure for the payer-company and a capital receipt for the payee-company. The court rejected the appellant's argument that the Godrej & Co. case was wrongly decided or should be reconsidered.

Issue 3: Commercial Expediency vs. Extra-Commercial Reasons
The revenue argued that the termination of the managing agency was driven by extra-commercial reasons, primarily to benefit both the outgoing and incoming managing agents, who belonged to the same family. The Tribunal found no evidence of negligence or inefficiency by the outgoing agents that would justify the termination. Instead, it appeared that the termination was voluntary and aimed at securing a recurring benefit of Rs. 30,000 per annum, which was considered an advantage of an enduring nature. The High Court and the Supreme Court both upheld this view, concluding that the expenditure was capital in nature.

Conclusion:
The Supreme Court concluded that the compensation paid to the outgoing managing agents was a capital expenditure and thus not deductible under section 10(2)(xv) of the Income-tax Act, 1922. The court emphasized that the termination of the managing agency was not driven by commercial expediency but by a profit-hunting motive to benefit related parties. The appeal was dismissed with costs, affirming the High Court's decision. The judgment clarified that while the specific case was deemed capital expenditure, each case should be examined based on its unique facts and circumstances.