1967 (8) TMI 14 - HC - Income Tax

Held that compensations were admissible deduction in law for the purpose of assessment under the IT Act

Summary

Issues Involved:
1. Deductibility of compensation payments to directors as business expenditure under section 10(2)(xv) of the Indian Income-tax Act.
2. Classification of fees paid to an architect for revaluation of business premises as capital or business expenditure.

Issue-wise Detailed Analysis:

1. Deductibility of Compensation Payments to Directors:

The primary issue was whether the compensations of Rs. 1,00,000 paid to Mr. M.G. Robson in the assessment year 1952-53, and Rs. 1,50,000 to Mr. J. Morshead and Rs. 1,00,000 to Mr. W.L.A. Radcliffe in the assessment year 1953-54, were admissible deductions under section 10(2)(xv) of the Indian Income-tax Act.

The Income-tax Officer disallowed these claims, arguing that the payments were not for the purpose of business, especially since the purported purpose of bringing in fresh blood was not implemented. The Appellate Assistant Commissioner upheld this view. However, the Appellate Tribunal allowed the appeals, reasoning that the payments were legitimate business expenses. The Tribunal emphasized viewing the expenses from a businessman's perspective and noted that the directors accepted a lower compensation, benefiting the company monetarily.

The Tribunal referenced a prior case involving Mr. Squarey, where similar compensation was deemed an allowable expenditure. The Tribunal concluded that the compensation payments benefited the company by saving money and aligning with the company's policy to introduce new directors.

The Revenue's counsel argued that the payments were either for wrongful breach of service contracts or for a non-economic policy, neither of which qualified as business expenses. The counsel cited the case of Godden v. A. Wilson's Stores (Holdings) Ltd., where compensation for early termination was not allowed as a business expense. However, the court distinguished this case, noting that the compensation in Godden's case was for winding up the business, not for its efficient conduct.

The court referred to Atherton v. British Insulated and Helsby Cables Ltd., which allowed expenses incurred voluntarily for commercial expediency. The court also cited Mitchell v. B. W. Noble Ltd., where compensation to avoid a scandal was allowed as a business expense.

The court observed that the payments to the directors were for reducing top-heavy administration costs, thus benefiting the company economically. The analysis provided by Mr. Palkhivala showed significant monetary benefits from these payments, which the Revenue did not dispute.

The court concluded that the compensation payments were a money-saving device and thus an expenditure wholly and exclusively for business purposes. The court rejected the argument that the payments to Morshead and Radcliffe were for different considerations, noting that the same resolutions authorized all payments.

2. Classification of Fees Paid to an Architect:

The second issue was whether the sum of Rs. 2,074 paid as fees to an architect for revaluation of business premises was a capital expenditure.

The Income-tax Officer disallowed this expenditure, classifying it as capital expenditure. The Tribunal, however, allowed the claim, noting that the payment was made to reduce recurrent expenses payable as municipal taxes. The Tribunal considered it a settlement of the assessee's exact liability of taxation, not a capital expenditure.

The court agreed with the Tribunal, noting that the premises were business premises and the taxes were payable from business earnings. The expenditure was necessary to secure proper valuation and avoid undue enhancement of municipal rates, thus justified by commercial expediency.

The court referenced Birla Cotton Spinning and Weaving Mills Ltd. v. Commissioner of Income-tax, Calcutta, where expenditure incurred to oppose illegal governmental action was deemed allowable. Similarly, in this case, the expenditure was to ensure proper taxation, thus an allowable business expenditure.

Conclusion:

Both questions were answered in the affirmative and in favor of the assessee. The compensation payments were deemed deductible business expenses, and the architect's fees were classified as business expenditure. The Commissioner of Income-tax was ordered to pay costs of the reference to the assessee.