1968 (2) TMI 31 - HC - Income Tax

Amount paid for termination of managing agency agreement - held that payment made for the termination of the managing agency was an allowable deduction u/s 10(2)(xv) in computing the total income of the assessee-company

Issues Involved:
1. Whether the payment of Rs. 2,50,000 made for the termination of the managing agency is an allowable deduction in computing the total income of the assessee-company for 1956-57.

Detailed Analysis:

Background and Context:
The respondent, a public limited company, originally named "Ashok Motors Limited," changed its name to "Ashok Leyland Limited" and was involved in importing and assembling motor accessories and vehicles. Under its articles, the company was authorized to carry out various activities related to motor vehicles. The company had appointed Car Builders Limited as its managing agents under an agreement dated October 18, 1948, which was irrevocable unless under specific conditions.

In 1951, the company secured rights for the distribution and assembly of Leyland trucks and ceased assembling Austin cars. The Government of India approved a technical collaboration between the company and Leyland Motors Limited. Consequently, the company resolved to terminate the managing agency agreement and paid Rs. 2,50,000 as compensation to the managing agents.

Income-tax Officer's View:
The Income-tax Officer disallowed the claim, viewing the payment as capital expenditure, arguing that it:
1. Relieved the company of future revenue payments.
2. Helped the company secure extra capital.
3. Provided an enduring benefit by associating with Leylands.

Appellate Assistant Commissioner's View:
The Appellate Assistant Commissioner upheld the disallowance, applying two tests under section 10(2)(xv) of the Indian Income-tax Act, 1922:
1. The expenditure must not be capital.
2. The expenditure must be laid out wholly and exclusively for business purposes.

He concluded that the expenditure was capital in nature, incurred to safeguard the company's framework, and relied on the ratio in Van den Berghs Ltd. v. Clark.

Tribunal's View:
The Tribunal allowed the company's appeal, concluding that:
1. The payment did not bring in any asset of an enduring benefit.
2. The company's existence did not depend on the termination of the agency.
3. The payment was not a condition for Leylands to bring in capital.
4. The payment was to carry on the existing business, not to acquire a new one.
5. The capital brought in by Leylands was incidental to the company's original trade.

Court's Analysis:
The court considered various precedents and tests to determine the nature of the expenditure. Key points included:
1. The distinction between capital and revenue expenditure is operational and intended for the furtherance of the enterprise.
2. The aim, object, and purpose of the expenditure, its impact on the business, and whether it secures an enduring benefit or is a step-in-aid of future expansion are crucial factors.

The court examined several cases, including:
- James Snook & Company Ltd. v. Blasdale
- A. V. Thomas and Co. Ltd. v. Commissioner of Income-tax
- Assam Bengal Cement Co. Ltd. v. Commissioner of Income-tax
- Pingle Industries Ltd. v. Commissioner of Income-tax
- Abdul Kayoom v. Commissioner of Income-tax
- Tata Hydro-Electric Agencies Ltd. v. Commissioner of Income-tax
- Royal Insurance Company v. Watson
- Robert Addie & Sons' Collieries Ltd. v. Commissioners of Inland Revenue
- B. W. Noble Ltd. v. Mitchell
- Anglo-Persian Oil Company Limited v. Dale
- P. Orr & Sons v. Commissioner of Income-tax
- Indian Copper Corporation Ltd. v. Commissioner of Income-tax

Conclusion:
The court concluded that the expenditure did not secure a lasting or enduring benefit, nor did it bring into existence any tangible asset or privilege for future profit-earning. The payment was made out of commercial expediency to avoid future liabilities and potential obstacles, aligning with the principles in the "agency cases."

Thus, the court held that the expenditure was chargeable to revenue and allowable under section 10(2)(xv) of the Indian Income-tax Act, 1922. The question was answered in favor of the assessee, with costs awarded.

Judgment:
The payment of Rs. 2,50,000 made for the termination of the managing agency is an allowable deduction in computing the total income of the assessee-company for 1956-57.

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