1968 (7) TMI 9 - HC - Income Tax

In view of loss incurred by assessee company its managing agent relinquished their right to remuneration - Assessee company subsequently made profits and paid to its managing agent Rs. 60,000 over and above their usual remuneration - held that Tribunal was right in disallowing the payment of Rs. 60,000 u/s 10(2)(xv) and/or section 10(1)

Issues Involved:
1. Whether the payment of Rs. 60,000 was allowable as a deduction under section 10(2)(xv) and/or section 10(1) of the Indian Income-tax Act, 1922.

Issue-Wise Detailed Analysis:

1. Allowability of Rs. 60,000 as Deduction under Section 10(2)(xv) and/or Section 10(1):

Background and Facts:
The assessee, a public limited company, appointed M/s. Agarwal Brothers as its managing agent, entitled to a commission and office allowance. Due to initial losses, the managing agents relinquished their remuneration and interest on loans for several years. The company later resolved to pay Rs. 60,000 to the managing agents for their past services and sacrifices. The assessee claimed this amount as a deduction in the assessment year 1957-58, arguing it was made for commercial expediency.

Income-tax Officer's Grounds for Disallowance:
The Income-tax Officer disallowed the deduction on several grounds:
- The payment was not per the terms of the managing agency agreement.
- The payment denoted a benefit of a lasting nature, making it a capital expense.
- The managing agents did not incur separate office expenses.
- The payment was not made on a commercial footing.
- The payment was made out of net profits and not charged to the profit and loss account.

Appellate Assistant Commissioner's Decision:
The Appellate Assistant Commissioner upheld the disallowance, stating the payment was for past events and not incurred for the business carried on during the year under consideration.

Income-tax Appellate Tribunal's Decision:
The Tribunal also upheld the disallowance, reasoning that the payment amounted to double remuneration and was not covered by section 10(2)(xv). It was further held that the payment, even if permissible, should have been allowed in the year the obligation was incurred. The Tribunal also noted that the payment was a reward for past sacrifices, which implied no legal obligation or expectation of compensation, thus falling outside the purview of section 10(2)(xv).

Court's Analysis:
The court examined section 10(2)(xv), which requires the expenditure to be "wholly and exclusively" for the business, and not of a capital or personal nature. The court referenced several precedents to outline the principles of commercial expediency and the scope of "for the purpose of the business."

The court noted that each case must be decided on its facts, and the principles are well-settled but difficult to apply uniformly. The court referred to the Madhya Pradesh High Court's decision in Kalyanmal Mills Ltd. v. Commissioner of Income-tax, which held that payments made voluntarily for past services without a clear business purpose are not allowable as business expenditure.

The court rejected the assessee's argument that the payment was to secure goodwill and facilitate future business, noting that this was not contended before the income-tax authorities. The managing agents already had adequate incentives through their commission, and no special incentive was needed.

Conclusion:
The court concluded that the expenditure was not "wholly and exclusively" for the business purpose, and thus, it did not fall within section 10(2)(xv). The court did not find it necessary to address whether the expenditure was capital in nature or incurred in the accounting year, as the primary finding was sufficient to disallow the claim.

Final Judgment:
The court answered the question in the affirmative, upholding the Tribunal's decision to disallow the payment of Rs. 60,000 as a deduction.

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