1968 (9) TMI 26 - HC - Income Tax

Payment made by the assessee to person for joining his company as director - payment made as the so-called director was to make the payment to concern of which he was in service. The payment was made to him for getting left the service - such expenditure is not allowable under section 37

Issues Involved
1. Whether the sum of Rs. 40,100 paid to Shri B. V. Mahabale is expenditure allowable under section 37 of the Income-tax Act, 1961.

Detailed Analysis

Background and Facts
The assessee-company, incorporated on 22nd July, 1960, was engaged in manufacturing certain parts of diesel engines. The shareholding of the company as on 30th June, 1961, included shares held by Shri and Smt. Desai, Shri Gaikwad, B. V. Mahabale, and Smt. Kusumawati Mahabale. The company faced difficulties in timely obtaining castings from M/s. Mysore Kirloskar Ltd. and thus started its own foundry. Shri B. V. Mahabale, previously an engineer at M/s. Mysore Kirloskar Ltd., agreed to join the assessee-company as a director on the condition that the company pays him Rs. 40,000 as liquidated damages for leaving his previous employer. This payment was made directly to M/s. Mysore Kirloskar Ltd. by the assessee-company.

Legal Question
The primary question was whether the payment of Rs. 40,100 to Shri B. V. Mahabale could be considered as expenditure allowable under section 37 of the Income-tax Act, 1961. The claim was disallowed by the Income-tax Officer, and subsequent appeals to the Appellate Assistant Commissioner and the Tribunal were also unsuccessful.

Nature of Expenditure
The court examined whether the expenditure was of a capital or revenue nature. The expenditure was made to procure the services, experience, and technical knowledge of Shri Mahabale, which was essential for setting the profit-earning machinery in motion. The court highlighted that an expenditure for the purpose of business might still be of a capital nature, which cannot be claimed as a deduction under section 37 of the Act.

Tests and Principles
The court referred to various principles laid down in previous cases, including the Supreme Court's decisions in Assam Bengal Cement Co. Ltd. v. Commissioner of Income-tax and Abdul Kayoom v. Commissioner of Income-tax. The principles emphasized factors such as whether the expenditure was made once and for all, whether it brought into existence an asset or advantage for the enduring benefit of the trade, and whether the expenditure was part of the fixed or circulating capital of the business.

Application of Principles
Applying these principles, the court concluded that the payment of Rs. 40,100 was a capital expenditure. The expenditure was incurred once and for all to procure the benefit and use of Shri Mahabale's services, technical knowledge, and experience. It was not a recurring expenditure in the nature of operational expenses. The assessee acquired an intangible asset in the form of Shri Mahabale's expertise, which provided an enduring benefit to the business.

Distinguishing Precedents
The court distinguished the current case from British Sugar Manufacturers Ltd. v. Harris and Commissioner of Income-tax v. Ciba of India Ltd. In the British Sugar case, the payment was for services rendered and was a recurring expense, whereas in the present case, the payment was a one-time expenditure to procure exclusive services. In the Ciba case, the assessee did not acquire any exclusive rights or assets, whereas in the present case, the assessee acquired exclusive services and technical knowledge.

Conclusion
The court held that the sum of Rs. 40,100 paid to Shri B. V. Mahabale was a capital expenditure, and thus, the assessee could not claim any deduction under section 37 of the Act. The assessee was ordered to pay the costs of the reference, with counsel's fee fixed at Rs. 200.

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