1960 (2) TMI 30 - HC - Income Tax

Summary

Issues Involved:
1. Whether the sum of lb20,000 paid as compensation for loss of office to the London directors was an admissible deduction under section 10(2)(xv) of the Indian Income-tax Act.

Issue-wise Detailed Analysis:

1. Contractual Obligation:
The assessee, a public limited company, claimed a deduction of lb20,000 paid to London directors as compensation for loss of office under section 10(2)(xv) of the Indian Income-tax Act. The company argued that the payment was justified under the articles of association, which formed part of the contract between the company and its directors. Articles 83, 84, 85, 94, and 95 of the articles of association outlined the directors' entitlements to fixed remuneration and a fixed term of office. The court agreed that the compensation was legally justified under these articles, referencing cases like In re New British Iron Co. and In re Dover Coalfield Extension Ltd., which established that such provisions in articles of association form part of the contract between the company and its directors.

2. Commercial Expediency:
Alternatively, the assessee argued that the payment was dictated by commercial expediency. The compensation was voted by the shareholders at an extraordinary meeting, which also decided to transfer the seat of control from the UK to India. The transfer resulted in significant savings and better business supervision. The court found this argument convincing, noting that the payment was made to put an end to an expensive method of carrying on business, thus falling within the ambit of section 10(2)(xv). The court referenced Anglo-Persian Oil Co. Ltd. v. Dale, where similar payments were considered admissible deductions due to commercial expediency.

3. Legal Interpretation of Section 10(2)(xv):
The court clarified that the expression "any expenditure laid out or expended wholly and exclusively for the purpose of such business" in section 10(2)(xv) is broader than the pre-1939 amendment phrase "incurred solely for the purpose of earning such profits." The court emphasized that it is not necessary for there to be a direct correlation in time between the expenditure and the earning of profits. The expenditure can be justified if made on the grounds of commercial expediency, indirectly facilitating the carrying on of the business.

4. Misinterpretation by the Appellate Tribunal:
The court found that the Appellate Tribunal had misdirected itself by concluding that there was no contract between the directors and the company and that the payment was not for the benefit of the company. The Tribunal's findings were inconsistent with the evidence, leading the court to intervene. The court referenced Edwards (Inspector of Taxes) v. Bairstow, which allowed for judicial intervention when a tribunal's findings are inconsistent with the evidence.

Conclusion:
The court held that the payment of lb20,000 to the London directors was an admissible deduction under section 10(2)(xv) of the Indian Income-tax Act. The question of law was answered in favor of the assessee, with the assessee entitled to the costs of the reference.