9911796707
TMI Blog1960 (2) TMI 30X X X X Extracts X X X X X X X X Extracts X X X X ..... in accordance with the views of the majority of the shareholders the seat of management and control of the company was transferred from United Kingdom to India on the 6th April, 1952. This decision was taken by a special resolution at an extraordinary general meeting of the company held on the 26th March, 1952. There was also an ordinary resolution passed at the same meeting of the company to the effect that the present directors should be paid as compensation for the loss of office the following amounts noted against their respective names : Sir Godfrey B.H. Fell (Chairman) ... 5,800 H.R. Mackillingin 2,840 The Hon. R.M.P. Preston ... 2,840 Captain H. Vivian ... 2,840 D.S. Warren ... 2,840 A.R.O. Williams 2,840 In pursuance of the resolution the amounts were paid to the respective directors. It was claimed by the assessee that these amounts should be deducted for the purpose of income-tax under section 10(2)( xv ) of the Indian Income-tax Act. The Income-tax Officer disallowed the claim on the ground that the expendit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... irectors of equal seniority, the directors to retire shall (unless such directors of equal seniority shall agree among themselves) be selected from among them by lot. A retiring director shall be eligible for re-election." Article 94 states as follows: "94. The directors shall be paid out of the funds of the company as remuneration for their services an amount at the rate of 250 per annum for each director, with an additional sum at the rate of 150 per annum for the chairman. The directors shall also be entitled to receive by way of further remuneration in each year in which the net profits of the company (including any sum or sums carried to any reserve account) shall be more than sufficient to pay a dividend at the rate of 10 per cent. on the average amount of the capital paid up on the issued shares of the company during such year, an amount equal to 5 per cent. of the profits remaining after calculating such dividend as aforesaid. The directors shall also be entitled to such further sums as the company may in general meeting determine. The certificate of the auditors of the company as to the amount of such net profits shall be conclusive and binding on all members of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company, the directors were entitled to rank as ordinary creditors in respect of the remuneration due to them at the commencement of the winding up. Reference should also be made to In re Dover Coalfield Extension Ltd. [1907] 2 Ch. 76, where it was held that the remuneration paid by a company under powers in its articles of association to a director was not profit derived from the use of his qualification shares, but payment for work done by him under his contract with the company. I accept, therefore, the submission made by learned counsel on behalf of the assessee that there was a contract between the company and its directors, and the compensation of 20,000 paid by the company to the directors for the loss of office was made under the terms of that contract. It was argued by the standing counsel of the Income-tax Department that under article 98 the company could have dismissed the directors by an extraordinary resolution even before the expiry of the period of office. Article 98 states that "the company may by extraordinary resolution remove any one or more of the directors before expiration of his or their period of office, and may by an ordinary resolution appoint any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5 at page 47 of the paper book. It is also manifest that there is better supervision and control of business after the transfer of the seat of management to India. It was also pointed out by the learned counsel for the assessee that the London directors had been in office for a long term of years and because of their experience and technical qualifications it was likely that they would be re-elected in future for an uncertain number of years. By asking the London directors to retire and paying them compensation the company was putting an end to an expensive method of carrying on business. It was an advantage from the commercial point of view for the company to ask its London directors to retire, and the compensation paid to the London directors was, therefore, a payment made wholly and exclusively in the interest of business. In my opinion, the argument put forward on behalf of the assessee is correct. Even assuming that there was no contract, I am of opinion that the payment of compensation made to the London directors in the circumstances of this case was payment made for commercial expediency and would fall within the ambit of section 10(2)( xv ) of the Indian Income-tax Act. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... year for five years. Moreover, according to the evidence, a considerable economy and saving in working expenses resulted to the company from the cancellation of the agency agreement, and therefore it is not unreasonable to suppose that the increased revenue of the company will more than cover the expenditure in question. But whether that be so or not does not affect the principle that such a payment is an income expenditure. Even if the company had been mistaken in its policy, and by getting rid of its agent had increased the working expenses instead of diminishing them, the payment would still have been a mere working expense, and as such chargeable to revenue." The principle to be applied to a case of this description has been stated by Viscount Cave in Atherton v. British Insulated and Helsby Cables Ltd. [1925] 10 Tax Cas. 155 at 191 as follows : "My Lords, I think it clear that the deduction from the profits of the above-mentioned sum of 31,784 is not prohibited by the First Rule applicable to Cases I and II, which prohibits the deduction of a disbursement not being money wholly and exclusively laid out or expended for the purposes of the trade. It was made clear in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the decision of the Australian High Court in Nevill and Co. Ltd. v. Federal Commissioner of Taxation 56 CLR 290 where Latham C. J. observed at page 301 as follows : "No expenditure, strictly and narrowly considered, in itself actually gains or produces income. It is an outgoing, not an incoming. Its character can be determined only in relation to the object which the person making the expenditure has in view. If the actual object is the conduct of the business on a profitable basis with that due regard to economy which is essential in any well conducted business, then the expenditure (if not a capital expenditure) is an expenditure incurred in gaining or producing the assessable income. If it is not a capital expenditure it should be deducted in ascertaining the taxable income of the taxpayer." The same view has been expressed by the Madras High Court in P. Orr Sons v. Commissioner of Income-tax [1959] 35 ITR 556. On behalf of the Income-tax Department reliance was placed upon two decisions, Overy ( H.M. Inspector of Taxes ) v. Ashford Dunn Co. Ltd. [1933] 17 Tax Cas. 497 and James Snook Co. Ltd. v. Blasdale ( H.M. Inspector of Taxes ) [1952] 33 Tax Ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of this case are wholly different and the ratio of Ashford Dunn Co. Ltd.'s case (supra) cannot apply to the present case. In James Snook Co. Ltd.'s case (supra) there was an agreement for the sale of shares of the appellant company in which there was a clause that the purchaser would procure the appellant company to pay compensation for loss of office to the directors and the auditor of the company who, under the agreement, were to resign. It was held by the Court of Appeal that the compensation for loss of office was part of the bargain between the incoming shareholders and the outgoing shareholders and that there was no payment made in the trading interest of the company. It was, therefore, held that the compensation paid was not an allowable deduction in computing the company's profits. In the present case the material facts are manifestly different and the principle laid down in James Snook Co. Ltd.'s case (supra) has no application. The argument was stressed by the learned standing counsel for the Income-tax Department that the question at issue in this case is a question of fact and the High Court has no jurisdiction to interfere with the finding of the Income- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t, that I think it a pity that such a tendency should persist. As I see it, the reason why the courts do not interfere with the Commissioners' findings or determinations when they really do involve nothing but questions of fact is not any supposed advantage in the Commissioners of greater experience in matters of business or any other matters. The reason is simply that by the system that has been set up the Commissioners are the first tribunal to try an appeal, and in the interests of the efficient administration of justice their decisions can only be upset on appeal if they have been positively wrong in law. The court is not a second opinion, where there is reasonable ground for the first. But there is no reason to make a mystery about the subjects that Commissioners deal with or to invite the courts to impose any exceptional restraints upon themselves because they are dealing with cases that arise out of facts found by Commissioners. Their duty is no more than to examine those facts with a decent respect for the tribunal appealed from and if they think that the only reasonable conclusion on the facts found is inconsistent with the determination come to, to say so without more ado ..... X X X X Extracts X X X X X X X X Extracts X X X X
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