9911796707
TMI Blog1972 (10) TMI 1X X X X Extracts X X X X X X X X Extracts X X X X ..... erred to as the "company" for the termination of managing agency is an allowable deduction in computing the total income of the company for 1956-57. The Income-tax Officer as well as the Appellate Assistant Commissioner rejected the claim of the company that it was a revenue expenditure but the Tribunal in appeal upheld the contention of the company. Aggrieved by the decision of the Tribunal, the Commissioner demanded a case to be stated for obtaining the opinion of the High Court on the question : Whether, on the facts and in the circumstances of the case, the payment of Rs. 2,50,000 made for the termination of managing agency is an allowable deduction in computing the total income of the assessee-company for 1956-57 ? The Tribunal refused to state the case taking the view that its findings are findings of fact. Thereafter, the Commissioner moved the High Court under section 66(2) and at the instance of the High Court, the Tribunal stated the case and submitted the aforementioned question of law to the High Court. But, the High Court answered that question in the affirmative and in favour of the company. Let us now have a look at the facts. The assessee was a public limit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is stated to have assured that the Government would arrange for the required capital in India but that responsibility would be in the nature of contingent liability and that it would accept such a liability only if the managing agency is abolished. The directors pointed out to the Minister that they had already taken steps to terminate the services of the managing agents on payment of compensation. On January 29, 1955, by means of an agreement between the company and the managing agents, the managing agency agreement was terminated subject to the condition that the managing agents were to be paid compensation in a sum of Rs. 2,50,000. The company paid the said sum during the accounting year ended on December 31, 1955, relevant to the assessment year 1956-57. The company claimed deduction of the same in its assessment as revenue expenditure laid out wholly and exclusively for the purpose of the business in the relevant previous year. It may also be mentioned that at about this time the company entered into an agreement with Leyland Motors Ltd., Leyland, U. K., for participation of the said concern with the company for implementing its manufacturing programme. On the aforement ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the collaboration of Leylands. In view of the change in the business activity of the company, continuance of the managing agency became superfluous. Its continuance meant unnecessary business expenditure for the company. Hence commercial expediency required the company to terminate the services of the managing agents and the managing agents could be got rid of only by paying reasonable compensation. The Tribunal found that the company terminated the services of the managing agents on business considerations. It accepted the plea of the company that, in view of the change in its business activity, the continuance of the managing agents became superfluous. These are findings of fact which are not open to question before this court. There is no doubt that, as a result of the termination of the services of the managing agents, the company got rid of its liability to pay office allowance as well as the commission it was required to pay under the managing agency agreement not only during the accounting year but also for a few years more. The expenditure thus saved undoubtedly swelled the profits of the company. From the facts found, it is clear that the managing agency was terminated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment. He claimed pound 50,000 as compensation ; but a compromise was arrived at and embodied in an agreement dated the 30th December, 1921, by which he agreed to retire from the company, to transfer his 300 pound 1 shares to the other directors at par value (they were then worth considerably more) and to surrender his participating notes. The company agreed to pay him pound 19,200 and the directors to pay him pound 300 (as consideration for his shares) making together pound 19,500 (payable in five annual instalments) which he agreed to accept in full satisfaction of all claims against the company or the directors. The question was whether the payment of pound 19,200 was a deductible expenditure. The Special Commissioners decided against the company but the King's Bench Division as well as the Court of Appeal accepted the company's contention and held that the payment of pound 19,200 made was an admissible deduction in arriving at its profits for income-tax purposes. In the course of his judgment Rowlatt J., sitting on the King's Bench Division, relied on the observations of the Lord Chancellor in Atherton V. British Insulated and Helsby Cables Ltd. to the effect : " 'a sum of mo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t is impossible to suggest that that is a reason for saying that this is a capital expenditure unless you get rid of that onerous contract (as I pointed out just now) by erecting in its place a capital asset in the nature of--of course I am only using this as an illustrative example--a labour-saving machine which gives you an asset and so dispenses with the expenses of labour. But, to say that it is a capital expenditure because it secured an enduring benefit by getting rid of an onerous contract is not to state the material thing, and it is completely inconclusive" In G. Scammell Nephew Ltd. v. Rowles, the Court of Appeal held that the expenditure incurred for the termination of a trading relationship in order to avoid losses occurring in the future through that relationship, whether pecuniary losses or commercial inconveniences, is just as much for the purposes of the trade as the making or the carrying into effect of a trading agreement. The case which can be said to be the nearest to the facts of the present case decided by any Indian court is that decided by the Calcutta High Court in Anglo-Persian Oil Co. (India) Ltd. v. Commissioner of Income-tax Therein, money was p ..... X X X X Extracts X X X X X X X X Extracts X X X X
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