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Commissioner of Income-tax Vs. Ashok Leyland Ltd. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtChennai High Court
Decided On
Case NumberTax Case No. 93 of 1964 (Reference No. 40 of 1964)
Judge
Reported in[1969]39CompCas180(Mad); [1969]72ITR137(Mad)
ActsIncome Tax Act, 1922 - Sections 10(2)
AppellantCommissioner of Income-tax
RespondentAshok Leyland Ltd.
Appellant AdvocateV. Balasubrahmanyan and ;J. Jayaraman, Advs.
Respondent AdvocateS. Swaminathan and ;K. Ramagopal, Advs.
Cases Referred(H. M. Inspector of Taxes). In Indian Copper Corporation Ltd. v. Commissioner of Income
Excerpt:
direct taxation - deduction - section 10 (2) of income tax act, 1922 - whether payment made for termination of managing agency allowable deduction in computing total income of assessee-company for 1950-57 - withdrawal of agency in very business belonging to principals neither creates nor destroys business of separate nature or asset that to be added to capital account - concerned sum normal payment made due to business exigencies - expenditure can be correlated to profits earned during year of expense - doctrinaire approach to problem has to be avoided as decision depends on overall consideration of all surrounding circumstances and expediency arising in each particular case - held, sum expended by company to terminate managing agency agreement deductible under section 10 (2) (xv). - .....kamaprasada rao, j. 1. the ashok leyland limited, madras, the res-pondent herein, is a public limited company which was originally incorporated on september 7, 1948, under the name and style of ' ashok motors limited ' under the indian companies act, 1913. apparently the change in name of the company was effectuated due to change in circumstances, which we shall presently animadvert to. its business previously consisted in importing motor accessories marketed by ' austins ' of the united kingdom, assembling austin cars and trucks and selling them as such. under the articles of the company, it was authorised to carry on business as manufacturers, assemblers of, dealers in, hirers, repairers, cleaners, stores, warehousers of motor-cars, motor-cycles, cycle-cars, motors, scooters,.....
Judgment:

Kamaprasada Rao, J.

1. The Ashok Leyland Limited, Madras, the res-pondent herein, is a public limited company which was originally incorporated on September 7, 1948, under the name and style of ' Ashok Motors Limited ' under the Indian Companies Act, 1913. Apparently the change in name of the company was effectuated due to change in circumstances, which we shall presently animadvert to. Its business previously consisted in importing motor accessories marketed by ' Austins ' of the United Kingdom, assembling Austin cars and trucks and selling them as such. Under the articles of the company, it was authorised to carry on business as manufacturers, assemblers of, dealers in, hirers, repairers, cleaners, stores, warehousers of motor-cars, motor-cycles, cycle-cars, motors, scooters, motor-buses and lorries, trucks, tractors, cycles, bicycles and carriages, launches, boats and ships, aeroplanes, hydroplanes arid other vehicles and conveyance of all descriptions for carrying passengers or other personal goods, commodities, produce, cargoes and other things on land or sea or by air (all hereinafter comprised in the term motor and other things) whether propelled or assisted by means of petrol, spirit, steam, gas, electrical, animal or other powers and all engines, chassis, bodies, turbines, tanks, tools, implements, accessories, and other things, materials and products used for, in or in connection with motors and other things. Inter alia, the articles enabled it to import into India Austin cars and other Austin products and to undertake progressive manufacture in India of such parts of Austin products and, for the purpose, an express provision was made in the articles, which is the charter of the company, to appoint Car Builders Limited, a private limited company, as its managing agents. Pursuant thereto, an agreement dated October 18, 1948, was entered into between the company and the managing agents. Inter alia, the agreement provided that the managing agents shall be so appointed for a period of fourteen years from September 7, 1948, and that the agreement is irrevocable unless it be as provided in Section 87B of the Indian Companies Act, 1913 ; but in the event of the winding up of the company for the purpose of and with the object of transferring its business to another company, the transferee company shall retain the managing agents on the same terms for the unexpired period, and in case the company is wound up otherwise, the agreement shall terminate, but subject to the right of the managing agents to recover compensation and damages for such premature determination of the contract of service. No doubt, the managing agents are obliged to faithfully and diligently discharge their duties as may from time to time be entrusted to them by the company.

2. During the year 1951, the company secured the all-India rights for distribution, assembly and progressive manufacture of Leyland trucks, etc. In fact, the company, in the year, assembled and delivered 1,262 cars and 366 trucks They were apparently both Austin and Leyland types as is spen from annexure ' A' which reflects the directors' report over the affairs of the company for the year 195 I. The company was not sanguine about the expeditious establishment of a motor manufacturing industry in India, due to the poor demand for cars and commercial vehicles at that time. It Wiis hopeful of positive results by reason of its association with Austins which by then was amalgamated with Nuffield, another top ranking manufacturing concern. In 1952, the Government of India referred the question of establishing an automobile industry in India to the Tariff Commission. The company prepared and submitted a comprehensive memorandum for the manufacture of Leyland trucks and took active interest in the Government sponsored scheme. Apparently, Austins were not interested in setting up such a manufactory. The Deputy Secretary to the Government of India, in his letter dated September 28, 1953, expressed the approval of the programme as drawn up by the company by the Government of India, which visualised a technical collaboration between the company and Leyland Motors Limited, United Kingdom. Having thus involved themselves in this scheme, the company ceased to assemble Austin cars and this was in strict conformity with the decision of the Government whereby the assesses was to confine its activities to the progressive manufacture of Leyland commercial vehicles only. With this background and a denned phased programme before it, the company resolved even on June 19, 1954, to terminate the managing agency agreement and to pay them a sum of Rs. 2,50,000 in full and final settlement and discharge of all accounts and claims for compensation for loss of office or otherwise. The above resolution was produced before us which we have perused as it was necessary in the interests of justice to do so. The company could not, however, make considerable progress in implementing the manufacturing scheme approved by the Government of India, The then Minister for Commerce and Industry, in a conference held for the purpose, expressed so and suggested that Leylands should be invited to provide capital as and when required, subject to certain conditions, and alternatively assured the company that in case such financial assistance was not forthcoming, the Government would in such a contingency arrange the required capital subject to such conditions as may be necessary or required. The Minister made it clear that the Government, in any event, would accept such a contingent liability only if the managing agency is abolished. It is at this stage that the Minister was informed that the company had decided to terminate the managing agency agreement on payment of compensation and that steps are being taken to finalise the matter (annexure ' B ' dated January 24, 1955). The board promptly, and indeed on the same day when the above conference was held, resolved to take up the matter with Leylands in the United Kingdom. In order to substantiate their bona fides and anxiety in the subject, the company, on January 29, 1955, terminated the managing agency agreement as per annexure ' C '. The immediate object of this agreement as set out therein is to carry out its technical collaboration programme with Leylands and also to keep up to their understanding with the Government of India and for providing itself with the required capital for the enterprise. The company, for reasons known to it, avoided a reference to the board's resolution on June 19, 1954, to cancel the managing agency agreement, though it is vaguely referred to in the jurat of the agreement. The fact, however, is indisputable that the managing agency was terminated on January 29, 1955, and a sum of Rs. 2,50,000 paid in full quit and final discharge of all claims of the managing agents. The later events that happened led to a consummation of the past decisions and eventually the company changed its style to ' The Ashok Leyland Limited ' and duly entered into the finance agreement and the technical collaboration agreement with Leylands on December 5, 1955. The above narrative has become necessary in order to appreciate the relative contentions of the parties before us, the department maintaining that the sum of Rs. 2,50,000 paid by the company is a capital expenditure and the company asserting that it has to be charged to the revenue and, therefore, an allowable expenditure.

3. The Income-tax Officer was of the view that the consequences of the termination of the managing agency (1) relieved the company of future revenue payments, (2) helped the company to secure extra capital, and (3) shows that the company obtained a benefit of an enduring nature by associating itself with Leylands, and thus disallowed the claim and added back the amount to the income of the company. The Appellate Assistant Commissioner, while dismissing the appeal, opined that the termination of the agreement was necessary only to implement the programme. He rightly formulated two tests as envisaged under Section 10(2)(xv) of the Indian Income-tax Act, 1922, namely, (1) the expenditure must not be capital, and (2) the expenditure must be laid out wholly and exclusively for the purposes of the business. He held that the second test was satisfied in the instant case, but was not satisfied that the first test has been fulfilled, His reason was that by Austins refusing to collaborate with the company in the manufacturing scheme, the company's existence was at stake as, according to him, the company's sole business was to import and assemble Austin cars and trucks. He proceeded to state that the managing agency agreement was entered into in order to continue the company's business. According to him, such an agreement was necessary because the Government would not accord its approval for the scheme otherwise. In the end he would conclude that the expenditure was incurred by the company to safeguard its framework, and relying upon the ratio in Van den Berghs Ltd, [1935] 3 I.T.R. 17. v. Clark held that the expenditure was on capital account and hence not an allowable expenditure. The company's appeal to the Tribunal was, however, successful. The Tribunal held that (a) the payment did not bring in any asset of an enduring benefit to the assessee, (b) it is not correct to state that the very existence of the company depended on the termination of the agency, (c) the payment, not being to Leylands, was not a condition for Leylands to bring in capital, (d) that the payment was not for acquiring a new business, but to carry on the business which continued to be the manufacture and sale of motor vehicles, (e) the capital brought in by Leylands was only incidental to the carrying on of the original trade of the company, and, in the ultimate analysis, reiterated that the expenditure was one laid out wholly and exclusively for the purpose of business and was not of a capital nature.

4. In the above conspectus of events, the Tribunal, on a direction by this court to state a case, has submitted an agreed statement of the case. The question formulated for our decision is:

' Whether, on the facts and in the circumstances of the case, the payment of Rs. 2,50,000 made for the termination of the managing agency is an allowable deduction in computing the total income of the assessee-company for 1950-57?'

5. The revenue, who is the appellant represented by Thiru Balasubrahmanyan, strenuously contends that the termination of the managing agency has led to a reorientation of the business of the assessee, though not strictly a new line of trade. The payment was made at the behest of the Government and was for non-business purposes. His contention is that it cannot be said that the amount was expended during the year ending December 31, 1955, to earn the profits for that year. It is not an operational expense, but one incurred to secure an enduring benefit. The assessee was expanding its business by securing additional capital. Finally, he would say that it was for securing a ' process ' to earn profits in the future. Thiru S. Swaminathan, on the other hand, would contend that the termination was totally dissociated from the corporate structure of the company arid the expenditure was incurred to avoid commercial inconvenience. He adds that there is no direct relation between expenditure and the earning of future profits, and it has not been incurred to secure an enduring benefit. This is not a case in which the expenditure can be said to create any asset, tangible or intangible, from which a return could be expected. The expenditure was made once and for all and is non-recurring and was not for any oblique purpose.

6. Various tests have been formulated by courts in order to decipher the nature and quality of the expenditure of an assessee while considering claims by them for allowance of such expenditure as against the income under Section 10(2)(xv). A clear-cut dichotomy cannot be laid down in the absence of a statutory definition of ' capital and revenue expenditure '. Invariably it has to be considered from the point of view of the payer. In the ultimate analysis, the conclusion of the admissibility of an allowance claimed is one of law, if not a mixed question of law and fact. The word ' capital ' connotes permanency and capital expenditure is, therefore, closely akin to the concept of securing something tangible or intangible property, corporeal or incorporeal rights, so that they could be of a lasting or enduring benefit to the enterprise in issue. Revenue expenditure, on the other hand, is operational in its perspective and solely intended for the furtherance of the enterprise. This distinction, though candid and well accepted, yet is susceptible to modification under peculiar and distinct circumstances. Thus, the facts of each case, the attendant circumstances revolving round the expenditure, the aim, object and purpose of the same, their impact on the assessee, particularly in matters relating to the future of the assessee's trade and business, whether it could be sustained on ordinary canons of commercial expediency simpliciter, whether it is a step-in-aid of future expansion or prolongation of life of an existing business, whether it is to secure an enduring benefit, whether the expenditure constitutes conceivable nucleus to form the foundation for posterior profit earning, whether the expenditure could be viewed as an integral part of the conduct of the business and to avoid inroads and incursions into its concrete present and potential future, are all some of the main incidents which have a bearing on the decision whether, in a given case, the expenditure is capital or chargeable to revenue. On the whole, an objective application of a judicial mind to the facts of each case is necessary. We shall now consider the various citations made at the Bar. James Snook & Company Ltd. v. Blasdale (H. M. Inspector of Taxes, [1952] 33 T.C. 241 was a case where an agreement for the sale of shares of the appellant company provided, inter alia, that the purchaser would procure the company to pay compensation for loss of office to the directors and the auditor of the company who, under the agreement, were to resign. The General Commissioners held that the compensation paid was not an allowable deduction in computing the company's profits. The decision rested on the finding that the assessee failed to discharge the onus which lay on him to prove that the payment was solely in the interests of the trade. In A.V. Thomas and Co. Ltd. v. Commissioner of Income-tax : [1963]48ITR67(SC) , the Supreme Court negatived the claim for deduction on the ground that, by the expenditure, the assessee company intended to acquire a capital asset for itself. In the illuminating judgment of Bhagwati J. in Assam Bengal Cement Co. Lid. v. Commissioner of Income-tax, : [1955]27ITR34(SC) , some broad principles of distinction were deduced by the learned judge as follows:

' 1. Outlay is deemed to be capital when it is made for the initiation . of a business, for extension of a business, or for a substantial replacement of equipment.........

2. Expenditure may be treated as properly attributable to capital when it is made not only once and for all, but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade.........

3. Whether, for the purpose of the expenditure, any capital was withdrawn, or, in other words, whether the object of incurring the expenditure was to employ what was taken in as capital of the business. Again, it is to be seen whether the expenditure incurred was part of the fixed capital of the business or part of its circulating capital. Fixed capital is what the owner turns to profit by keeping it in his own possession. Circulating or floating capital is what he makes profit of by parting with it or letting it change masters. Circulating capital is capital which is turned over and in the process of being turned over yields profit or loss. Fixed capital, on the other hand, is not involved directly in that process and remains unaffected by it.'

7. Reliance was placed on the dicta of Lord Sands in Commissioners of Inland Revenue v. Granite City Steamship Co. Ltd., [1927] 13 T.C. 1, of Bowen L.J. in City of London Contract Corporation v. Styles, [1887] 2 T.C. 239, of Viscount Cave L.C. in Atherton v. British Insulated and Helsby Cables Ltd., [1925] 10 T.C. 155, and that of Lord Haldane in John Smith & Son v. Moore, [1920] 12 T.C. 266. In conclusion, the Supreme Court was of the view that, : [1955]27ITR34(SC) :

'.........where the expenditure is made for the initial outlay or for extension of a business or a substantial replacement of the equipment, there is no doubt that it is capital expenditure .... If on the other hand it is made not for the purpose of bringing into existence any such asset or advantage but for running the business or working it with a view to produce the profits it is a revenue expenditure.'

8. In Pingle Industries Ltd. v. Commissioner of Income-tax, : [1960]40ITR67(SC) , the Supreme Court had to consider whether the payments made by a lessee to a jagirdar to secure a right to extract stones in the jagir stretched over for a period of years were revenue expenditure and, therefore, allowable under the corresponding law of the Hyderabad State, as it then was. The court held that the payment, though periodic in fact, was neither rent nor royalty but a lump payment in instalments for acquiring a capital asset of enduring benefit to his trade and that the amounts were outgoings on capital account and were not allowable deductions. In fact, Assam Bengal Cement Co, Ltd. v. Commissioner of Income-tax, : [1955]27ITR34(SC) , was cited with approval. In Abdul Kayoom v. Commissioner of Income-tax, : [1962]44ITR689(SC) , Hidayatullah J., while agreeing , that the expenditure therein was laid wholly and exclusively for the purpose of the business, held that it was a capital expenditure and observed that none of the tests formulated in decided cases, is either exhaustive or universal and each case depends on its own facts and a close similarity between one case and another is not enough, because even a single significant detail may alter the entire aspect. The claim was disallowed because the amount was paid to secure an enduring asset. The Privy Council in Tata Hydro-Electric Agencies Ltd. v. Commissioner of Income-tax, [1937] 5 I.T.R. 202, observed :

' If the purchaser of a business undertakes to the vendor as one of the terms of the purchase that he will pay a sum annually to a third party, irrespective of whether the business yields any profits or not, it would be difficult to say that the annual payments were made solely for the purpose of the business.........'

9. In Royal Insurance Company v. Watson, [1896] 3 T.C. 500, the House of Lords negatived the claim for deduction made by the assessee company therein on the ground that the payment formed part of the condition of the transfer of a business in favour of the assessee and, therefore, partook the nature of capital expenditure. Reference was also made to Van den Berghs Ltd. v. Clark, [1935] 3 I.T.R. 17. That was a converse case. The locus classicus on the subject as rendered by Viscount Cave L.C. in Atherton v. British Insulated and Helsby Cables Ltd., [1925] 10 T.C. 155. was relied on. It was held that the payment in the recipient's hands was not an income receipt. In Robert Addie & Sons' Collieries Ltd. v. Commissioners of Inland Revenue, [1924] 8 T.C. 671, the facts were :

' Under the terms of a mineral lease, a colliery company was obliged to restore to an arable state all ground occupied by it or damaged by its workings, or, at its option, to pay the lessor for all such ground not so restored, at the rate of thirty years' purchase of the agricultural value thereof. In the exercise of its option, the company paid the lessor a sum of 6,104, as representing the value of the damaged lands.'

11. The court held :

'......that such payment was in the nature of capital expenditure, and was not therefore a proper deduction in computing the company's liability to income tax.'

12. Even so, Rowlatt J., in 'Countess Warwick' Steamship Co. Ltd. v. Ogg, [1924] 8 T.C. 652, held that money paid to procure a cancellation of a contract, which was not for the purpose of earning profits or for the purpose of furthering, protecting or continuing the assessee's existing business, was capital expenditure. This dictum was approved by the Supreme Court in Swadeshi Cotton Mills Co. Ltd. v. Commissioner of Income-tax (No. 2) : [1967]63ITR65(SC) . Two more cases in the catena may be noted. The House of Lords in Morgan (Inspector of Taxes) v. Tale and Lyle Ltd., [1954] 26 I.T.R. 195, was dealing with a case where a company engaged in sugar refining incurred expenses in a propaganda campaign to oppose the threatened nationalisation of the industry. The Commissioners for the General Purposes of the Income Tax found that the sum in question was money wholly and exclusively laid out for the purposes of the company's trade and was an admissible deduction from its profits for income tax purposes.

13. The Law Lords held :

' That the object of the expenditure being to preserve the assets of the company from seizure and so to enable it to carry on and earn profits there was no reason in law to prevent the Commissioners from so finding. On the evidence it was not to be assumed that the trade of the company would have continued, in an income tax sense, in other hands, after nationalisation arid accordingly that the expenditure was incurred for the purpose of preventing a change of ownership.'

14. In Gotan Lime Syndicate v. Commissioner of Income-tax, : [1966]59ITR718(SC) , the court was concerned with a payment of royalty and dead rent made by licensee of a mine to the Government. Such payment, not being referable to the acquisition of the mining lease, was held to have relation only to the lime deposits to be got and had, therefore, to be treated as revenue expenditure. The learned judges were of the view that it is not the law in every case that, if an enduring advantage is obtained, the expenditure for securing it must be treated as capital expenditure.

15. At this stage it is convenient to refer to what we may terminologically characterise as ' agency cases '. B. W. Noble Ltd. v. Mitchell, [1927] 11 T.C. 372, was a case wherein the company got rid of one of its directors, but to avoid publicity injurious to the company's reputation, the company paid compensation to him. Kowlatt J., in his characteristic style, was of the view that in the ordinary case, a payment to get rid of a servant when it is not expedient to keep him in the interests of the trade, is a proper deductible expense. According to him, the amount was paid to get rid of him for the sake of the good name of the company and they did not want any litigation or publicity or any scandal or anything of that kind, and hence they paid it for business reasons. He relied upon the classical statement of Lord Cave in Atherton v. British Insulated and Helsby Cables Ltd., [1926] 10 T.C. 155, and concluded :

' It seems to me it is simply this, although the largeness of the figures and the peculiar nature of the circumstances perplex one, that this is no more than a payment to get rid of a servant in the course of the business and in the year in which the trouble comes.'

16. Lord Hanworth M. R., agreeing with the view of Rowlatt J., concluded :,

' It is a payment made in the course of business, dealing with a particular difficulty which arose in the course of the year, and was made not in order to secure an actual asset to the company but to enable them to continue, as they had in the past, to carry on the same type and high quality of business unfettered and unimperilled by the presence of one who, if the public had known about it, might have caused difficulty to their business and whom it was necessary to deal with and settle with at once.'

17. The next case in this series is Anglo-Persian Oil Company Limited v. Dale (R. M. Inspector of Taxes), [1931] 16 T. C. 253. In this case, the appellant company appointed another limited company as its agents in Persia and the East, and their remuneration was by commission at specified rates. With the passage of time, the amounts payable to the agents by way of commission increased by leaps and bounds and the agreement was cancelled on the company agreeing to pay the agents 3,00,000 in cash. The court held that the payment to the agents was an admissible deduction for purpose of income-tax. Lord Hanworth M.R., agreeing with Rowlatt J., opined:

' It seems difficult to accept the view that the appointment of an agent, or the withdrawal of an agency, in the very business belonging to the principals, creates or destroys a business of a separate nature or an asset which is to be added to the capital account.'

18. Romer L.J., in his concurring judgment, put the matter in a slightly different way and explained the words ' enduring benefit ' thus :

' I agree with Mr. Justice Rowlatt that by ' enduring ' is meant enduring in the way that fixed capital 'endures'.' An expenditure on acquiring floating capital is not made with a view to acquiring an enduring asset. It is made with a view to acquiring an asset that may be turned over in the course of trade at a comparatively early date. Nor, of course, need the advantage be of a positive character. The advantage may consist in the getting rid of an item of fixed capital that is of an onerous character, as was pointed out by this court in the case of Mallet v. Staveley Coal and Iron Company reported in 13 T.C. 772.'

19. The Calcutta High Court took a similar view in Anglo-Persian Oil Company v. Commissioner of Income-tax : [1933]1ITR129(Cal) . That was a case where a lump sum compensation was paid for loss of agency. Their Lordships were of the view that the payment not having been shown to be distribution of profits, wholly gratuitous or for some improper or oblique purpose, the deduction was permissible and that expenditure thus permissible under Section I0(2)(ix) of the Act need not be made with a view to produce profits in the year of account.

20. In G. Scammel and Nephew Ltd. v. Rowles : [1940]8ITR41(Cal) , the Court of Appeal held that 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, and, agreeing with the view of Lawrence J., the court held that the payments made in such circumstances were made for purposes of the trade and were admissible deductions in computing the income of the payer for purposes of income-tax. In fact, the decision in Van den Berghs Limited v. Clark, [1935] 3 I.T.R. 17, was distinguished in this case and reliance was placed on B. W. Noble Ltd. v. Mitchell, [1927] ll T.C. 372, and Anglo-Persian Oil Company Ltd. v. Dale (H. M. Inspector of Taxes), [1931] 16 T.C. 253. This court had occasion to consider a similar case when large sums were paid on the occasion of the termination of the managing agency agreement of a company. In P. Orr & Sons v. Commissioner of Income-tax : [1959]35ITR556(Mad) , Rajagopalan J., speaking for the court, held the view that such payments made to secure the termination of the managing agency and its attendant recurring annual liability to the company were not intended to bring in any capital asset, nor did it result in the acquisition of any capital asset. It was, therefore, held that the payment was not an item of capital expenditure within the meaning of Section 10(2)(xv) of the Income-tax Act. Here again reliance was placed on the dicta of B. W. Noble Ltd. v. Mitchell, : [1955]27ITR34(SC) , Assam Bengal Cement Co. Ltd. v. Commissioner of Income-tax, [1931] 16 T.C. 253, and Anglo-Persian Oil Co. Ltd. v. Dale (H. M. Inspector of Taxes). In Indian Copper Corporation Ltd. v. Commissioner of Income-tax : [1960]38ITR544(Patna) , it was held that the payment of compensation to outgoing directors for the loss of office as per the articles of association of the company could be claimed as a deduction under Section 10(2)(xv) of the Income-tax Act. The learned judges also held that it is not necessary for expenditure to be allowable under Section 10(2)(xv) of, the Income-tax Act that there should be any direct correlation in point of time between the expenditure and the earning of any profits.

21. The tests laid down in the above decided cases, though not exhaustive, are essentially illustrative, as in the ultimate analysis each case has to be decided on its own merits. In this case, the company was originally concerned with assembling Austin cars and trucks. This was only one wing of its activities, as the articles of the company were wide enough to cover a larger range of business enterprise including manufacturing and assembling of motors, trucks of whatever make they may be. Quite consistent with their scheme of activity as envisaged in the articles, the company had to necessarily engage Car Builders Limited as their managing agents. It was under this agreement large sums of moneys were payable to the agents year after year. Contemporaneous with such dealings with ' Austins ' through Car Builders, the company, in the light of their avowed objects to expand their field of trade, secured in the year 1951 the right to distribute, assemble and progressively manufacture Leyland trucks, etc. At or about that time, the Government of India was keen on establishing a motor manufacturing industry in India. The company's scheme found favour with the Government. But by such a scheme it became necessary for them to collaborate with Ley-lands as Austins were not interested in the same. It was at this point of time that the company resorted to terminate the managing agency of Car Builders Limited, as their continuance depended upon the continued patronage of Austins, which, as already stated, was not forthcoming. Therefore, on June 19, 1954, a resolution to terminate the managing agency agreement was passed resulting in an outgoing to the concern in the sum of Rs. 2,50,000. Thereafter, the Government of India began to whip up the programme and called upon the company to seek the financial assistance of Leylands besides technical collaboration so that the establishment of a premier motor industry in India may be a fait accompli. The Government also indicated that, in case finance from Leylands was not forthcoming, they would assist the company, provided there is no managing agent for the company. This contingency never occurred because Leylands gave the required financial assistance. But, in order to avoid any possible hurdle and primarily for purposes of business expediency, they paid the sum of Rs. 2,50,000 to the managing agents. The termination agreement dated January 29, 1955, reflects clearly the mind of the company. By such a payment, the company got rid of an onerous responsibility under the managing agency agreement, benefited financially thereby by avoiding future payments and incidentally provided for a foreseeable contingency in case Leylands were disinclined to finance the project. It is, therefore, necessary for us to consider whether the above expenditure incurred by the company can be plugged into any one of the well-laid pigeonholes categorised in the catena of decisions cited above. We are of the view that the expenditure in question did not secure a lasting or an enduring benefit to the company. It has not secured to the company anything tangible so as to form the basis for future profit earning. This was not an expense to expand the trade either. This was incurred, no doubt, once and for all but does satisfy all the attributes of circulating capital rather than fixed capital. The sum spent did not bring into existence any asset, right or privilege to run the company's future business. The money paid, though prima facie to procure the cancellation of a contract, was obviously not for the purpose of furtherance, protection and continuance of the trade. It was commercial expediency that prompted the company to pay the same and make way for the financial benefits that they may secure from the Government, in case Leylands fail to accommodate them. The payment is, therefore, to be characterised as one made to steer clear of any possible obstacle in the way of the conduct of their normal trade untrammelled by their contractual obligations with Car Builders Limited, which, if it were allowed to subsist, would be more a burden and a liability rather than an advantage. This case squarely comes within the Rules of the agency cases cited above. In the words of Lord Hanworth M.R. ' the withdrawal of an agency, in the very business belonging to the principals neither creates nor destroys a business of a separate nature or an asset which is to be added to the capital account,' It is not even suggested that the payment is designed and motivated. In our view, this is a normal payment made due to business exigencies. The contention that the expenditure cannot be correlated to the profits earned during the year of expense is one without force. A doctrinaire approach to the problem has to be avoided as the decision depends on an overall consideration of all the surrounding circumstances and expediency arising in each particular case. We are, therefore, satisfied that the sum of Rs. 2,50,000 expended by the company to terminate the managing agency agreement is chargeable to revenue and, therefore, an allowance deductible under Section 10(2)(xv) of the Indian Income-tax Act, 1922. The question referred is, therefore, answered in favour of the assessee and in the affirmative with costs. Counsel's fee Rs. 250.


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