G. K. MITTER J. - The main question in this reference under section 66(1) of the Indian Income-tax Act is whether a sum of money paid to a manager and director of a company in terms of a resolution of the board of directors to dispense with his service was an expenditure admissible as an allowance under section 10(2)(xv) of the Indian income-tax Act. The other question of a similar nature relates to certain payments made by way of commission to four managers of the company. According to the terms of their engagement, commission was payable on the result of the year of account for which it was due but as they appear to have left the service of the company before the completion of the year, the payments were made on the basis of the figures of the previous year which exceeded the figures for the year in question by about Rs. 22,199.
The facts are as follows :
The assessees are the liquidators of Begg Dunlop & Co. Ltd., which went into liquidation on March 30, 1948. The assessment year is 1948-49 and the financial year is that ending on March 30, 1948. There was a material change in the composition of the shareholders of the company in the month of July, 1947. According to the statement of case the new shareholders influenced the management of the company in various ways and were of the view that a thorough reshuffling in the management was necessary. Ultimately, they decided to have the company wound up. Before they took such decision the directors of the company passed a resolution by virtue of which Mr. Mackay, the manager, who was also a director, was asked to retire from the service of the company and was given a sum of Rs. 2,80,000. The text of the resolution of the board of directors passed on September 20, 1947, is as follows :
'The chairman reported that owing to the recent changes in the holding of the controlling interest in the company and the changes and economies that were being effected in the running of the company by the new shareholders there was no longer any suitable employment for Mr. H. G. G. Mackay as a manager of the company and it was with great regret that the board had decided to dispense with Mr. Mackays service as a manager of the company with effect from the 30th September, 1947.
It was resolved that in view of the fact that Mr. Mackay would in normal circumstances have continued as a manager of the company for a further seven years and the premature termination of his service by the company, he should be given the sum of Rs. 2,80,000 as compensation for such premature termination of his service.'
It should be noted that there was no subsisting agreement between the company and Mr. Mackay regarding the tenure of his service. It is recorded that Mr. Mackay had been in service for a pretty long period and had worked up to the position of manager by his efficiency. According to the assessees Mr. Mackay would have retired in about seven years from 1947 and he could therefore expect to be in service for that period. As such the directors felt dispensing with his service by premature termination had to be compensated and the payment of Rs. 2,80.000 was occasioned by commercial expediency and admissible as an expense under section 10(2)(XV).
The assessee further paid a sum of Rs. 49,295 to the managers of the company by way of commission. The entire commission was determined with reference to the profits for the year ending on March 30, 1947, and not on the profits for the year ending on March 30, 1948, relevant for the assessment year in consideration. The auditors of the company had made a note that this was an exceptional procedure and there was no authority for the company to make such payment. The commission due on the profits made up to March 30, 1948, was Rs. 27,096. The Income-tax Officer allowed this amount as a deductible expense and added back a sum of Rs. 22,199 as not allowable. In their comment on the audit the auditors observed, 'we understand that this procedure was adopted in order to expedite settlement of accounts with managers but we have seen no authority for this method of payment.'
With regard to the payment to Mr. Mackay the Tribunal observed in its order that the employee was not under an agreement to serve for a particular period and the company was under no legal liability to pay any compensation to him for terminating his service. The Tribunal also noted that just a few months after the termination of his service the company itself went into liquidation and if the dismissal had taken place at the same time as the liquidation no question of compensation could have arisen and the payment would have been taken to be an ex gratia one. According to the Tribunal, 'merely because the termination was a few months earlier, we cannot say that the ultimate intention of the assessee company was to liquidate the companys affairs and this treatment with Mr. Mackay was only a process undertaken by the company before the shareholders resolved to wind up. Even apart from the fact that the services were not dispensed with immediately at the time of liquidation, the reasons given are economically conducting the affairs of the company...... In any case, to our mind, the payment was not a compensation for premature termination but merely an ex gratia payment for services rendered by him in the past. As such the payment was not an expenditure admissible under section 10(2)(XV).'
It appears that in deciding the case before it the Tribunal did not at first adjudicate upon the ground whether the amount of Rs. 22,199 paid in excess to the managers was liable to be disallowed against the computation of profits. The Tribunal accepted the contention of the revenue and rectified its order under section 35 of the Income-tax Act by adding a paragraph to the above order. By this further order the Tribunal notes that according to the auditors of the company this extra payment to the managers was without any authority and in disregard to the procedure followed in previous years. The Tribunal added that as the assessee was maintaining the system of mercantile accounting it could find no reason to interfere with the order of the Appellate Assistant Commissioner.
The questions framed for determination by this court are as follows :
'(1) Whether, on the facts and in the circumstances of the case, the sum of Rs. 2,80,000 paid by the assessee company to the director and manager was an expenditure admissible as an allowance under section 10(2)(XV) of the Indian Income-tax Act
(2) Whether, on the facts and in the circumstances of the case, the entire amount of Rs. 49,295-9-6 paid to the managers was an expense admissible under section 10(2)(xv) of the Indian Income-tax Act ?'
To come within section 10(2)(XV) the expenditure must not be an allowance of the nature described in clauses (i) to (xiv) inclusive; it must not also be in the nature of capital expenditure or personal expense of the assessee but must be laid out or expended wholly and exclusively for the purpose of its business. The test, therefore, is whether the payment can be related wholly and solely to business expediency. It must be such as commercial men would be justified in spending for their business without taking any extraneous matters into consideration. Thus, for instance, there must not be an element of an ex gratia payment or gratuity. This does not mean that commercial men are supposed to be deprived of all human considerations but for Income-tax purposes the payment must be measured in terms of commercial efficacy. Thus if an employee is asked to quit his employment all of a sudden because there is no work for him or because the condition of the business in such that economies must be effected by retrenchment it would hardly be right to throw him out of employment without any compensation. If he had been working under a definite service agreement regard must be had to that including the surrounding circumstances and the financial circumstances of the assessee to give him reasonable compensation. Even if an employee is not working under an agreement for a definite period he ought not to be asked to go without any compensation whatsoever. Even such a person may be paid some compensation which will not be the same as in the case of one who had been working under a service agreement for a definite period. Ordinarily, if the master has fixed the compensation bona fide and reasonably no exception ought to be taken thereto. But it would be for the assessee to place all the available material before the Income-tax authorities to satisfy them that fixation of compensation was reasonable and bona fide. If the service of an employee is being terminated to effect economy material must be disclosed to show how economy was being effected. It is not enough to say that an employee was being paid a not inconsiderable sum of money as compensation without informing the Income-tax authorities as to the emoluments which he was getting at the time of the termination of his service. In this case all that we know is that Mr. Mackay would in the normal course of things have been superannuated after seven years from September, 1947. No material has been disclosed to show what was his yearly remuneration. If, for instance, his yearly remuneration was in the neighbourhood of rupees five lakhs, the payment of Rs. 2,80,000 - roughly remuneration for six months - would be quite reasonable but if his yearly remuneration came to no more than Rs. 40,000 or Rs. 50,000 then the payment of Rs. 2,80,000 to him would mean paying him for the entire period he would have been in the service of the company and in the result this would mean paying him for the said period without taking any service from him. When all the circumstances are disclosed it may be that a particular board of directors might have decided to pay Mr. Mackay Rs. 2,00,000 while another set of directors might have fixed Rs. 3,00,000 as the proper amount of compensation but in that case no exception can be taken if the amount actually fixed is Rs. 2,80,000, but if no circumstances are disclosed then it is impossible for the revenue authorities to test the correctness of the ground given, namely, effecting economy in the running of the company. I do not think much importance can be attached to the fact that within six months after the board of directors had passed their resolution relating to Mr. Mackay, the shareholders decided to put the company into liquidation. It would have been otherwise if the board had decided to make this payment with the knowledge that the shareholders were thinking of putting an end to the venture but there is no such suggestion in this case.
I now proceed to examine the authorities which cited at the Bar on the first question. Some of these are judgments of the English Court of Appeal or the House of Lords while the others are Indian. In this connection it is necessary to remember that by clauses I and II, rule I of Schedule D to the English Income Tax Act no sum was to be deducted 'for any disbursements or expenses whatever, not being money wholly and exclusively laid out or expended for the purposes of such trade, manufacture, adventure or concern.' Under section 10(2)(xv) of the Indian Act on the other hand only such expenditure is allowable which is not covered by clauses (i) to (xiv) of section 10(2) of the Act and is not in the nature of capital expenditure or personal expense of the assessee but is laid out or expended wholly and exclusively for the purpose of such business, profession or vocation. The earliest English authority referred to is the case of British Insulated & Helsby Cables Ltd. v. Atherton, where three of the law Lords were of opinion that the payment concerned was in the nature of capital expenditure while two others held a contrary view. It is not necessary to examine the facts of that case but Viscount Cave L.C., after scrutiny of several older decisions, observed 'that a sum of money expended, not of necessity and with a view to a direct and immediate benefit to the trade, but voluntarily and on the grounds of commercial expediency, and in order indirectly to facilitate the carrying on of the business, may yet be expended wholly and exclusively for the purposes of the trade.' His Lordship also said 'but when an expenditure 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, I think that there is very good reason (in the absence of special circumstances leading to an opposite conclusion) for treating such an expenditure as properly attributable not to revenue but to capital'. These dicta were referred to by Mr. Mitra, counsel for the assessee, as having been followed in a large number of English cases. In Anglo-Persian Oil Co. Ltd. v. Dale, the decision mentioned above was extensively referred to. In this case the assessee were a company incorporated with the object of raising, refining, selling and otherwise dealing with crude oil and its products in Persia and elsewhere. By an agreement of the year 1914 the assessee appointed Strick, Scott & Company Ltd., as their agents, to manage their business in Persia and the East and to carry out the sale of petroleum and other products on certain terms as to remuneration including commission on the sales. The agreement was to be in force for ten years in the first instance renewable for a further period on terms to be arranged either by agreement or by arbitration. The assessee found that the remuneration payable under the agreement was more onerous than anticipated and started negotiations with the agents for terminating the agreement. Ultimately, the parties agreed in 1922 whereby the agency agreement of 1914 was to be terminated and the company was to go into liquidation and wind up its business in consideration of the assessee paying them Pound 3,00,000. There were other agreements between the parties with regard to the taking over of the employees of the agents and payment for the plant, machinery and launches, etc., in use by them for the purpose of the agency business. The agreements were carried out and the sum of Pound 3,00,000 paid. The assessee treated this sum in their accounts as a revenue payment. The Special Commissioners disallowed the same and Rowlatt J. held that the sum in question was an admissible deduction. His judgment was upheld by the Court of Appeal. Lord Hanworth M.R. repelled the contention of the revenue that the finding of the Commissioners ought to be accepted as one of fact within their own sphere and so not the subject of appeal as a question of law. According to the learned Master of the Rolls this was not correct and the deductions which were permissible had to be examined from the point of view of law. His Lordship was inclined to doubt the correctness of Lord Caves test 'that where money is spent for an enduring benefit it is capital.' According to the learned Master of the Rolls it was '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' and added 'where, as in this case, the expenditure is to bring back into the hands of the company a necessary ingredient of their existing business - important, but still ancillary and necessary to the business which they carry on - the expenditure ought to be debited to the circulating capital rather than to the fixed capital, which is employed in and sunk in the permanent - even if wasting - assets of the business.' According to His Lordship the payment was made to put an end to an expensive method of carrying on the business which remained the same whether the distributive side was in the hands of the respondents themselves or of their agents.
In the Anglo-Persian case, the figure of compensation was settled taking into consideration the period during with the agreement would have been in force and the agreement was between the principals and the agents. Here there is no question of the shareholders of the company expressing their views at a meeting of the company and the decision is that of the board of directors with regard to what should be done to one of themselves. Here, as already indicated, no attempt was made to satisfy the revenue authorities as to how economy was being effected by the payment of a lump sum of money. The burden of proof being on the person claiming the exemption it was for the assessee to show what were the average total annual emoluments of the manager and how any economy was being achieved.
The English authority referred to by the Tribunal in its order is the case of Overy v. Ashford Dunn & Co. Here the assessee, Ashford Dunn & Co. Ltd., was a private company with three shareholders and directors, namely, Ashford Dunn, Oswald Dunn and Gladys Dunn, who had complete control of the company in the popular sense. Under article 24 of the articles of association the directors were to be paid out of the funds of the company, by way of remuneration for their services, such sums to be divided among them in such proportions and manner as the company might in general meeting from time to time prescribe. By article 25 Ashford Dunn was to be the first managing director. In December, 1929, and agreement was arrived at between these three persons, the directors and shareholders, the company and another company called Slate Slab Products Ltd. by which the control and interest of the company was to be transferred to Slate Slab Products Ltd. The Special Commissioners accepted the evidence that the arrangement was entered into by reason of the dominating position of Slate Slab Products Ltd. in the market, so that the business of the assessee could be carried on more economically. The three shareholders and directors were to be entitled to the benefit of the book debts of the assessee as on the 30th day of November, 1929, and they were also to get remuneration for the 8 months preceding that date besides the sum of Pound 3,000 to be paid to them as compensation for loss of office. According to Finlay J. 'it is found that it was in the best interests of the company that the directors should retire; but there is no finding that this payment of Pound 3,000 as compensation for loss of office was necessary to induce the directors to retire, or for any other reason...' His Lordship considered the case of Mitchell v. Noble, where a director was induced to retire on payment of a sum of Pound 19,000 as the other directors thought his remaining in office would be or might have caused scandal likely to be injurious to the company. His Lordship said 'the distinction between that case and this seems to me to be obvious. There the money was necessary for business purposes. It was necessary to pay that sum of money to get rid of a director, and it was necessary to get rid of a director, of course, for business reasons, and quite bona fide the other directors conceived that was necessary in the best interests of the carrying on of the business.' In the result, His Lordship found himself unable to uphold the decision of the Special Commissioners and allowed the appeal.
The earliest Indian case cited at the bar was that of the Anglo-Persian Oil Co. Ltd. There the assessee who carried on in India the business of selling fuel oil and other products through selling agents paid by commission on sales, determined to put an end to the agency and take up the distribution themselves. To effectuate this purpose they paid Messrs. Shaw Wallace & Co., their agents, a sum of Rs. 3,25,000 as compensation for the loss their office as agents. So far as this payment in the hands of Shaw Wallace & Co. was concerned, the matter was taken up to the Privy Council and found to be receipt on capital account. The Commissioner of Income-tax found the assessees case to be true in that the money was paid in a lump sum as compensation for loss of agency, whereby the assessee relieved itself of future annual payments of commission chargeable to revenue account. The learned Advocate-General appearing in support of the revenue conceded that the payment in question was not capital expenditure. He, however, contended (a) the payment was not shown to have been made solely for the purpose of earning profits and (b) though, even if this were shown, it was not made solely for the purpose of earning profits in the year of account. Rankin C.J. repelled both these contentions. As regards the first he held that there was no suggestion that the payment was made by way of distribution of profits or was wholly gratuitous or for some improper or oblique purpose and as regards the second he held that clause (ix), sub-section (2) of section 10 of the Indian Income-tax Act did not mean that the expenditure must be made with a view to produce profits in the year of account.
In P. Orr & Sons v. Commissioner of Income-tax, the facts were as follows :
The assessee company was at first a private limited company then transformed into a public limited company reverting to its status as private limited company in 1938. One J. M. Smith was in management all through till March, 1950. The assessee company entered into a managing agency agreement with Smith Ltd., which consisted only of Smith and his wife as shareholders. By the agency agreement Smith Ltd. and its assigns and successors in business were to be the managing agents of the assessee company for a period of twenty years from December 24, 1936, and thereafter, unless they resigned from office or were removed therefrom. The agents were to be entitled to a monthly allowance of Rs. 3,000 plus twenty - five per cent. of the annual net profits of the company. Up to March 31, 1947, Smith and his wife held between them a large block of shares in the assessee company without however a controlling interest therein. The directors of the assessee company including Smith entertained the idea of converting the company again to a public company and it was thought desirable to end the managing agency agreement. In consideration of the termination of the managing agency agreement with retrospective effect and waiver of the right to the twenty-five per cent. commission, Smith was offered a lump sum of Rs. 1,25,000 as well as a life directorship of the company with charge of the London office on a remuneration of Pound 1,200 per year. The commission payable to Smith for 1947-48 was estimated at Rs. 31,000 but later on the figure worked out to Rs. 89,214. Smith accepted the offer and the managing agency agreement was terminated. In their letter to the shareholders the directors of the company informed them that Rs. 1,25,000 to be paid to Smith was approximately equal to the commission paid and payable for the three years ended March 31, 1948. The shareholders accepted the proposals and decided further that after the death of Smith his wife should get a pension for her life at Pound 100 per month. The managing agency agreement came to an end on April 1, 1948, Smith being credited with the sum of Rs. 1,25,000 in the assessees books. The question before the Income-tax Tribunal was whether the payment of Rs. 1,25,000 to the managing agents represented compensation for loss of office and not deductible under the provisions of section 10(2)(xv). The Tribunal found that the reasons for the payment of the compensation were not business reasons motivated by any commercial consideration and could not, therefore, be said to have been wholly and exclusively laid out for the purpose of the assessees business. The Madras High Court upset the findings of the Tribunal. According to the High Court 'the payment of Rs. 1,25,000 was to secure the termination of the managing agency and its attendant recurring annual liability to the company. It was not intended to bring in any capital asset; nor did it result in the acquisition of any capital asset.' Reference was made to the case of Nevill & Co. Ltd. v. Federal Commissioner of Taxation, where, referring to an expenditure on the revenue side, Latham C.J. observed that 'if the actual objects 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'. The learned judges of the Madras High Court also referred to the cases of Noble Ltd. v. Mitchell and the Anglo-Persian Oil Co.s case. The Madras High Court found that the arrangement 'which involved the payment of Rs. 1,25,000 was entered into to enable the assessee company to continue its business freed of the managing agency, freed of the liability to pay the managing agents a monthly remuneration and twenty-five per cent. of the net profits every year. The quantum of payment was wholly reasonable from a business mans point of view.'
Here good faith is not questioned but there are no materials indicative of the basis for fixation of the quantum of compensation.
In F. E. Dinshaw Ltd. v. Commissioner of Income-tax, the assessee company along with three others formed the Cement Agency Ltd., a company which was appointed the managing agents of a public company called the Associated Cement Companies Ltd. In order to look after the business of the public company, the Cement Agencies Ltd. appointed four persons to act as its managing directors. Their remuneration was however not to be paid by the Cement Agencies Ltd., but by its four principal shareholders. The assessee company appointed one H. S. Captain as one of such managing directors with remuneration payable on a percentage basis relative to dividends declared by the Cement Agencies Ltd., but with a minimum of Rs. 60,000 per year. This arrangement was altered in September, 1951. H. S. Captains service were terminated as from the said date. Thereafter, the salary of the four managing directors was to be paid by the Cement Agencies Ltd. H. S. Captain was to be paid Rs. 3,600 per month with certain allowances. Under the previous agreement H. S. Captain had been getting remuneration varying between Rs. 86,000 and Rs. 1,25,000 every year. The Cement Agencies Ltd. had not declared any dividend before October, 1951. A sum of Rs. 1,34,400 was paid to H. S. Captain on account of his salary for the period ending on September 30, 1951. H. S. Captain demanded a sum of three lakhs as compensation for termination of his service and after some discussion it was settled at one lakh of rupees. The learned judges of the Bombay High Court observed that 'the matter has to be viewed in the light of principles of commercial trading and commercial expediency. What is required is that the expenditure must be germane to the business of the assessee and not something which is de hors the business of the assessee. If it is an expenditure of the nature of compensation for termination of the services of an employee, the closer test would seem to us to be that of commercial expediency... If the payment is made under the honest belief that the claim by the employee for compensation or damages is justified and the assessee has acted in the matter of the settlement of the claim as an ordinary prudent businessman would act, it would not be for the department to say that the claim would not have succeeded in its entirety or even partly in a court of law. In such a case the department cannot insist on framing its own standard of reasonableness or prudence. It cannot claim the right or discretion to look at the matter subjectively but must examine it objectively.' The learned judges went on to add that there may be cases where the legal liability of the employer may be a debatable one and when faced with a claim for compensation or damages by a servant the employer is to view the matter as one of commercial expediency and it would be open to him in such a case to use his own judgment and act as a prudent businessman would do.
In this case there was no claim made either for damages or for loss of office. No data are available about Mackays remuneration or emoluments. The revenue authorities cannot be blamed if on the evidence before them they could not hold that the payment was necessitated by commercial or business expediency.
The fact in the case of Indian Copper Corporation Ltd. v. Commissioner of Income-tax could only warrant one conclusion. Here the assessee was a sterling company carrying on business in the mining of copper ore and manufacturing of copper and brass in the State of Bihar. In the accounting year it paid to its London directors as compensation a sum of Rs. 2,66,677. The company being registered in the United Kingdom its affairs were looked after by a board of directors resident there. In course of time about 85 per cent. of the total shares passed to the hands of the Indian nationals and the seat of management and control of the company was transferred on April 6, 1952, from the United Kingdom to India. The resolution recording this change in management and control was passed at an extraordinary general meeting of the company held on March 26, 1952. The total of Pound 20,000 (equal to Rs. 2,66,677) was paid to six directors for loss of office. The Income-tax Officer held that there was no legal obligation on the company to pay this amount and it was not incidental to the business of the company. It was submitted on behalf of the assessee that the company was benefited in four different ways by the transfer of the seat of control and management from the United Kingdom to India. It was shown that the expense of remuneration of directors was halved because of this and the travelling expenses of the managing directors for attending meetings in India which came to about Pound 48,000 a year was altogether dispensed with. There can be no doubt that the transfer of the seat of management to India was in the interest of better supervision and control of the business. The learned judges of the Patna High Court held that '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.... 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.'
In the case of Commissioner of Income-tax v. Royal Calcutta Turf Club the question was whether the expense incurred in connection with the running of a school for the training of jockeys to ride horses in races was an admissible deduction on the revenue account of the assessee whose business was to hold race meetings in Calcutta on a commercial basis. The assessee did not own any horses and did not employ any jockeys who were all employed by owners and trainers of horses which were run in the races but it was a matter of some importance to them that there should be jockeys available to the owners with sufficient skill and experience because the success of races to a considerable extent depended on their skill and experience : as there was a risk of the jockeys becoming unavailable leading to a serious disruption of the business the respondent considered it expedient to remedy that defect by establishing a school for the training of Indian boys as jockeys so that after the completion of their training they might be available for purposes of race meetings held under its auspices. It is immaterial that the school did not prove a success and had to be closed down after three years. The Supreme Court held that the deduction was admissible under section 10(2)(xv). They repelled the contention that the expense was in the nature of capital expense because no asset of an enduring nature was created thereby. The court further observed 'any expenditure which was incurred for preventing the extinction of the respondents business would, in our opinion, be expenditure wholly and exclusively laid out for the purpose of the business of the assessee and would be an allowable deduction.'
In Gordon Woodroffe Leather Manufacturing Co. v. Commissioner of Income-tax, a person who was an employee of the managing agents of the assessee company from 1922 to 1935 and, thereafter, an employee of the assessee from 1935 and also its director from 1940 was paid a sum of Rs. 40,000 by the assessee company 'in appreciation of his long and valuable services to the company.' The company had no scheme for payment of gratuities nor did it pay such gratuities in practice. There was nothing to show that the employee had accepted a low salary in expectation of a gratuity on retirement or that the gratuity was paid for the purpose of facilitating the carrying on of the business of the company or as a matter of commercial expediency. The Supreme Court held that the amount of gratuity was not an expenditure admissible under section 10(2)(xv). It was argued before the Supreme Court that the amount had been paid as a matter of commercial expediency and in the interest of the company as an inducement to other employees that if they rendered services in a similar manner with efficiency and honesty they would be similarly rewarded. The court rejected this submission and observed that, 'the proper test to apply in this case is, was the payment made as a matter of practice which affected the quantum of salary or was there an expectation by the employee of getting a gratuity or was the sum of money paid on the ground of commercial expediency and in order indirectly to facilitate the carrying on of the business.'
This test cannot be applied to the facts of this case because there are no data to which the test can be put. We simply have the decision of the directors that Mackays services were to be dispensed with as they were no longer necessary and he was being paid Rs. 2,80,000 to effect economy : this decision is said to have been taken in view of the fact that as he could still expect to be in the service of the company for seven years the premature termination merited the payment of compensation. The assessee has failed to show how economy was being effected by the expenditure of Rs. 2,80,000.
In view of the above the first question must be answered in the negative and against the assessee. With regard to the second question it appears that the Tribunals order under section 35 was put on a wrong basis, there being no question of the sum of Rs. 22,199 being added back as the assessee was maintaining the mercantile system of accounting. The whole question was whether the company was justified in paying out Rs. 49,295-9-6 when the commission actually due was Rs. 27,096-8-9. The auditors of the company rightly remarked that there was no authority for this payment. The managers were over-paid to the extent of Rs. 22,199 without any reason and, therefore, the only proper deduction which is admissible is Rs. 27,096-8-9. The answer to the second question therefore is that out of the amount of Rs. 49,295-9-6 a sum of Rs. 27,096-8-9 was admissible under section 10(2)(xv) of the Indian Income-tax Act.
The assessee must pay the costs of this reference.
Certified for two counsel.
LAIK J. - I agree.