COSTELLO, J. - This matter comes before us by way of a case stated by the commissioner of Income Tax on his own motion under Section 66(1) of the Income Tax Act (XI of 1922). The Commissioner has referred for the judgment of the Court a question of law arising in the course of proceedings under section 33 of the Act in regard to the 1931-32 assessment of Imperial Chemical Industries (India), Ltd., The commissioner of Income Tax has put the matter in this form : 'Whether payments amounting to Rs. 10,000 described by the assessees as compensation to ex-agents, but found in fact to be : (a) in part, ex gratia gift made in recognition of past services, (b) in part, payments with a view to secure willing co-operation in the course of taking over the agency business; and (c) in part, payments as consideration for an undertakings not to compete with the assessees business after the termination of the agency - are or are not expenditure allowable in charge under section 10(2)(ix) of the Act.'
Section 10(2) deals with the manner in which profits or gains are to computed for the purpose of assessment of income tax, and it contains an enumeration of the allowance which the assesses shall be entitled to make or, to put it more accurately perhaps, the deductions which the assessees are entitled to make before a net sum is arrived at upon which income tax becomes payable, and in sub-paragraph (ix) we find as a permissible allowance or deduction 'any expenditure, not being in the nature of capital expenditures incurred solely for the purpose of earning such profits or gains.' The Court is, therefore asked by the Commissioner of Income Tax to decide in effect whether the payment of Rs. 10,000 was on which could be taken into account by way of deduction for the purpose of arriving at the net sum upon which income tax would be payable in respect of the tax year 1931-32.
This matter originally came before the court on the 12th February, 1934. Some questions was then raised by learned Counsel on behalf of the assessees as to whether or not he might be able to avail himself of the provisions contained in sub-paragraph (viii-a) of section 10(2). That sub-paragraph makes allowable a deduction for any sum paid to an employee as bonus or commission for services rendered, where such sum would not have been payable to him as profits or dividend, if it had not been paid as bonus or commission : provided that the amount of the bonus or commission is of a reasonable amount with reference to : (a) the pay of the employee and the conditions of his service, (b) the profits of the business for the year in question, and (c) the general practice in similar businesses. Mr. Isaacs, appearing on behalf of the assessees on the 12th February, 1934, invited the Court to refer the matters back to commissioner of Income Tax in order that he might determine the findings of fact necessary for the purposes of enabling the Court to form an opinions as to the applicability of sub-paragraph statement of the case, as it is described, made under Section 66(4) of the Act. In that statements the Commissioners of Income Tax has expressed certain opinions and indeed arrived at certain conclusions of fact, upon the question whether the sum of Rs. 10,000 would be an admissible deduction under sub-paragraph or as he calls it sub-section, only came into operation on the 4th April, 1930, and consequently, as it follows that only expenditure of the kind contemplated by the sub-paragraph which has been incurred since the 4th April, 1930, would fall within the operation of this sub-paragraph any expenditure incurred before that date had not, at the time when made, a deductible character and no subsequent change in law could give it such a character.
We do not think it necessary for the purpose of disposing of this matter to express any opinion as to whether that view of the Commissioner of Income Tax was correct or not, nor indeed to express any opinion at all as to whether or not the sum with which we are here concerned could properly be treated as an admissible deduction under provisions of sub-section (viii-a), because in our opinion the matter can be decided as originally asked by the Commissioner of Income Tax, solely with reference to the provisions of sub-section (ix) of Section 10(2) of the Act.
In order to make it quite clear what the point is which has been submitted for determination by the Court, it is necessary that I should recite the relevant facts which show the circumstances in which, and the conditions under which, the payment in question came to be made by the assessees. The Commissioner points out that payments in issue relate to two agencies of the assessees, that is, of the Imperial Chemicals Industries (India), Ltd., one at Madras and the other at Colombo. It appears that the assessees succeeded a company known as Messrs. Brunner Mond and Company (India), Ltd., in the tax-year 1928-29. I presume the Commissioner of Income Tax means that the business of Messrs. Brunner Mond & Co., was taken over by or absorbed into the undertakings known as Imperial Chemical Industries (India), Ltd. Messrs. Brunner Mond & Co., on 9th February, 1923, had entered into what is described as a del credere commission agency with a firm known as Parry and Company, Madras. That agreement contained inter alia the following clause : Either party may, by notice to the other, terminate this agreement and six months after the receipt of such notice this agreement and the agency hereby constituted shall cease except so far as concerns the rights of either part in connection with acts, matters or things done or matters to be done before such termination.' That was Clause 14 of the agreement, and Clause 15 was as follows : 'After the determination of this agreement shall have no claim against the principal for any commission in respect of any subsequent sales made by the principal within the agents districts to customers originally introduced to them by the agents.'
The commissioner of Income Tax puts the history of the matter in this way : 'The business of which the assessee is one subsidiary was re-organised in 1927, on the constitution of the parent company, Imperial Chemicals Industries Ltd., (United Kingdom). It was then decided that the concern would conduct its own business throughout India. Messrs. Parry and Company were given a preliminary intimation of this policy in a letter of 4th February, 1927 (copied as Annexure A). This letter states inter alia that the agreed notice would be given in due course that the agents had consented to the assessee setting up his organisation during the currency of the notice (though the agents would draw full commissioner throughout); that possibly the agents would be given the agency at certain outports for some further period; and 'As compensation to a certain extent for the loss of our agency we should be willing to pay you the sum of Rs. 500 per month for 5 years to be reckoned from the date of the expiry of the notice determinating the agency, or a lump sum of Rs. 30,000 if you preferred it, provided that you would agree not to enter into compensation with us in the products you are now handling on our behalf during the five years referred to. This would not preclude you from continent to sell Paint; for which we understand you hold other agencies than ours...'
The letter concludes with the assessees proposal that his own employees would, meantime, be assisted towards getting a thorough insight into the working of the business prior to taking over, and thanked the agents for 'the very kind reception you have given to our proposals and for the assistance you are prepared to render to facilitate the opening of our own offices.'
On 8th February, 1927, the agents replied accepting the proposals (in the letter copied as Annexure B), including their appreciation of 'the friendly and generous attitude which has guided these negotiations.'
By a letter of 14th June 1927 (copied as Annexure C), the assessee gave due formal notice of termination of the agreement with effect from 31st December, 1927.
By agreement with the assessee the agents debited in their running account of 28th December, 1927, the lump sum of Rs. 30,000 but the assessee distributed the charge in his revenue accounts, passing Rs. 4,500 through the books on 30th September, 1928, and Rs. 6,000 annually since then : so that, Rs. 6,000 falls in the accounts for the year ending 30th September, 1930, under the present assessment, that is of course the assessment for the tax year 1931-32. Then the Commissioner of Income Tax says : 'It may be noted for information that the Commissioner (gross) payable to Messrs. Parry and Company had been approximately
Then the commissioner deals with the position as between Imperial Chemicals Industries (India) Ltd., and their Ceylon agents. He says : 'There was a similar agreement with Messrs. Hayley and Kenny of Colombo, dated 16th February, 1923; and it included the clause quoted above. The preliminary notice to them was given by a letter of 12th March, 1929 (copied as Annexure D), which stated inter alia that 'as compensation for the loss of this Agency and an indication of our appreciation we should pay you lump sum of Rs. 20,000 on the understanding that you would not handle our products from competitive sources without previously obtaining our permission, which would not unreasonable by withheld; also that you would render us every possible assistance in establishing our own office in Colombo; and it was agreed that you would permit one of our European Assistance to work in you office for such period as we desire, probably 6 months, in order to become thoroughly acquainted with the buyers of our products and with depots that have been opened.'
The agent replied by letter, dated 21st March, 1929 (copied as Annexure E), accepting the proposals and nothing inter alia : We take this opportunity of thanking you for offering us the sum of Rs. 20,000 in compensation for the loss of the Agency... We agree not to handle your products from competitive sources without your permission which, we note with thanks, would not unreasonably be withheld.'
By a letter of 15th June, 1929, the assessee gave due formal notice of termination of the agency with effect from 31st December, 1929, as upon the terms laid down in the above correspondence. Then the Commissioner says : 'There was a subsequent letter of 3rd December, 1929, in which the agents, being informed that the assessees manager would arrive on 5th January, 1930, stated that they would have pleasure in giving him all assistance to take up the threads of their business in Ceylon.'
The sum of Rs. 20,000 appears to have been debited by the agents in their accounts with the assessee on some date prior to 1st January, 1930. The assessee passed Rs. 4,000 through his books annually on this account, beginning with 30th September, 1930, under the present assessment. It may be noted for information that the agents receipts of commission (gross) were approximately :-
the latter sum being allowed for 4 months of the year after the formal expiration of the agency.
The comes the material statement in the case the regard to says : 'The amount thus charged in this period in respect of the two agencies totaled Rs. 10,000.
It appears that the Agents held and kept stocks of the assessees goods : and in the course of the change-over of the business, transferred the stocks to the assessee as convenient. Then in paragraph 5(b) the Commissioner Says : 'The assessees case throughout the assessment in his application to the Commissioner for revision was as follows (quoted from his letter of 5th October, 1931) :-
'We still contend that this compensation is from our point of view an allowable business expense. The payment of the compensation depended on an agreement that the ex-agent would not compete with out products and this agreement, we argue, changed the payment from an ex gratia one to a definite business one.'
Then he says : 'No other ground was raised within the time permissible to the assessee; but it appears that eventually my predecessor decided to leave the case to await the decision of the High Court in the Anglo-Persain Case mentioned above.' The Commissioner here refers to his statement in paragraph 2 of the case where he says :-
'Your Lordships decided in the matter of the Anglo-Persian Oil Company (India) Ltd., on the 8th February, 1933, that a certain payment as compensation for loss of Agency whereby that company relieved itself of future annual payments of commission chargeable to revenue account, was an allowable charge.
'In referring, that case the Commissioner accepted the Companys description of the payment without criticism or detailed examination. The decision is represented by the present assessee to cover the facts of his case. I am satisfied that it does not; but the issue is of general importance and frequent recurrence, and it is very desirable that it should be fully determined with the authority of your Lordships judgment.
'Now, it is to be observed, therefore, at the outset that the Imperial Chemical Industries (India) Ltd., as the assessees, were contenting that the payment of the sum of Rs. 10,000 ought to be taken as an allowable business expenditure, because the payment depended on an agreement and was not in the nature of ex gratia payment to their former agents. The learned Commissioner of Income Tax has thought fit to split up the sum of Rs. 10,000 into three parts, and to allocate each of those parts to certain objects. As I have already pointed out, he says that it has been found in fact that the sum of Rs,. 10,000 was (a) in part, an ex gratia gift made in recognition of past services, (b), in part, payment as consideration for an undertakings not to compete with the assessees business after the termination of the agency. The learned Commissioner had apparently based that view upon the interpretation which he himself had placed upon the letters which passed between the assesses or rather Messrs. Brunner Mond & Co., their predecessors and Messrs. Parry & Co., of Madras, and the correspondence between Messrs. Brunner Mond & Co., and Messrs. Hayley and Kenny of Colombo.
As regards what I will call the Madras Agency correspondence, we find in the letter of 4th February, 1927, which is Annexure 'A' the result of the negotiations between the company and their Madras agent, summarised as follows :-
(1) You will allow any members of our European staff, whom we may detail for the purpose, to work on our business in your office during the continuance of the agency.
(2) As the time approaches when we consider that our staff will shortly be in a position to run the business independently, we shall give you the six months notice required under your Agency agreement.
(3) You will not oppose the opening of our office or offices in Madras or elsewhere during the period of the notice. This will, of course, not affect your position as regards commission, which will be payable until the notice expires.
Paragraphs (4) and (5) are not very material, but in paragraph (6) it is stated :-
'We informed Mr. Wood that as compensation to a certain extent for the loss of our agency, we should be willing to pay you the sum of Rs. 500 per months for five years to be reckoned from the date of expiration of the notice terminating the agency or a lump sum of Rs. 30,000 if you preferred it, provided that you would not agree not to enter into competition with us in the products you are now handling on our behalf during the five years referred to.'
The last paragraph contained the following words quoted by the Commissioner in his summary of events :
'We wish you to accept our sincere thanks for the very kind reception you have given to our proposals, and the assistance you are prepared to render to facilitate the opening of our own officers.'
In answer to that letter, Messrs. Parry & Co., wrote on the 8th February, 1927, as follows :-
'We accept your proposals and terms as recorded in your letter under reply, and give you our assurance that you will receive from us all the co-operation and help which it is possible for us to give to your representatives before the transfer is made, and to your company thereafter.'
In the Colombo Agency correspondence Messrs. Brunner Mond & Co., in their letter of the 12th March, 1929, recording the result of the verbal negotiations which had taken place say as follows :-
'We confirm the conversation which took place between Messrs. Hayley and Simpson and Mr. Nicholson and the undersigned on the 7th instant when we advised that owing to the necessity for the development of our interests all through the near and the far East, it was essential that we should open our own office in Ceylon in the near future. It was placed on record that this in no way reflected on your handling our agency in the past as we were extremely satisfied with the attention you have given to our interest and the willingness you showed at all times to co-operate with us in developing the sales of the produce entrusted to your charge. It was agreed that as compensation for the loss of this Agency and an indication of our appreciation we should pay you sum of Rs. 20,000 on the understanding that you would not handle our products from competitive sources without previously obtaining our permission which would not be unreasonably withheld, also that you would render us every possible assistance in establishing our won office in Colombo and it was agreed that your would permit one of our European Assistance to work in your office for such period as we desire, probably 6 months, in order to become thoroughly acquainted with the buyers of our products and with depots that have been opened. It was also agreed at your special request that the amount fixed as compensation should be paid to your when our European Assistant was attached to your office.'
Those proposals were accepted by the Colombo Agents in their letter of the 21st March, 1929. It will be seen from that correspondence that the real position was that Messrs. Brunner Mond & Co., as predecessors of Imperial Chemical Industries (India), Ltd., were making an arrangement whereby instead of conducting their business and providing for the sale of their products through agency firms in Madras and Colombo, they would in future conduct their business through their own officers and their own staff in those two centres respectively. In brief, the position was that although Messrs. Brunner Mond & Co., were entitled to put an end to the agency agreement upon a bare six months notice and nothing more, they, by the arrangement they had made, secured for themselves certain advantages which otherwise might not have enured to them, if they had merely exercised their strict legal right and terminated the agencies and had done nothing more. The advantages which were obtained may be summarised thus : They were to be entitled to take steps for establishing their own organization during the currency off the notice which was putting an end to the functioning of their previous agencies : they were to be entitled to have their European assistants installed in the office of their old agents in order that those assistants might familiarize themselves with business conditions in the areas in which they were going to work. Lastly, and this perhaps is even of greater importance than other advantages, there was to be no competition at all as regards the Madras area for a period of five years and as regards the Ceylon area on to a very limited degree, that is to say, so far as they chose to give express permission to sell products similar to their products. It seems to me that these were highly valuable advantages which the assessees were obtaining for themselves by means of the payments which were made and to be made, totalling altogether the two sums of Rs. 30,000 and 20,000.
Now, as I have pointed out, the Commissioner has thought fit to split up the total consideration money, if I may so describe it, into three parts, and he has made a tripartite division of his own accord, and he has so far as one can see, without any justification whatever decided concerned ought to be taken to be referable to the three objects which he has set out at the beginning of the case he has stated. He has even gone beyond that in fact, because at the end of the case he has said : 'I would allocate 60 per cent. of the payments to ex gratia rewards, 10 per cent. to restrain future competition, and 30 per cent. towards facilitating the transfer.' It is not easy to say, or indeed to imagine, on what possible hypothesis or upon what basis the Commissioner of Income Tax has arrived at those percentages. Quite clearly on the evidence, that is to say, on the evidence furnished by the correspondence which the Commissioner himself had set out as annexures to the case, it is quite impossible to discover anything which would warrant the splitting up of thus sum into definite aliquot parts as the Commissioner had done, or even to warrant its being split up and designated as being referable to the three matters which the Commissioner described as payments as ex gratia rewards, for restraint of future competition of Income Tax could have come to that conclusion. But what is for more important for the purpose of the determination of the case now before us, is that there was nothing in the pure facts of the case as set out by the Commissioner in the paragraph headed 'Facts' which justified him in taking the view that any part whatever of the Rs. 10,000 was payment in the nature of an ex gratia gift made in recognition of past services. On the contrary, the assessees, or rather their predecessors say quite definitely and categorically in paragraph (6) of their letter of the 4th February, 1927, that the sum which they were willing to pay was as compensation to a certain extent for the loss of the agency, that is to say, they were prepared to pay the sum of Rs. 30,000 to make up to a certain degree the remuneration which Messrs. Parry & Co., would otherwise have earned as agents of Messrs. Brunner Mond & Co. But it is to be noted that they expressly said that payment would only be made, provided there was an undertakings on the part of the ex-agents not to enter into competition with them for a period of five years.
It is true that when dealing with the Colombo Agency Messrs. Brunner Mond & Co. did say in their letter of the 12th March, 1929, in effect, that the payment of Rs. 20,000 was as compensation for the loss of this agency, and as an indication of their appreciation. But there again the payment was to be made on the understandings that the ex-agents would not handle their (the companys) products without obtaining their previous permission. So, I think, it can equally well be said in respect of the Colombo Agency that the payment which Messrs. Brunner Mond & Co., were prepared to make was for the direct purpose of securing certain definite advantages to themselves, and, if I may so put it, to smooth the way as regards their future business operations in the territories theretofore work by Messrs. Parry & Co., of Madras and Messrs. Haley and Kenny of Colombo respectively.
The learned Advocate-General has argued very forcibly that it is not competent for us to travel outside very circumscribed position demarcated for us by the Commissioner of Income Tax by the form of the question of law which he has submitted to the Court. As I have already pointed out, the main and indeed the fundamental question upon which the opinion of the Court is sought, is contained in the question whether payments amounting to Rs. 10,000 are or are not expenditure liable in charge under Section 10(2)(ix) of the Act. If the learned Commissioner had stated the question simply in that form, no objection could have been taken by the learned Advocate-General on behalf of the Income Tax authorities, to out answering it, even with a plain 'yes' or 'no.' But the position is complicated by the fact that the commissioner of Income Tax has purported to make certain findings of fact with regard to the character or, perhaps more accurately, the purpose of the payment which was made, in that he has divided it up in the way I have already described. The learned Advocate-General says that the Court must take the findings of fact as they are stated by the Commissioner, and either express an opinion, because the findings of fact are not warranted by the evidence upon which they were based, and it is not competent to us to look at the real situation and to give a decision or judgment founded upon what appears to us to be the real position, having regard to all the circumstances and all the facts as revealed by the evidence which the Commissioner has put before us. I have already stated that in our opinion there was no justification for what the Commissioner says he has found as a fact, namely, the splitting up of the sum of Rs. 10,000 or the finding that it was made in part as an ex gratia gift in recognition of past services. The learned Advocate-General says that nevertheless we must answer such part of the question as we can upon those findings, and reject the rest, or else say that it is impossible to deal with this reference at all.
The learned Advocate-General has quoted a number of authorities. Notably the case of The Tata Iron and Steel Company Limited v. The Chief Revenue Authority, Bombay, where it was apparently decided that the decision of the Court given upon a reference under Section 51 of the Indian Income Tax Act (VII of 1918) which was the forerunner of the present section 66 of the Act of 1922, is not a judgment within the meaning of the Chapter 39 of the Letters Patent of the Bombay High Court, so as to give rise to a right of appeal. The Advocate-General argued that the decision which was one of the Judicial Committee of the Privy Council, was passed upon the view that the court, when dealing with references under the Income Tax Act, was only functioning in an advisory or consultative capacity, and that, therefore, the High Courts in India when dealing with references under the Indian Income tax Act, have not the same powers with regard to examination of the facts upon which the reference is founded as have the Kings Bench Division of the High Court in England. It seems to me, however, that the decision in The Tata Iron and Steel Company, Limited v. The Chief Revenue Authority, Bombay proceeded much more upon the footing of the passage in the judgment of LORD ATKINSON at page 223 of the report, where his Lordships says : 'The decision of the High Court does not in any way enforce the discharge of that liability, that is, the amount of the tax-payers liability. It would appear clear to their Lordships that the word judgment is not here used in its strict legal and proper sense. It is not an executive document directing something to be done or not to be done, it is merely the expression of the opinions of the majority of the Judges who heard the case, together with a statement of the Judges who heard the case, together with a statement of the Judges who heard the case, together with a statement of the grounds which those opinions are based. It amounts only to a ruling that a certain deduction claimed by a taxpayer to be allowed from the sum for which he has been already assessed to income tax is not permissible.' I cannot hold, therefore, that the case of The Tata Iron and Steel Company, Limited v. The Chief Revenue Authority, Bombay, is any real authority for saying that it is not open to this Court to examine for itself the whole of the case which is put before it by the Commissioner of Income Tax under section 66(1) of the Act. If that part of the case which contained a statement of what has been found as fact, merely contained conclusions on questions of pure facts, then and in that event no doubt it would not be open to this Court to go behind the statement of facts, if only for the reason that there would be no material upon which it was possibly for it to do so. But in the present instance what the Commissioner of Income Tax says he has found as facts if actually a series of conclusions which are founded partly on pure facts and partly on inferences which he has drawn from those facts. the Pure facts in the present instance are the matters set out in paragraphs 3 and 4 of the case and what he had stated in the opening paragraph as having been found as a fact specially as regards item (a), is really the inferences which the Commissioners has drawn from the bare facts which he has stated in paragraphs 3 and 4. In those circumstances it seems to me that we ought to deal with this case upon the principles which are contained in a passage in the judgment of the Master of the Rolls in the case of The Gramophone and Typewriter Ltd. v. Stanley, where his Lordships said : 'The question arises on a case stated by the Commissioner. It is undoubtedly true that, if the commissioner find a fact, it is not open to this Court to question that finding unless there is no evidence to supper it. If, however, the Commissioners state the evidence which was before them, and add that upon such evidence they hold that certain results follow I think it is open, and was intended by the Commissioners that it should be open, to the court to say whether the evidence justified what the Commissioners held. I am satisfied that the case stated by the Commissioners falls under the latter head. They have carefully stated the evidence but they have not in my opinion, to use the word found in one of the authorities, 'stated the appellants out of Court.' There is also a passage in the judgment of the Master of the Rolls in the case of The American Thread Company v. Joyce, which is in these words : 'In finding questions of pure fact, the tribunal is a tribunal without appeal. It is perfectly true that if it finds fact where there is no evidence, that become a matter of law, and we can set aside the findings.' Reference may also be made to the case of The Commissioner of Inland Revenue v. Frank Bernard Sanderson, where it was held by the Court of Appeal that the evidence, before the Special Commissioners did not justify the conclusion of fact that an enforceable agreement for sale had existed between the parties prior to a written agreement (of 12th October, 1916). Lastly, we have very definite indication of the way the Court ought to act where it is not satisfied that the inference drawn by the Commissioner from the pure facts of the case is warranted by the evidence which he himself has set before the Court, in the judgment of ROWLATT, J., given by him when sitting at first instance in the case of The Anglo-Prsian Oil Co., Ltd. v. Dale, where he said : 'There is no sort of question so far of any question of fact. I do not question what they say about the facts, or claim a jurisdiction to question that it was enduring benefit by getting rid of an onerous contract. All that I say is that does not go far enough. When I look at the facts, so far, all I see is one thing, that is getting rid of a payment which falls to be charged to the revenue account every year, namely, payment of commissions to people who run the business.' In the previous paragraph he had said with reference to the judgment of the LORD CHANCELLOR in the case of Atherton v. British Insulated and Helsby Cables, Ltd., 'What LORD CAVE is quite clearly speaking of is a benefit which endures in the way that fixed capital endures; not a benefit which endures in the sense that for a good number of years it relives you of a revenue payment. It means a thing which endures in the way that fixed capital endures. It is not always an actual asset, but it endures, in the way that getting rid of a lease or getting rid of onerous capital assets or something of that sort as we have had in the cases, endures. I think that the Commissioners, with great respect, have been misled by the way in which they have taken enduring to mean merely something that extends over a number of years. I do not quite understand how the view that they appear to have taken is consistent which the numerous cases.' Then the learned Judge proceeded to deal with the case almost as if the whole matter was at large and he was in a position to form his own judgment upon the whole of the materials then before him. All the cases to which I have just referred and certain other cases are collected and discussed in SUNDARAMS book on the Law of Income Tax at p. 1037 (et seq.)
In the light of all those authorities I think what we ought to do in the present instance is to give a decision which will operate by way of guidance to the Commissioners of Income Tax upon the pure facts of the case as disclosed in the evidence which the Commissioner himself has put before us and upon which the matter really arises. Upon that view, the burden is case upon us of deciding whether or not payments amounting to a sum of Rs. 10,000 made by the assessee in the year 1931-32 are properly deductible by them under the provisions of Section 10(2)(ix). I have enumerated what appears to be the several advantages which were being derived by the assessees from the expenditure of the sum in question and the later instalments which in total would make up the two sums of Rs. 30,000 and Rs. 20,000. It can scarcely be disputed, I think, that whatever may be the way in which one regards the payment from the point of view of relief from income-tax, there is no doubt whatever that the purpose and the intent with which those payments were made was to facilitate and promote the business interests of the assessees in the two areas in Madras and Ceylon and, therefore without any expansion or extravagance of language one can quite easily hold that it was an expenditure incurred solely for the purpose of earning profits or gains by the undertaking concerned and, indeed, the learned Advocate-General, who has argued this matter very fully and cogently on behalf of the income-tax authorities, has scarcely troubled himself to contest that aspect of the matter. On the contrary, he has conceded that what was being done, at any rate as regards the operations which the Commissioners of Income Tax has placed under (b) and (c) of paragraph was to nurture and protect what the learned Advocate General has described - though in my opinion, inaccurately described - as a new business. I do not think it can properly be said don any aspect of the matter that what Messrs. Brunner Mond and Company (India), Ltd., or the Imperial Chemicals Industries (India), Ltd., were doing was to found a new business; what they were doing was to take into their own hands for the purpose of conducting by means of their own employees a business which therefore had been carried on through the instrumentality of the firms in Madras and Colombo. They were not nurturing or protecting a new business but they were making, in my judgment, an outlay of certain sum of money in order to facilitate their own future operations. In those circumstances, it seems to me unarguable to suggest that the assessee were doing anything else than making payment for the purpose of acquiring for themselves an enduring benefit which would result in increased profits or gains.
The real question which has been canvassed before us in this case and the actual point upon which we have to express our opinion is, whether or not the expenditure was of the kind which falls within the provisions contained in the words within the parenthesis in sub-section (ix). Those words are 'not being in the nature of capital expenditure.' Paraphrasing the whole of sub-section (ix), a proposition can be formulated thus : It is permissible that an allowance shall be made for an expenditure which has been incurred solely for the purpose of earning profits or gains of any business, provided that such expenditure is not an expenditure in the nature of capital expenditure. Stated in a different form, the problem which we have to solve is whether or not the payment of the sum, of Rs. 10,000 was a payment which ought to be charged to capital account in the books of the assessees or could properly be chargeable to revenue account. The assessees themselves have contended, as the Commissioner had admitted in paragraph 5(b) of the case, that the payment was a definite business one and the Commissioner has stated in the course of his narrative in paragraph 3 of the statement of the case that the assessee have distributed the charge in their revenue accounts, passing Rs. 4,500 through the books on 30th September, 1928, and Rs. 6,000 annually since then; so that Rs. 6,000 falls in the accounts for the year ending 30th September 1930, that is, in respect of the payment made to the Madras Firm and presumably the position was the same as regards the payment to the Colombo Firm, because the Commissioner makes no material distinction though he puts the matter slightly differently by saying : 'The assessee has passed Rs. 4,000 through his books annually on this account beginning with 30th September, 1930, under the present assessment.' Presumably he is there referring to the revenue account. There is no doubt that the question whether any particular payment should properly be described as in the nature of capital expenditure or not is one of considerable difficulty and perplexity and even as recently as last year the present Master of the Rolls, in giving judgment in the analogous case of Golden Horse Shoe (New), Ltd. v. Thurgood, made the following observation : 'After careful consideration of the present case in the course of which my mind has fluctuated on either side, I think it is to be decided upon its own facts - that none of the tests suggested afford a strict rule of guidance.' We are disposed to take the same of view and to say, after a very careful consideration of the whole of the authorities which have been put before us, that it is not possible to lay down any hard and fast rule or to enunciate a rigid and scientific principle which can be applied as a criterion when this particular point comes up for determination. The decided cases, however, do of course afford considerable assistance. In Vallambrosa Rubber Co. v. Farmer, LORD DUNEDIN suggested one test to be applied and that is whether or not the payment was of a kind which would be made 'once and for all' by way of a lump sum.
Obviously that is not a test which would afford any great assistance in the majority of the cases coming before the Court and in regard to that particular test, VISCOUNT CAVE, who was then LORD CHANCELLOR, in the case of British Insulated and Helsby Cables v. Atherton made this comment : 'In Vallambrosa Rubber Co. v. Farmer LORD DUNEDIN, as President, of the Court of Session, expressed the opinion that in a rough way it was not a bad criterion of what is capital expenditure - as against what is income expenditure - to say that capital expenditure is a thing that is not going to recur every year; and no doubt this is often a material consideration. But the criterion suggested is not, and was obviously not intended by LORD DUNEDIN to be, a decisive one in every case; for it is easy to imagine many cases in which a payment, though made once and for all would be properly chargeable against the receipts for the year. Instances of such payments may be found in the gratuity of Pound 1,500 paid to a reporter on his retirement, which was the subject of the decision in Smith v. Incorporated Council of Law Reporting for England and Wales and in the expenditure of Pound 4,994 in the purchase of an annuity for the benefit of an actuary who had retired, which in Hancock v. General Reversionary and Investment Co. was allowed, and I think rightly allowed to be deducted from profits.' Then the LORD CHANCELLOR said : '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.' Then he says that there is considerable authority for the view and he cites various cases. He held that the case he was then dealing with, which the same principle and he came to the conclusion that such an expenditure was in the nature of capital expenditure and, according, that the deduction of the amount from profits was rightly held by the Court of Appeal not be admissible. The opinion of the LORD CHANCELLOR was shared by two other members of the House, LORD ATKINSON and LORD BUCKMASTER. But LORD CARSON and LORD BALANESBURGH gave dissentient judgments and some of the passages in LORD BLANESBURGHS judgment are very material and useful for our present purpose. At p. 236 his Lordship said with reference to the matter then under discussion : 'In no sense of the word capital, circulating, working or fixed did this expenditure involve any withdrawal. It was made out of gross receipts in a year in which, working capital and, a fortiori, fixed capital remaining intact, a large surplus still emerged. Nor, in my judgment, did the expenditure in any relevant sense create a new asset of the company of the nature of a fixed capital asset or another.' And referring to what LORD JUSTICE SCRUTTON had said when the case was before the Court of Appeal, LORD BLANESBURGH made this comment : 'The learned Lord Justice does not more closely describe this so-called asset nor, fixed though it was, did he attach to it name by which it could be recognized. He did not suggest that it resulted in an enhanced goodwill. He could not, in my judgment, have done so with reason, because it has never, I think even been suggested that a contented personnel is an element in goodwill, whatever else it may be. In that state of things it has occured to me, my Lords, that the existence or nonexistence of this so-called asset might fairly be submitted to the prosaic test of asking what in liquidation would be forth coming in respect of it when a liquidator essayed his statutory duty to relies the companys assets and divide the proceeds amongest his constituents. Certainly no part of the fund. That in its entirety is completely alienated. And I can myself think of nothing else. Moreover, my Lords, a reference to the authorities shows, it seems to me. clearly that it is by reference to no such shadowy conceptions that the words of the statute 'employed as capital' have be interpreted. Such things as a purchase of good will involving a capital expenditure might come within them : Smith & Sons v. More an excess profit duty case.' Then he quotes various other instances.
Now, the passage which I have quoted from LORD BLANESBURGHS judgment suggests two further tests in addition to those indicated by LORD DUNEDIN and LORD CAVE. The first test is this : Did the expenditure involve any withdrawal of capital It would seem that in the case with which we are concerned the payment of Rs. 10,000 involved no withdrawal of capital. Indeed, there is no evidence before us that is did any thing of the kind. On the contrary, it was debited to the revenue account
The other test suggest by LORD BLANESBURGH is the prosaic test : What would be forthcoming in a liquidation as a result of the expenditure which has been made In the present instance, again, as my learned brother pointed out repeatedly in the course of the argument, if there were any question of selling or even valuing what the assessees had acquired as a result of the expenditure of Rs. 10,000, the answer would have to be 'There was nothing they could sell and nothing that anybody could accurately value.' What may have been of considerable or even of immense value to them for the purpose of their business operations in Madras and Colombo, had material or market, value and there was nothing which would in any sense properly be described as an addition to the assets of the company. In applying these tests, some little difficulty is created by the latter part of the criterion suggested by LORD CAVE, because he seems to have been of the opinion that a payment ought to be regard as capital expenditure, if it resulted in the acquisition of any enduring benefit or advantage to the business of the persons or firm making the payment. The difficulty to a large extent, if not wholly, disappears, however, upon a perusal of the judgment of LORD JUSTICE ROMER in the case of Anglo Persian Oil Co. v. Dale. The observations of the learned Lord Justice are so important for our present purpose that I take leave to quote at length several passages from his very laminating justment. Referring to the English Income Tax Act his Lordship said : 'So far as the Act itself is concerned one is therefore left without guidance as to the deductions that the permissible, but with the mind somewhat unsettled by reason of the list of prohibited deductions as to what, in the view of the legislature is to be considered for the purpose of income-tax the balance of the profits or gains. In these circumstances, it is not surprising that the case in which the Court has been called upon to say whether some particular dedication is or is not permissible should have been numerous and not always easy to reconcile with other in which the facts were not dissimilar. Nor is it surprising that learned Judges should have applied tests which, however satisfactory, for the purpose of solving the particular problem before them, should turn out to be inconclusive or insufficient when applied to the facts of another case. The law applicable to such cases as the present was, it seems to me, placed beyond the realm of controversy. The boundary line between deductions that were permissible and those that were not, had previously been uncertain and difficult to follow. As regards the large, majority of deductions there was, and could be, no conceivable doubt. They were clearly on one side of the line or the other. But as regards a comparatively small number, it was difficult to say on, but is made once and for all. It was points out by LORD CAVE in Athertons Case, that an expenditure, though made once and for all, may nevertheless be treated as a revenue expenditure. And he then added this : 'But when an expenditure is made, not only once and for all, but with a view to bringing into existence an assets or an advantage for the enduring benefit of a trade, I think that there is very good reason (in the absence of a special circumstance leading to an opposite conclusion) for treating such an expenditure as properly attributable not to revenue but to capital.' Then, LORD JUSTICE ROMER states his explanation of LORD CAVES observations in these words : 'It should be remembered that the expenditure is to be attributed to capital if it be made with a view to bringing an asset or advantage into existence. It is not necessary that it should have that result. It is also to be observed that the assets or advantage is to be for the enduring benefit of the trade. I agree with ROWLATT, J., that by enduring is meant enduring in the way that fixed capital endures.' An expenditures on acquiring floating capital is not made with a view to acquiring an asset that may be turned over in the course of trade at a comparatively early date.' Then he continued : '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 Mallet v. Stavely Coal and Iron Co. Then comes a very important passage : 'This being the test to be applied in such cases as the present, it is obvious that the question whether an expenditure made once and for all is or is not to be treated an chargeable to capital and not revenue, is one of fact only. Being a question that the Commissioners are eminently qualified to answer, it is to be hoped that in future they will answer it by reference to the language of the test laid down by LORD CAVE, and not as though they are deciding a question of law. Too often in the past, the Commissioner have found that a particular sum is or is not a permissible deduction. That is a question of law or, at any rare, mixed law and fact. If they will find that the expenditure in question was or was not made, as the case may be, with a view to bringing into existence some asset or advantage for the enduring benefit of the trade, their finding will be one of fact, and if there be some evidence upon which the finding can reasonably be made, it will not be subject to review in the Courts.' That passage might very well be taken to heart, if I may say to with say so with respect, by the Commissioners of Income Tax in this country. If the Commissioner in the present case had contended himself merely with a finding of fact on the lines suggested by LORD JUSTICE ROMER, what he has decided could not have been open to question by this or any other court. I have already expressed my opinion that in the present case there was no evidence on which learned Commissioner of Income Tax could have come to the conclusion he dud on matters which here really questions of mixed law and fact.
In our judgment the principles laid down in the case of The Anglo-Presian Oil Co. v. Dale, (the applicability of which to the present case the Commissioner of Income Tax disputed] are quite wide enough to proved the answer to the real and paramout question which is before us. In that case the facts were that in 1914 the Anglo-persian Oil Co. entered into an agreement with a firm called Strick, Scott Co., Ltd., under which the latter were appointed agents of the company to manage its business in Persia and the East for a term of ten years. It appears that the remuneration paid to these agent proved larger and more onerous than had been anticipated by the company; accordingly in the year 1922 the company entered into an agreement with Strick, Scott and Co., Ltd., whereby it was agreed that the agency should be terminated, that Strick, Scott and Co. should go into liquidation and wind up their business and that they would not start or act in or bout any business connected with petroleum in a certain are a in Persia, while in return the company should pay Strick, Scott and Co. a sum of Pound 3,00,000. That sum was paid and the agency was termination. The money was treated in the companys accounts as a revenue payment and was charged to revenue in instalments of Pound 60,000 for five years. The company claimed that his course was correct and justified the deduction from its annual expenses as being one incurred for selling the profits and gains. The Inspector of Taxes disputed this course and he claimed that the Pound 3,00,000 ought to be treated as an expenditure on capital account as being an expenditure which brought to an end an onerous contract and secured to the company a freedom from charges which would otherwise have continued for some years. The Commissioners of Income Tax accepted the latter argument and held that the sum of Pound 3,00,000 was not an admissible deduction in computing the profits and gains of the company for the year ending 31st March, 1923, and adjusted the figures of the assessment for the year ending 5th April, 1923, 1924, 1925 and 1926 accordingly. MR. JUSTICE ROWLATT, when the matter came before him held that the sum was an admissible deduction. His judgment from which I have already quoted in another connection and which is reported in Anglo-Persian Oil Co. v. Dale is very germane to our present problem. At the bottom of page 262 the learned Judge said : 'What he, the Attorney-General, says is that this is not merely a question of getting rid of an annual expense in the form of commission, and he says also, as I understand him it paraphrase his words : 'This is clearing the ground of the agency and embarking upon a new organization in this district, of the business, by having you own organization, and your own servants. Now, in what way would that operate? It might mean that you simply start with your own servants without any expenditure at all, or might means that you buy the good-will of somebody who has got a right to stay there and with whom you could not compete without paying them out - I understand it was suggested that there was something of that sort in this case, perhaps - or you might, as I say, expend money in the way of capital to get your service on its feet. What I feel here is that there is not a trace of any such thing. There is not evidence of it - none. There is no any evidence, and it was not suggested before the Commissioners as I understand it, that any part of this sum was paid for the purpose of acquiring anything analogous to goodwill on the part of these people. Of course they had to be paid for the value of their right for ten years to receive this money.'
Now the Advocate-General has argued before us that that passage of MR. JUSTICE POWLATT, so far from being of assistance to the assessees, really tells in favor of the income tax authorities, because, said the Advocate-General, what Messrs. Brunner Mond and Co., or Imperial Chemical Industries (India), Limited, were doing was to acquire a new were business or, at any rate, to acquire the goodwill of somebody elses business, I have already expressed the opinion that upon the facts - just as MR JUSTICE POWLATTT felt in the case of Anglo-Persian Oil Co., Ltd. v. Dale, what I feel here is that there assessees were acquiring a new business or taking over any business other than their own business or taking over any business other their own business. They were merely taking over their own business, and they were not acquiring any goodwill belonging to anybody elses concern.
As I have already stated, MR. JUSTICE ROWLATT was of opinion that the payment of Pound 3,00,000 in the Anglo-Persian Oil Co., Ltd., was an admissible deduction. On appeal the Court of Appeal held, even after applying the test laid down by LORD CHANCELLOR CAVE in the case of Atherton v. British Insulated & Helsby Cables, Ltd., that the payment in question did not bring any asset into existence, nor could it properly be said that it brought into existence an advantage for the enduring benefit of companys trade within the meaning of the expression used by LORD CAVE. Accordingly, the Court of appeal held that the payment was a revenue payment, and so deductible by that company when ascertaining its net profits for the purpose of paying tax.
It seem to me that the decision of the Court of Appeal in a case where a company had brought out its agent - with view to running their own business by their own staff - by means of the payment of the enormous sum of Pound 3,00,000 must be taken by us as being ample authority for holding that the payment of a comparatively small sum of Rs. 10,000, the subject-matter of the present proceedings was revenue payment and so was properly deductible by the Imperial Chemical Industires (India), Ltd., when arriving at their profit for the purpose of income tax.
I think also that the whole matter is put beyond all question by the decision in the recent case which I have already mentioned, viz. Golden Horse Shoe (New), Ltd. v. Thurgood, because in that case what was acquired was something tangible which as matter of first impression might easily be considered to be in the nature of assets which ought to be properly comprised with in denomination of fixed capital. The Golden Horse Shoe (New), Ltd. had been formed for the purpose of acquiring the right to take away and re-treat very large dumps of residual deposits were call 'tailings.' These tailing were known to contain a certain amount of gold, and by some new process of treatment some of this gold was recovered and sold by the company. It was held by the Court of Appeal, reversing the decision, of MR. JUSTICE FINLAY, that as the tailings were raw material already won and gotten, the amount expended in acquiring them was in the nature of an expenditure on the raw material of the companys trade, and therefore that for the purpose of assessing the companys profits or gains, the cost of the tailings treated during the period of assessment was a proper deduction from the proceeds realized by the sale of the gold extracted.
LORD JUSTICE ROMER said :- 'The question to be decided in this case is whether the dumps are to be regarded as fixed capital or as circulating capital. If they are the former, it is conceded by the appellant, that the assessment made on them is correct. If on the other hand, they are floating or circulating capital, it is conceded that the cost of them to the appellants must be debited in the profits and loss account the account being credited with the cost price of what, was left of the dumps at the end of the year of assessment. The dumps, in other words, must be dealt with in the profit and loss account as stock in hand to be dealt with in the profit and loss account of any other trader.' Then the learned Lord Justice said : 'The reason for this distinction being drawn between fixed and floating or circulating capital is not far to seek.'
In the present instance, in my opinion, it cannot be said that the payment which was made was one other then one in the nature of a payment out of circulating capital; and it is obvious that the expenditure did not result in the acquisition of anything of a kind which rightly be described as a new asset or as an addition to the fixes capital of the company. The acquisitions derived from the payment were metaphysical rather than physical.
We come back to the point of view described by LORD HANWORTH, the present master of the Rolls in Golden Horse Shoe (New), Ltd., when he said at page 560 of the report : 'The test of circulating as contrasted with fixed capital is as good a test in most cases to my mind as can be found; but that involves the question of fact : Was the outlay in the particular case from fixed or circulating capital ?' That is only say once more that the matter really resolves itself in the last resort into a question of fact in each particular case, and there is no sure touchstone which can be applied universally to solve a problem of the kind involved in the general proceedings.
We accordingly hold that in this case the payment of Rs. 10,000 made by Imperial Chemical Industries (India), Limited, and debuted to their revenue account for the year ending 30th September, 1930, and coming for assessment into the tax year 1931-32, was an allowance they were entitled to make under the provisions of Section 10(2)(ix) of the Income Tax Act of 1922, or to use the prices language of the question submitted to us, the payment amounting to Rs. 10,000 described by the assessee as compensation to ex-agents was expenditure allowable in charge under Section 10(2)(ix) of the Act.
The assessees will have the costs of this reference.
LORD-WILLIAMS, J. - I agree.
Reference answered accordingly.