Law:

Section:

Section 37(1) of the Income-tax Act, 1961 [Corresponding to section 10(2)(xv) of the Indian Income-tax Act, 1922] - Business expenditure - Allowability of - Assessment year 1957-58 - Owners of assessee-company entered into an agreement to sell company to sellers and also resolved to terminate employment of all employees in office establishment in lieu of commutation of pension - Managing director of company, whose services were liable to be terminated under a contract, by 6 month's notice in writing was also decided to be terminated - However, it was decided that termination should be without any notice of six months and in that connection, compensation in lieu of notice was resolved to be paid to him - By agreement for sale between sellers and purchases, it was agreed that sellers would arrange to terminat services of all employees and managing director and that purchasers and/or their nominees would be entitled to appoint or elect all members of staff and directors as they should think fit and that purchasers would deduct amount so expended from purchase price - ITO disallowed assessee's claim for deduction under section 10(2)(xv) of 1922 Act holding that services of employees and managing director were terminated because purchasers of shares made that a condition and that expenses were not incurred for any business expediency - Whether since amounts in question were paid towards discharge of company's already existing liabilities, they could be said to have been made wholly and exclusively for purpose of business of company and, therefore, were allowable as deduction under section 10(2)(xv) of 1922 Act - Held, yes FACTS The equity shares of the assessee-company were held directly or through nominees by three persons. In pursuance of the negotiations for sale of the whole of the holding of the issued capital and the transfer of management of the assessee-company to purchasers, it was decided, by a directors' resolution, to terminate the employment of all the employees in the office establishment. It was also decided to commute pensions to them; which were already being paid to six of the retired employees and/or widows of such employees. The managing director…

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