Law: Income Tax Act, 1922

Section: 10(2)(xv)

Law: Income Tax Act, 1961

Section: 37(1)

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 1944-45 - Appellant company appointed a firm as its managing agent for 20 years at 2½ per cent commission - Though firm was not guilty of negligence, laches, fraud or inefficience, appellant terminated managing agency after two years and for this paid certain amount to said firm as compensation - Appellant, however, appointed another managing agent at 2 per cent commission - Whether disbursement of compensation to outgoing managing agent was of capital nature and was, therefore, not deductible expenditure - Held, yes FACTS The appellant assessee entered into an agreement by which it employed a firm as the managing agents of the company. The managing agents were to work for the company for a period of 20 years and were to charge commission at the rate of 2½ per cent. About two years later the appellant decided to terminate the agreement executed in favour of the said managing agents. The managing agents accepted the offer of the appellant as a result of which a deed of release was executed by the managing agent, under which the appellant agreed to pay a sum to the outgoing managing agents by way of compensation for terminating the agreement. The appellant, however, employed another firm as their new managing agents at 2 per cent commission. The assessee contended the payment of compensation was wholly and exclusively for the purpose of carrying on the business of the company it would fall under section 10(2)(xv) of the 1922 Act, and therefore, an allowable deduction. The appellant's case was negatived by the ITO, the AAC and also by the Tribunal. The Tribunal also refused to make a reference to the High Court as in its opinion no point of law arose. The appellant then approached the High Court which directed the Tribunal to make a reference. The High Court held that the expenditure in question was incurred wholly and exclusively for the purpose of the assessee's business, but as the amount was in the nature of a capital expenditure it was not deductible under the provisions of the Act. On…

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