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 1959-60 – Assessee company incurred expenditure by way of payment of amount to agent on termination of agency – There was precedent not only in respect of such type of payment but even with regard to quantum – Payment made was to ensure proper transition without any let or hindrance on part of agent – Whether payment made by assessee was clearly justified by commercial expediency, being necessary in order to facilitate carrying on of business and therefore, said payment was entitled to deduction under section 10(2)(xv) of 1922 Act - Held, yes FACTS The assessee-company had entered into an agreement of agency with a company for the purposes of distribution of its products. The agent company was to be paid 5 per cent of the net value of the goods excluding the value of additional freight charges, if any, octroi or terminal tax, if any, as invoiced by the agent. No duration of the agency period was specified in the agreement but it was provided that the agreement may be terminated by either party giving one month notice of their intention to do so. The assessee-company later decided to terminate the agreement and discontinued the agency of the agent. After the termination of the agreement, the assessee paid to the agent a sum out of which some represented an amount equivalent to three times the largest agency commission paid to the agent and the balance was in respect of rent for office and godown premises as also amount paid to the landlord by way of brokerage for letting the premises to the new tenant. The assessee claimed a deduction in respect of the amount paid to the agent as business expenditure. The ITO disallowed the claim holding that the amount could not be regarded as expenditure which was wholly and exclusively necessary for the purposes of the business. The AAC confirmed the disallowance. The Tribunal held that the expenditure should be allowed as being permissible under section 10(2)(xv) of the 1922 Act. On reference : HELD While determining the question as to whether the…

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