Law:

Section:

section 10(2)(xv) of the indian income-tax act, 1922 [corresponding to section 37(1) of the income-tax act, 1961]-d, holding directly or through his nominees entire shares of assessee-company, entered into an agreement with t in terms of which d sold his shares to t-agreement provided for termination of services of employees and managing director and for payment of retrenchment compensation, commutation of pension and compensation to managing director-whether the said payments made by assessee was allowable as business expenditure-held, yes Facts The assessee, a private limited company, is an investment company and its shares were originally held, either directly or through nominees, by A, B and C (hereinafter collectively referred to 'D'). At a meeting held on 2-12-1955, the directors of the assessee-company passed a resolution recommending that the services of the 22 employees should be terminated by paying certain sums or annuity as and by way of retrenchment compensation and compensation for termination of employment and also for long and faithful services rendered by them in the past to the assessee-company. The shareholders of the assessee-company approved the said recommendation of the directors in their extraordinary general meeting held on 25-1-1956. On 23-3-1956, an agreement was entered into between D and T, whereby D agreed to sell the 1,000 ordinary shares held by him or his nominees in favour of T or his nominees for a sum of Rs. 155 lakhs. It was stipulated in the agreement that the assessee-company would pay retrenchment compensation to the employees in accordance with the resolution passed on 25-1-1956 and the amount so paid would be deducted from the purchase price agreed upon. It was also provided in the agreement that D would arrange to terminate the services of all the employees and also to arrange that the directors (including the managing director) would resign their offices so that T or his nominees could appoint or elect all or any of the members of the staff and directors of the assessee-company as they deemed fit. T re-employed 9 employees out of the 22 employees terminated by the assessee-company. During the accounting year relevant…

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