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 1955-56 - One 'A' had found certain deposits suitable for manufacture of cement and made available this information to 'J' - With help of 'A' an agreement was reached between 'J' and former Ruler of State of Jind to win and work said deposits for manufacturing of cement - Later, assessee-company was formed and 'J' transferred rights under aforesaid agreement to company - Assessee then entered into an agreement with 'A' in which it agreed to pay him certain commission on its annual net profits from manufacture of cement as he, being one of promoters of company, had rendeed service in its promotion, helped in entering into agreement with Ruler of State of Jind and finding deposits available for manufacture of cement - In 1951 assessee-company refused to make payment to 'A' and latter filed a suit against assessee - Suit was settled and agreement stood terminated in lieu of which company agreed to pay a lump sum of Rs. 70,000 - In preceding years annual payment under agreement was treated by Department as revenue expenditure - Payments of Rs. 18,597 and Rs. 70,000 were made by company to 'A' on 15-6-1954 as per settlement in suite - Whether expenditure of Rs. 18,597 had been incurred in connection with procurement of raw material for business and trade of assessee and could not be described as capital expenditure but was allowable as business expenditure - Held, yes - Whether since payment of compensation for terminating agreement was for an indefinite period in sense that it was to continue so long as agreement of assessee-company with former Jind State continued and it was to be out of profits of assessee-company and thus related to its annual profits which flowed from its trading activities and had no relation to capital value of its assets and it was also not related to or tied up, in any way, to any fixed sum between parties as a part of acquisition of assets of assessee-company even in beginning, it was allowable as revenue expenditure - Held, yes - Whether, further, since earlier…

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