Case: J.K. Cotton Manufactures Ltd Vs. The Commissioner Of Income Tax, Lucknow

down particularly in cases where the managing agency is terminated would be to find out whether the termination of the agency is in terrorem or purely voluntary for obtaining substantial benefits. In other words, the decisive test to determine whether or not termination of the agency is in terrorem would be to find out if in such a case commercial expediency requires that the agency should be terminated as it had become onerous or it was creating difficulties or the agents were guilty of negligence, etc. It will also include payments for retrenchment compensation or conferment of benefits on employees or termination of other disadvantages or onerous relationshipsThese are some of the instances which I have given but they are by no means exhaustive. The present case, however, falls within condition No. (4) pointed out by us above, and the termination of the agency cannot be said to be in terrorem but was voluntary so as to obtain an enduring or recurring benefit 30. Before applying these tests to the facts of the present case, I would like to stress the important ingredients of section 10(2)(xv) of the Income-tax Act, 1922, itself. Section 10(2)(xv) runs thus 10. (2) Such profits or gains shall be computed after making the following allowances, namely (xv) any expenditure (not being an allowance of the nature described in any of the clauses (i) to (xiv) inclusive, and not being in the nature of capital expenditure or personal expenses of the assessee laid out or expended wholly and exclusively for the purpose of such business, profession or vocation. An analysis of this section would clearly show that in order to be deductible expense the amount in question must fulfil two essential conditions : (i) that expense must be laid out wholly and exclusively for the purpose of the business, profession or vocation ; and (ii) that it should not be expense of a capital nature. Both these conditions have to be complied with before an assessee can claim deduction under section 10(2)(xv). The High Court in this case has found that while the assessee had complied with the first condition that the expenditure was incurred for the purpose of the business, yet it has held that in the circumstances the expenditure is of a capital nature. It cannot be argued as was suggested by Mr. Asoke Sen at one time that whenever an expenditure is incurred in the course of the business it would never be a capital expenditure because section 37 of the Income-tax Act, 1961, itself contemplates a contingency where even though the expenditure may be incurred wholly and exclusively for the purpose of the business yet it may be of a capital natureLet us now apply the test laid down by the courts as specified by us to the facts of the present case. We have already given the facts found by the Tribunal which have not been disputed before us. In this connection there are two circumstances which clearly indicate that the expenses incurred by the assessee were not dictated by commercial expediency but were inspired by a profit-hunting motive (1) That there was absolutely no necessity to terminate the managing agency of Juggilal Kamlapat only two years after the appellant entered into agreement with them. There was no complaint that the agents had in any way caused any loss or damage to the appellant or to their reputation, nor was there anything to show that the outgoing agents were guilty of negligence, laches, fraud or inefficiency. In these circumstances, therefore, the only irresistible inference that could be drawn is that the assessee wanted to benefit both the firms, namely, incoming agents and the outgoing agents, which belonged to the Singhania family as found by the Tribunal and not disputed before us. The outgoing agents were benefited because an amount of Rs. 2, 50, 000 was paid to them and the incoming agents were benefited because they were given the managing agency of the company and as found by the Tribunal the appellant had pledged their goods in lieu of advance (2) That it is the admitted case of the appellant that by virtue of the fact that the incoming agents had agreed to charge only 2% commission, the appellant got a benefit of Rs. 30, 000 per annum. This amount is a recurring benefit to the appellant and can safely be regarded as an advantage of an enduring nature so as to fall within the definition laid down by Viscount Cave L.C 31. In these circumstances, therefore, the present case is fully covered by the decision of this court in Godrej & Co.s caseFor these reasons we are satisfied that the High Court was right in holding that the disbursement of compensation of Rs. 2, 50, 000 was of a capital nature and was, therefore, not deductible expenditure under section 10(2)(xv) of the Indian Income-tax Act, 1922. We, however, feel that the High Court was in error in giving a cryptic finding that the expenditure in question was incurred wholly and exclusively for the purpose of the business. This finding has been arrived at without considering the facts mentioned by us above and is not borne out from the facts and circumstances proved in this case. Nevertheless, we uphold the order of the High Court on reasons different from those given by the High Court 32. We would, however, like to make it clear that we have held that the compensation paid to the outgoing agents in the peculiar facts of the present case amounts to capital expenditure. But we should not be understood as laying down a general rule that in all cases where compensation is paid to the managing agents whose agency is terminated it would amount to capital expenditure. We have already pointed out the various tests to be applied which are by no means exhaustive, nor are they of universal application. Each case has to be examined in the light of the circumstances of that case 33.

Decision (1 = appeal accepted, 0 = rejected): 0

Explanation:
0[ds]The Tribunal, on the basis of these facts, came to the conclusion that the compensation was paid due to extra-commercial reasons and could not be regarded as expenditure incurred wholly and exclusively for the purpose of the business. The High Court differed from the reasons given by the Tribunal but affirmed its view on the ground that the expenditure incurred by the assessee-company being of a capital nature it was not deductibleHaving regard to the facts and circumstances of the present case we have no doubt that this case is wholly covered by the decision of this court in Godrej & Co.s case. In this case, while it is true that this court was dealing with the case of compensation in the hands of payee-company who were the agents, yet in view of the clear observations made by the court there can be no manner of doubt that the expenses incurred in the present case by way of payment of compensation to the outgoing agents would be of a capital natureMr. Asoke Sen tried to distinguish this case on the ground that the court was concerned in the Godrej & Co.s case only with the nature of the payment in the hands of the payee-company and any observations made as to what would be the nature of the payment in the hands of the payer-company would be obiter, and, therefore, not binding on this court. We are, however, unable to agree with this view. Godrej & Co.s case his considered all the previous decisions and has clearly laid down that in the circumstances, such as the present, the expenditure incurred would be a capital expenditure in the hands of the payer-company and a capital receipt in the hands of the payee-company within the meaning of section 10(2)(xv) of the Income-tax Act. The distinction sought to be made by the learned counsel for the appellant is extremely subtle and it is a distinction without any difference. Moreover, there are a number of other circumstances which clearly show that the expenditure concerned cannot but be treated as a capital expenditureon the facts and circumstances of the present case, we do not find any special reasons to reconsider the decision in Godrej & Co.s case, particularly when in view of the facts and circumstances of this case we are really of the opinion that the amount in question is undoubtedly a capital expenditureIt is true that some observations in the aforesaid case are presumably in favour of the appellant but the Calcutta High Court was careful to guard itself against its decision being treated as a general principle to apply to all cases and in this connection it observed as follows The case of payer and payee must be considered upon an independent statement of the relevant facts proved in his presence, there being no overriding principle of law that the income-tax authorities are entitled to tax once at least on every payment.In the instant case, as we have already pointed out, termination of the managing agency of the outgoing agents was a voluntary act not caused by any negligence or inefficiency by the outgoing managing agents. In these circumstances, on the facts and circumstances, we would not consider whether it was commercially expedient in order to facilitate business that the managing agency of the outgoing agents should have been terminatedWe have already said that the inference drawn on the material on record is that the managing agency agreement had been terminated with the object of taking over its management by the board of directors and there is no evidence which will lead to an inference that it was done with the oblique motive or oblique purpose of securing the payment of the said amount of Rs. 17 lakhs to the managing agentsSeveral tests that have been evolved over the years by this court as also the other High Courts may be briefly formulated as follows(1) Bringing into existence an asset or advantage of enduring nature would lead to the inference that the expenditure disbursed is of a capital nature. These terms, such asasset or advantage of enduring natureare, however, purely descriptive rather than definitive and no rule of universal application can be laid down. Ultimately, the question will have to depend on the facts and circumstances of each case, namely, quality and quantum of the amount, the position of the parties, the object of the transaction which has impact on the business, the nature of trade for which the expenditure is incurred and the purpose thereof, etc(2) An item of disbursement may be regarded as of a capital nature when it is relatable to a fixed asset or capital, whereas the circulating capital or stock-in-trade would be treated as revenue receiptSmith & Son v.Moore has aptly and adroitly explained the termsed capital is what the assessee turns into profit by keeping it in his own possession and circulating capital is what he makes profit of by parting with it and letting it change masters.(3) Expenditure relating to framework of business is generally capital expenditure(4) Another important and safe test that may be laid down particularly in cases where the managing agency is terminated would be to find out whether the termination of the agency is in terrorem or purely voluntary for obtaining substantial benefits. In other words, the decisive test to determine whether or not termination of the agency is in terrorem would be to find out if in such a case commercial expediency requires that the agency should be terminated as it had become onerous or it was creating difficulties or the agents were guilty of negligence, etc. It will also include payments for retrenchment compensation or conferment of benefits on employees or termination of other disadvantages or onerous relationshipsThese are some of the instances which I have given but they are by no means exhaustive. The present case, however, falls within condition No. (4) pointed out by us above, and the termination of the agency cannot be said to be in terrorem but was voluntary so as to obtain an enduring or recurring benefitBefore applying these tests to the facts of the present case, I would like to stress the important ingredients of section 10(2)(xv) of the Income-tax Act, 1922, itself. Section 10(2)(xv) runs thus0. (2) Such profits or gains shall be computed after making the following allowances, namely(xv) any expenditure (not being an allowance of the nature described in any of the clauses (i) to (xiv) inclusive, and not being in the nature of capital expenditure or personal expenses of the assessee laid out or expended wholly and exclusively for the purpose of such business, profession or vocation.An analysis of this section would clearly show that in order to be deductible expense the amount in question must fulfil two essential conditions : (i) that expense must be laid out wholly and exclusively for the purpose of the business, profession or vocation ; and (ii) that it should not be expense of a capital nature. Both these conditions have to be complied with before an assessee can claim deduction under section 10(2)(xv). The High Court in this case has found that while the assessee had complied with the first condition that the expenditure was incurred for the purpose of the business, yet it has held that in the circumstances the expenditure is of a capital nature. It cannot be argued as was suggested by Mr. Asoke Sen at one time that whenever an expenditure is incurred in the course of the business it would never be a capital expenditure because section 37 of the Income-tax Act, 1961, itself contemplates a contingency where even though the expenditure may be incurred wholly and exclusively for the purpose of the business yet it may be of a capital natureLet us now apply the test laid down by the courts as specified by us to the facts of the present case. We have already given the facts found by the Tribunal which have not been disputed before us. In this connection there are two circumstances which clearly indicate that the expenses incurred by the assessee were not dictated by commercial expediency but were inspired by a profit-hunting motive(1) That there was absolutely no necessity to terminate the managing agency of Juggilal Kamlapat only two years after the appellant entered into agreement with them. There was no complaint that the agents had in any way caused any loss or damage to the appellant or to their reputation, nor was there anything to show that the outgoing agents were guilty of negligence, laches, fraud or inefficiency. In these circumstances, therefore, the only irresistible inference that could be drawn is that the assessee wanted to benefit both the firms, namely, incoming agents and the outgoing agents, which belonged to the Singhania family as found by the Tribunal and not disputed before us. The outgoing agents were benefited because an amount of Rs. 2, 50, 000 was paid to them and the incoming agents were benefited because they were given the managing agency of the company and as found by the Tribunal the appellant had pledged their goods in lieu of advance(2) That it is the admitted case of the appellant that by virtue of the fact that the incoming agents had agreed to charge only 2% commission, the appellant got a benefit of Rs. 30, 000 per annum. This amount is a recurring benefit to the appellant and can safely be regarded as an advantage of an enduring nature so as to fall within the definition laid down by Viscount Cave L.CIn these circumstances, therefore, the present case is fully covered by the decision of this court in Godrej & Co.s caseFor these reasons we are satisfied that the High Court was right in holding that the disbursement of compensation of Rs. 2, 50, 000 was of a capital nature and was, therefore, not deductible expenditure under section 10(2)(xv) of the Indian Income-tax Act, 1922. We, however, feel that the High Court was in error in giving a cryptic finding that the expenditure in question was incurred wholly and exclusively for the purpose of the business. This finding has been arrived at without considering the facts mentioned by us above and is not borne out from the facts and circumstances proved in this case. Nevertheless, we uphold the order of the High Court on reasons different from those given by the High CourtWe would, however, like to make it clear that we have held that the compensation paid to the outgoing agents in the peculiar facts of the present case amounts to capital expenditure. But we should not be understood as laying down a general rule that in all cases where compensation is paid to the managing agents whose agency is terminated it would amount to capital expenditure. We have already pointed out the various tests to be applied which are by no means exhaustive, nor are they of universal application. Each case has to be examined in the light of the circumstances of that case