Case: Commissioner Of Income-Tax, Madras Vs. M/S. Ashok Leyland Ltd

pay him Rs.300 (as consideration for his shares) making together Rs.19,500 (payable in five annual instalments) which he agreed to accept in full satisfaction of all claims against the Company or the Directors. The question was whether the payment of Rs.19,200 was a deductible expenditure. The Special Commissioners decided against the Company but the Kings Bench Division as well as Court of Appeal accepted the Companys contention and held that the payment of Rs.19,200 made was an admissible deduction in arriving its profits for Income-tax purposes. In the course of his judgment Rowlatt. J. sitting on the Kings Bench Division relied on the observations of Lord Chancellor in Atherton v. British Insulated and Helsby Cables Ltd. (1926) 10 TC 155 at p. 192 to the effect: a sum of money expended, not of necessity and with a view to a direct and immediate benefit to the trade, but voluntarily and on the grounds of commercial expediency, and in order indirectly to facilitate the carrying on of the business, may yet be expended wholly and exclusively for the purposes of the trade. 14. These observations of the Lord Chancellor were again quoted with approval by Lord Hanworth M. R. when the matter was taken in appeal to the Court of Appeal. 15. The next case which may be usefully referred is the decision in Anglo Persian Oil Co. Ltd. v. Dale, (1932) 16 Tax Cas 253. Therein the assessee company by agreement made in 1910 and 1914 had appointed another limited company as its agents in Persia and the East for a period of years, upon the terms (inter alia) that the agents should be remunerated by commission at specified rates. With the passage of time the amounts payable to the agents by way of commission increased far beyond the amounts originally contemplated by the Company and, after negotiation between the parties, the agreements were cancelled in 1922, the agent company agreeing to go into voluntary liquidation and the company agreeing to pay to the agents Rs.300,000 in cash. This sum was in fact paid and the company contended before the Special Commissioners that it was an admissible deduction in computing the Companys profits for purposes of Income-tax and Corporation Profits Tax. The Special Commissioners rejected this contention and the Company appealed. Rowlatt, J. sitting in the Kings Bench Division allowed the appeal and held that the payment to the agents was an admissible deduction for the purpose of Income-tax and Corporation Profits tax. His decision was affirmed by the Court of Appeal. In the course of his judgment Rowlatt, J. observed : Now I want to see how the Commissioners have dealt with it, and what they say is that this was expenditure of a special nature to secure an enduring benefit for the Companys trade by getting rid of an onerous contract. In my judgment that is a finding which is perfectly inconclusive. It does not deal with the question. The question is not merely getting rid of an onerous contract, but an onerous contract for what If it is an onerous contract for the payment of wages or commission which are chargeable to revenue account in the plainest possible way, and if that is the onerous contract that you are getting rid of, it is impossible to suggest that that is a reason for saying that this is a capital expenditure unless you get rid of that onerous contract (as I pointed out just now) by erecting in its place a capital asset in the nature of - of course I am only using this as illustrative example - a labour-saving machine which gives you an asset and so dispenses with the expense of labour. But to say that it is a capital expenditure because it secured an enduring benefit by getting rid of an onerous contract is not to state the material thing, and it is completely inconclusive. 16. In G. Scammell and Nephew Ltd. v. Rowles, (1940) ITR Suppl. 41 the Court of Appeal held that the expenditure incurred for the termination of a trading relationship in order to avoid losses occurring in the future through that relationship, whether pecuniary losses or commercial inconveniences, is just as much for the purposes of the trade as the making or the carrying into effect of a trading agreement. 17. The case which can be said to be the nearest to the facts of the present case decided by any Indian Court is that decided by the Calcutta High Court in Anglo-Persian Oil Co. (India) Ltd. v. Commissioner of Income-tax, (1933) 1 ITR 129 = (AIR 1933 Cal 777). Therein money was paid by on Oil Company in a lump sum as compensation for loss of agency whereby the company relieved itself of future annual payments of commission chargeable to revenue account. The question was whether the money paid as compensation was allowable as proper deduction from the business profits of the Company. The Court upheld the contention of the Company that it was a revenue expenditure. Further the Court observed that the principle that capital receipt spells capital expenditure or vice versa is simple but it is not necessarily sound. Whether a sum is received on capital or revenue account depends or may depend upon the character of the business of the receipt. Whether a payment is or is not in the nature of capital expenditure depends or may depend upon the character of the business of the prayer and upon other factors related thereto. 18. It is obvious from the facts set out earlier that the compensation paid for the termination of the services of the managing agents was a payment made with a view to save business expenditure in the relevant accounting year as well as for a few more years. It was not made for acquiring any enduring benefit or income-yielding asset. We agree with the High Court that the tribunal was right in its conclusion that the expenditure in question was a revenue expenditure.

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

Explanation:
0[ds]16. In G. Scammell and Nephew Ltd. v. Rowles, (1940) ITR Suppl. 41 the Court of Appeal held that the expenditure incurred for the termination of a trading relationship in order to avoid losses occurring in the future through that relationship, whether pecuniary losses or commercial inconveniences, is just as much for the purposes of the trade as the making or the carrying into effect of a trading agreement17. The case which can be said to be the nearest to the facts of the present case decided by any Indian Court is that decided by the Calcutta High Court in Anglo-Persian Oil Co. (India) Ltd. v. Commissioner of Income-tax, (1933) 1 ITR 129   = (AIR 1933 Cal 777). Therein money was paid by on Oil Company in a lump sum as compensation for loss of agency whereby the company relieved itself of future annual payments of commission chargeable to revenue account. The question was whether the money paid as compensation was allowable as proper deduction from the business profits of the Company. The Court upheld the contention of the Company that it was a revenue expenditure. Further the Court observed that the principle that capital receipt spells capital expenditure or vice versa is simple but it is not necessarily sound. Whether a sum is received on capital or revenue account depends or may depend upon the character of the business of the receipt. Whether a payment is or is not in the nature of capital expenditure depends or may depend upon the character of the business of the prayer and upon other factors related thereto18. It is obvious from the facts set out earlier that the compensation paid for the termination of the servicesof the managing agents was a payment made with a view to save business expenditure in the relevant accounting year as well as for a few more years. It was not made for acquiring any enduring benefit or income-yielding asset. We agree with the High Court that the tribunal was right in its conclusion that the expenditure in question was a revenue expenditure.