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

1. The Commissioner of Income-tax, Madras is appealing against the decision of the Madras High Court in a Reference under Section 66 (2) of the Indian Income-tax Act, 1922 (to be hereinafter referred to as the Act) after obtaining certificate of fitness from the High Court2. The question before the authorities under the Act was whether the payment of Rs. 2,50,000/- made by the respondent-assessee which will hereinafter be referred to as the company for the termination of managing agency is an allowable deduction in computing the total income of the company for 1956-57. The Income-tax Officer as well as the Appellate Assistant Commissioner rejected the claim of the Company that it was a Revenue expenditure but the Tribunal in appeal upheld the contention of the Company. Aggrieved by the decision of the Tribunal, the Commissioner demanded a case to be stated for obtaining the opinion of the High Court on the question:Whether on the facts and in the circumstances of the case the payment of Rs. 2,50,000/- made for the termination of Managing Agency is an allowable deduction in computing the total income of the assessee company for 1956-573. The Tribunal refused to state the case taking the view that its findings are findings of fact. Thereafter the Commissioner moved the High Court under S. 66 (2) and at the instance of the High Court, the Tribunal stated the case and submitted the aforementioned question of law to the High Court. But the High Court answered that question in the affirmative and in favour of the Company5. The Company appointed Car Builders Limited, as their managing agents under an agreement dated October 18, 1948 for a term of 14 years from the date of its registration. The managing agents were to be paid at the rate of Rs. 2,000/- per mensem as office allowance and 10 per cent of the annual profits with a minimum of Rs. 18,000 per annum in case of inadequacy or absence of profits6. Initially the business of the Company consisted in the assembly and sale of Austin cars and Leyland Trucks. During the year 1952, the Government of India referred the question of establishing an Automobile Industry in India to the Tariff Commission. The Company prepared and submitted a comprehensive memorandum to the Tariff Commission for the manufacture of Leyland Trucks. It also participated in the proceedings of the Tariff Commission. The Government instructed the Company to take take up the manufacture of Leyland Commercial Vehicles. From April 1954, the Company ceased to assemble Austin Cars in view of the Government decision and engaged itself in the manufacture of Leyland Commercial Vehicles. The progress of the scheme was reviewed by all the Directors on January 24, 1955 when the Union Minister for Commerce and Industry was also present. In the course of the discussion, the Union Minister suggested to the Company to invite Leylands to provide capital as and when required till their holding bore to the existing paid up capital in the ratio of 40/45 to 50/55 per cent subject to a maximum of half a million pounds. The Company was asked to raise the remaining capital in India. The Minister is stated to have assured that the Government would arrange for the required capital in India but that responsibility would be in the nature of contingent liability and that it would accept such a liability only if the Managing Agency is abolished. The Directors pointed out to the Minister that they had already taken steps to terminate the services of the managing agents on payment of compensationOn January 29, 1955, by means of an agreement between the Company and the managing agents, the managing agency agreement was terminated subject to the condition that the managing agents were to be paid compensation in a sum of Rs. 2,50,000/-. The Company paid the said sum during the accounting year ended on December 31, 1955, relevant to the assessment year 1956-57. The Company claimed deduction of the same in its assessment as Revenue expenditure laid out wholly and exclusively for the purpose of the business in the relevant previous year. It may also be mentioned that at about this time the Company entered into an agreement with Leyland Motors Limited, Leyland U. K. for participation of the said concern with the Company for implementing its manufacturing programme.

Reasoning:
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.