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PETITIONER: COMMISSIONER OF INCOME-TAX, MADRAS

       Vs.

RESPONDENT: M/S.  ASHOK LEYLAND LTD.

DATE OF JUDGMENT03/10/1972

BENCH: HEGDE, K.S. BENCH: HEGDE, K.S. REDDY, P. JAGANMOHAN DUA, I.D.

CITATION:  1973 AIR  420            1973 SCR  (2) 516  1973 SCC  (3) 201  CITATOR INFO :  RF         1975 SC1945  (18,20)

ACT: Income tax--Payment of compensation for terminating managing agency--Capital or Revenue expenditure.

HEADNOTE: The  assessee-company (respondent) was initially  doing  the business  of  assembly and sale of Austin cars  and  Leyland trucks.   It appointed Managing Agents under  certain  terms regarding  office  allowance and commission.  In  1954,  the respondent  ceased to assemble Austin cars, in view  of  the decision  of  the  Government  and  engaged  itself  in  the manufacture of Leyland commercial vehicles.  The progress of the scheme was reviewed in 1955 and the Government of  India suggested  to  the  respondent that  Leyland,  U.K.,  should provide  part  of the capital, that  the  remaining  capital should  be  raised by the respondent in India and  that  the Government  would  arrange  for such  capital  in  India  on condition  that  the  managing agency  was  abolished.   The respondent terminated the managing agency and paid a sum  of money   to  the  Managing  Agents  as   compensation.    The respondent also entered into an agreement with Leyland, U.K. for participation.  The respondent claimed deduction of  the amount  paid as compensation to the Managing Agents, in  its assessment,  as  revenue  expenditure laid  out  wholly  and exclusively for the purpose of the business in the  relevant previous   year.   The  Income-tax  Officer  and   Appellate Assistant  Commissioner rejected the claim but the  Tribunal and  the  High Court, on reference, held in  favour  of  the assessee. Dismissing the appeal to this Court, HELD  :  The  managing agency  was  terminated  on  business considerations  and as a matter of commercial expediency  In view of the change in business activity, the continuance  of the managing agents had become superfluous.  It is true that by  terminating  the  services  of  Managing  Agents,  whose continuance had become superfluous, the respondent not  only saved  expense  that  it  would have had  to  incur  in  the relevant  previous  year but also for a few  more  years  to come.   But  the payment was made only with a view  to  save

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business expenditure and it, will not be correct to say that by  avoiding  certain business  expenditure  the  respondent acquired an enduring benefit or acquired an income  yielding asset.    Therefore,   the   expenditure   was   a   revenue expenditure, and not a capital expenditure. [520A-D;  523C- E] B.W. Noble Limited v. Mitchell, 11 Tax Cas. 372, Atherton v. British insulated and Helsby Cables Ltd., 10 T.C. 192, Anglo Person  Oil Ltd. v. Dale, 16 Tax Cas. 253, G.  Scammell  and Nephew  Ltd.  v. Rowles, (1940) I.T.R. Supp. 41  and  Anglo- Persian Oil Co. (India) Ltd. v. Commissioner of  Income-tax, (1933) Vol.  1 I.T.R. 129, referred to.

JUDGMENT: CIVIL  APPELLATE  JURISDICTION : Civil Appeal  No.  1989  of 1969. Appeal  by  certificate from the judgment  and  order  dated February 8, 1968 of the Madras High Court in Tax Case No. 93 of 1964., 517 S.   Swaminathan, D. P. Mohanthy and S. Gopalakrishnan,  for the respondent. The Judgment of the Court was delivered by HEDGE, J. The Commissioner of Income-tax Madras is appealing against the decision of the Madras High Court in a Reference under  s.  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 Court. 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 1956-57." 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 Company. Let  us  now have a look at the facts.  The assessee  was  a public  Limited Co., originally known as Ashok  Motors  Ltd. It  was incorporated on September 7, 1948.  The Articles  of Association of the Company authorised it to carry on various businesses,  such  as  manufacturers,  assemblers,  dealers, hirers,  repairers of motorcars, motorcycles,  motor  buses, lorries,  trucks  etc.   In  particular  it  authorised  the Company  "to import into India Austin Cars and other  Austin products, to assemble Austin products from their components, to  undertake the progressive manufacture in India, of  such parts  of Austin products as can under  suitable  provisions

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for such manufacture be manufactured thereto, supply Austin 518 products and parts to accredited distributors for resale  to the  public in India and to provide adequate facilities  for the prompt servicing of Austin products in India." The Company appointed Car Builders Limited, as their  manag- ing  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 profits. 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  Corn-mission.   The  Government instructed the Company to 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 50155 per cent subject to a maximum of half a million pounds.  The Company was asked  to rise 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 compensation. On  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 519 year.  It may also be mentioned that at about this time  the Company  entered  into  an  agreement  with  Leyland   Motor Limited, Leyland U.K. for participation of the said  concern with   the  Company  for  implementing   its   manufacturing programme. On the aforementioned facts, the question arises whether the compensation  paid to the managing agents can be  considered as  an expenditure wholly and exclusively laid out  for  the purpose  of  the  business or whether  the  same  should  be considered as a capital expense. There  are  numerous decisions of this Court., of  the  High Courts in this country as well as. of the courts in  England dealing with the controversy whether an item of  expenditure should  be  considered as a capital expenditure  or  revenue

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expenditure. The   Act   has  not  defined   the   expressions   "capital expenditure"  and the "revenue expenditure".  The line  that divides  revenue  expenditure from  capital  expenditure  is often  times very thin.  Hence the decisions of courts  have not  been able to give a quietus to the controversy  whether an  item of expenditure is capitol or revenue.  The  general tests to be applied to distinguish capital expenditure  from revenue   expenditure  have  been  enunciated   in   various decisions.   There  is no difficulty  in  enumerating  those tests.  But the difficulty arises when the courts are called upon to apply those tests to a given set of facts.   Barring rare, exceptions, facts of no two cases are similar. A  long  line  of  decisions have laid  down  that  when  an expenditure  is made with a view to bring into existence  an asset  or an advantage for the enduring benefit of a  trade, there   is   good  reason  (in  the   absence   of   special circumstances  leading to opposite conclusion) for  treating such an expenditure as property attributable not to  revenue but to capital. It  was urged on behalf of the revenue that the  termination of  the  managing  agency has led to  reorientation  of  the business  of the Company.  That termination facilitated  the Company to enter into collaboration with Leylands.  It  also made it possible for the Company to get financial assistance from  the, Government if there be need.  It was  also  urged that  the  compensation  was  paid  at  the  behest  of  the Government and was for a non-business purpose.  Under  these circumstances,  it was said that the expenditure  cannot  be considered  as having been incurred to meet  any  commercial expediency.   The  learned Counsel for  the  Company  joined issue  on each one of those contentions.  He contended  that because of the Government policy the Company had to give  up its  assembling activity and take to manufacture of  Leyland Trucks.   For  that  purpose  it  sought  and  obtained  the collaboration  of  Leylands.  In view of the chance  in  the business activity of the Company. 520 continuance  of the managing agency became superfluous.  Its continuance  meant unnecessary business expenditure for  the Company.   Hence commercial expediency required the  Company to  terminate  the services of the managing agents  and  the managing  agents  could  be  get  rid  of  only  by   paying reasonable  compensation.   The  Tribunal  found  that   the Company.  terminated the services of the managing agents  on business considerations, It accepted the plea of the Company that  in  view of the change in its business  activity,  the continuance  of  the  managing  agents  became  superfluous. These  are findings of fact which are not open  to  question before this Court. There is no doubt that as a result of the termination of the services of the managing agents, the Company got rid of  its liability to pay office allowance as well as the  commission it  was required to pay under the managing agency  agreement not only during the accounting year but also for a few years more.   The expenditure thus saved undoubtedly  swelled  the profits of the Company.  From the facts found,- it is  clear that   the  managing  agency  was  terminated  on   business considerations  and  as a matter of  commercial  expediency. There  is  no  basis for holding  that  by  terminating  the managing  agency. the Company acquired any enduring  benefit ,or  any  income  yielding  asset.   It  is  true  that   by terminating the services of the managing agents, the Company not  only saved the expense that it would have had to  incur in  the relevant previous year ’but also for few more  years

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to  come.   It will not be correct to say that  by  avoiding certain  business  expenditure, the Company can be  said  to have  acquired  enduring  benefits or  acquired  any  income yielding asset. To  quote  the illustration given by Rowlatt J.  in  B.  IV. Noble Limited v. Mitchell,(1) in the ordinary case a payment to get rid of a servant when it is not expedient to keep him in the interest of trade would be a deductible  expenditure. A  payment  made to remove the possibility of  a  recurring disadvantage  cannot  be  considered as a  payment  made  to acquire an enduring advantage. In Noble’s case (supra), Rowlatt J. had to examine the ques- tion whether the item of expenditure concerned in that  case was a revenue expenditure.  Briefly stated the facts-of that case  were  :  ’Under  its  Articles  of  Association,   the management  of a company of Insurance brokers registered  in England was vested in its Board of Directors in London, with powers  of delegation.  One of the Directors  was  appointed Resident  Director  in  France.   He  conducted  the  French business  of  the Company from an office in  Paris  under  a power of attorney from the Company.  The Company ,claimed as a  deduction from its profits for income-tax purposes a  sum of  pound  19,200  payable (by instalments)  to  a  retiring Director  in  the  following circumstances  :  The  Original Directors were ap- (1)  11 Tax Cas 372. 521 pointed for life so long as they held a qualifying number of shares,  Subject.   Lo dismissal forthwith  for  neglect  or misconduct towards the Company.  A Director so dismissed was only  entitled to receive his salary then due and  could  be required  to sell his shares to the under Directors at  par. He  would  also have to surrender for  cancellation  certain notes issued by the, Company entitling him to participate in surplus  profits.  Circumstances arose in 1920 and  1921  in which  the  Company might possibly have  been  justified  in -dismissing  one  of the Directors, but to  avoid  publicity injurious  to  the  Company’s reputation,  it  entered  into negotiation  with  the  Director  for  his  retirement.   He claimed  pound 50,000 as compensation; but a compromise  was arrived  at  and  embodied in an agreement  dated  the  30th December,  1921  by  which  he agreed  to  retire  from  the Company,  to transfer his 300 pound 1 shares to  the,  other Directors  at par value (they were then  worth  considerably more) and to surrender his participating notes.  The Company agreed to pay him pound 19,200 and the Directors to pay  him pound 300 (as consideration for his shares) making  together pound  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 pound 19,200 was a deductible expenditure.   The Special  Commissioners decided against the Company  but  the King’s  Bench Division as well as Court of  Appeal  accepted the Company’s contention and held that the payment of  pound 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 King’s  Bench  Division relied on the observations of Lord Chancellor in Atherton v. British Insulated and Helsby Cables Ltd. (1) 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 expanded wholly  and

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             exclusively for the purposes of the trade." 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. The next case which may be usefully referred is the decision in  Anglo  Persian Oil Co. Ltd. v. Dale. (2  )  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 corn- (1) 10 T.C. P. 192. (2) 16 Tax Cas 253. 522 mission   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 pound  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 Company’s 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 King’s 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 Company’s 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  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  an  illustrative  examples   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." In  C. Scammell and Nephew Ltd. v. Rowles, (1) 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, wheth er  pecuniary losses or commercial inconveniences,  is

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just as much for the purposes of the trade as the making  or the carrying into effect of a trading agreement. 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.(2) Therein  money  was paid by an (1) [1940] I.T.R. Suppl 41 (2) [1933] vol. I, I.T.R. 129. 523 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 recipient.  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 payer  and upon other factors related thereto. It  is  obvious  from the facts set  out  earlier  that  the compensation  paid  for 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. In  the result this appeal fails and the same  is  dismissed with costs. V.P.S. Appeal dismissed. 16-L498SupCI/73 524