Commissioner of Income-Tax, Madras Vs.
M/S. Ashok Leyland Ltd.  INSC 244 (3 October 1972)
REDDY, P. JAGANMOHAN DUA, I.D.
CITATION: 1973 AIR 420 1973 SCR (2) 516 1973
SCC (3) 201
RF 1975 SC1945 (18,20)
Income tax--Payment of compensation for
terminating managing agency--Capital or Revenue expenditure.
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
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; 523CE] 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 AngloPersian Oil Co. (India)
Ltd. v. Commissioner of Income-tax, (1933) Vol. 1 I.T.R. 129, referred to.
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
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 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 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
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 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
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 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
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
In Noble's case (supra), Rowlatt J. had to
examine the question 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 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, 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.
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)  I.T.R. Suppl 41 (2)
 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.