The Judgment of the Court was delivered by

M.S Menon, J.:— This is a reference by the Income-tax Appellate Tribunal, Madras Bench “A”, under section 66(1) of the Indian Income-tax Act, 1922. The questions referred are:

“(1) Whether, on the facts and circumstances of the case, the payment of Rs. 3 lakhs by the company to the managing agency firm as constituted on February 5, 1951, was compensation for premature termination of office of the managing agents and whether the payment was an expenditure wholly and exclusively laid out for the purpose of the business of the company?

(2) Whether the payment of Rs. 3 lakhs was an expenditure wholly and exclusively laid out for the purpose of the business of the company?

(3) Whether on the facts and circumstances of the case the legal expenses of Rs. 2,000, Rs. 1,000 and Rs. 1,765 and the travelling expenses of Rs. 1,876 and Rs. 2,013 and costs of Rs. 2,000 were expenditures wholly laid out for purposes of the business?”

2. It is common ground that the third question requires no separate consideration, and that the answer to that question will depend solely on the answers to the first and the second of the three questions.

3. The assessee is the Cannanore Spinning and Weaving Mills Ltd., Cannanore. It was incorporated on September 4, 1945. On the same date it appointed the Malabar Industrial Syndicate as its managing agents in pursuance of the articles of association. The Malabar Industrial Syndicate was a firm formed on May 19, 1945, and consisting of seven partners. The agreement with the firm (annexure A) stipulated that the said firm should be the managing agents of the company for a term of twenty years from the date of its incorporation, “unless in the meanwhile they, of their own free will, resign or become insolvent or are removed from the office by a resolution passed at a general meeting of the shareholders of the company consequent on the said managing agents or any partner or partners of the said firm of managing agents, being convicted of an offence in relation to the affairs of the company punishable under the Indian Penal Code and being under the provisions of the Code of Criminal Procedure, 1898, non-bailable, provided however that due notice of the proposed meeting and of the resolution to be passed thereat, has been given to the managing agents in the same manner as is given to the members of the company.”

4. The agreement also provided that no such resolution shall take effect:

“(1) In the event of the conviction being of one or more of the partners of the firm of the managing agents, such a partner or partners is or are expelled from the firm, or

(2) If his or their conviction is set aside on appeal.”

5. Controversies arose and they culminated in a petition to the High Court of Madras, O.P No. 293 of 1954. Thanks to the suggestions from the Bench and the intercession of persons interested in the welfare of the company a settlement was reached by the middle of November, 1954. The deed of settlement is reproduced as annexure “K-1” in the paper-book before us.

6. The settlement was reported to the Madras High Court and Mr. Justice Ramaswami Gounder passed the following order in O.P No. 293 of 1954 on November 18, 1954:

“This matter was argued more or less fully on both sides, and on the facts of this case I considered that it was an eminently fit one for settlement. Without a settlement I felt that there was no chance of the company carrying on any successful business in the future. That suggestion, I am glad to say, has been accepted on both sides, and today the learned counsel on both sides report that the matter has been amicably settled out of court. That being so, the learned counsel for the petitioners prays for permission to withdraw the petition; and it is accordingly permitted to be withdrawn and is dismissed.”

7. The deed of settlement said:

“In view of the fact that the legality of the resolutions of the board of directors of the first respondent company passed on 11th, 12th and 19th of October, 1954, suspending and/or dismissing Malabar Industrial Syndicate from their office as managing agents of the said company is disputed and proceedings in respect thereof are pending before the High Court of Judicature at Madras in O.P No. 293 of 1954 and whereas after the O.P was heard sometime on November 4, 1954. the judge has adjourned it to enable the parties to effect a settlement if possible in the best interest of the company, and whereas if the dispute is not settled as soon as possible further or other legal proceedings and suits are possible and likely, and the result will be a series of suits or other legal proceedings which will be prolonged and costly, and which may interfere with the efficient management of the company and thereby be detrimental to the interests of the company, and in view of the legal advice rendered to the company, the parties consider it desirable and necessary to settle all the disputes as between the managing agents and the company without further protracting the proceedings in court, and also acting on the advice of certain common friends who have mediated in the matter the parties have agreed as follows:

“(i) That the managing agents, namely, the Malabar Industrial Syndicate hereby resign their office of managing agency of the first respondent company as and from this date and consequently the agency will be terminated and they be relieved of their office from this date;

(ii) That the company do pay to the said Malabar Industrial Syndicate, the managing agents, a sum of Rs. 3,00,000 (three lakhs of rupees) by way of compensation for the premature termination of their agency and for their loss of office as managing agents for the unexpired term in full and final settlement of their claims therefor;

(iii) That the sum of Rs. 3,00,000 mentioned above be paid over to Sri A.K Kaderkutty, the second petitioner in the above O.P, and that be should apportion the same among petitioners Nos. 1, 2, 4 and 6 in the said O.P, the other partners of the managing agency firm, namely, respondents Nos. 3 and 6 in the O.P, having waived at the request of the directors their claim to share in the said amount paid to the managing agents or to claim any amount from the company as compensation;

(iv) The aforesaid sum of Rs. 3,00,000 shall be paid out in the manner aforesaid as soon as appropriate resolution or resolutions are passed at a duly convened meeting of the directors approving the said arrangement;

(v) Respondents Nos. 2 to 13 shall cancel the general body meeting called for and fixed for November 20, 1954, and call instead an extraordinary general body meeting of the company to be held on or before December 31, 1954, with a view to pass a special resolution confirming the termination of the managing agency as aforesaid and the payment of the said sum of Rs. 3,00,000 to the managing agents as aforesaid by way of compensation for premature termination and loss of their office;

(vi) In the event of the special resolution mentioned in clause (v) above not being passed or in the event of any claim being established against petitioners Nos. 1, 2, 4 and 6 in respect of the said sum of Rs. 3,00,000 paid to them, respondents Nos. 2 to 13 hereby agree personally to indemnify and keep them indemnified from any such claim or loss or damage in respect thereof.”

8. The sum of Rs. 3 lakhs provided in the deed was paid to the managing agents. The controversy before us relates to the liability of that amount to tax in the assessment of the company. According to the Department it is taxable and according to the assessee it should be excluded as an admissible allowance under section 10(2)(xv) of the Act.

9. Sub-section (1) of section 10 of the Indian Income-tax Act, 1922, provides that income-tax shall be payable by an assessee under the head “Profits and gains of business, profession or vocation” in respect of the profits and gains of any business, profession or vocation carried on by him, and sub-section (2) of that section that such profits or gains shall be computed after making the allowances specified in that sub-section. The gist of the allowances specified in sub-section (2), clause (xv), reads as follows:

“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.”

10. It is common ground that clauses (i) to (xiv) are not attracted and that the expenditure will not come under “personal expenses of the assessee”. The Tribunal has apparently proceeded on the assumption that the expenditure is also not in the nature of “capital expenditure”, and no question has been referred to us as to whether the allowance claimed is inadmissible on the ground that it was in the nature of a “capital expenditure”.

11. In these circumstances the only question that arises for consideration is whether the expenditure was “laid out or expended wholly and exclusively” for the purpose of the business. We entertain no doubt that the answer should be in the affirmative.

12. In Atherton v. British Insulated and Helsby Cables Ltd. 1925 10 Tax Cas. 155, 191. Viscount Cave, L.C, said that “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”. In Noble Ltd. v. Mitchell Rowlatt, J., in referring to this passage observed that it was perhaps “the clearest as well as the most authoritative statement on the point”. The passage was quoted with approval by the Supreme Court in Eastern Investments Ltd v. Commissioner Of Income Tax, West Bengal [1951] 20 I.T.R 1, 4..

13. In Scammell and Nephew Ltd. v. Rowles [1940] 8 I.T.R Suppl. 41, 54 Greene, M.R, said: “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”; and in P. Orr & Sons v. Commissioner of Income-tax [1959] 35 I.T.R 556, 574. the Madras High Court said that in deciding whether an expenditure was incurred wholly and exclusively for the purpose of the assessee “the view-point is that of business expediency, what a normally prudent businessman could be expected to do in good faith”. In Tata Sons Ltd.…Assessees v. The Commissioner Of Income-Tax, Bombay….* [1950] 18 I.T.R 460, 467 Chagla, C.J, dealt with the matter as follows:

“Now, the decided cases show that one has not got to take an abstract or academic view of what is proper expenditure laid out or expended wholly and exclusively for the purposes of one's business. One has got to take into consideration questions of commercial expediency and the principles of ordinary commercial trading and the main consideration that has got to weigh with the court is whether the expenditure was a part of the process of profit-making. If the expenditure helps or assists the assessee in making or increasing the profits, then undoubtedly that expenditure would be expended wholly and exclusively for the purposes of business.”

14. Counsel for the Department took us through the whole of the deed of settlement and contended that there are indications therein that persons other than the company were also intended to be benefited by the payment of the Rs. 3 lakhs. The indications, according to him, are in the fact that some of the partners of the managing agency firm relinquished their shares in the compensation in favour of the other partners under paragraph 1(iii) of the deed and in the provision in paragraph 6 thereof for the transfer of some of the shares of the company between some of the parties to the agreement. We do not think that any of these circumstances have any real bearing on the question at issue. We have considered the deed carefully and our conclusion is that the payment of Rs. 3 lakhs by the company was for nothing other than the termination of an arrangement which had become dangerous to its future well-being. We are quite satisfied that the payment of the said sum reflects a genuine and bona fide settlement, that it was not actuated by generosity or any indirect or improper motive, and that it was dictated solely by considerations of commercial expediency and for the benefit of the company.

15. In the light of what is stated above all the three questions referred have to be answered in the affirmative and we do so. There will be no order as to costs.

16. A copy of this judgment under the seal of the High Court and the signature of the Registrar will be forwarded to the Appellate Tribunal as provided by sub-section (5) of section 66 of the Indian Income-tax Act, 1922.

17. Questions answered in the affirmative.