- (1.) This is an appeal from the judgment of the High Court at Calcutta (Harries C. J. and Chatterjea J.) pronounced on a reference made to it by the Income-tax Appellate Tribunal under S. 66 (1), Income-tax Act. The relevant facts are these. The respondents are a private limited company which was brought into existence to float various companies including cotton mills. In November 1932 the Basanti Cotton Mills Co., Ltd. was incorporated and the respondents were appointed the managing agents. Their remuneration was fixed at a monthly allowance of Rs. 500 and a commission of 3 per cent. on all gross sales of goods manufactured by the Mills Company. The fixed monthly allowance was liable to be increased in the event of the capital of the company being increased. The details are immaterial. It appears that certain hundis were drawn by one of the directors of the respondent company, acting in the capacity of the managing agents of the Mill Company, in the name of the Mill Company and the same were negotiated to others. The Nath Bank, Ltd., claimed payment of these hundis. The Mill Company repudiated its liability as it appeared from the books of the Mill Company that they had not the use of the sum of Rupees 1,80,000 claimed by the Nath Bank, Ltd., under the hundis. The Nath Bank, Ltd., instituted four suits against the Mill Company, in two of which the respondents were party defendants. The Mill Company was advised to settle the suits and the respondent company entered into an agreement with the Mill Company, the material part of terms of which runs as follows: "Memorandum of Agreement made between the Calcutta Agency, Limited, of the one part and Basanti Cotton Mills, Ltd., of the other part WHEREAS the Nath Bank, Limited, demanded from the Mills the payment of the sum of Rs.1,80,000 and interest thereon AND WHEREAS the said Mills repudiated their liability in respect thereof as it appeared from the books of the said Mills that the said Mills did not have the use of the said sum of Rs.1,80,000 or any part thereof AND WHEREAS the said Nath Bank, Ltd., thereupon instituted four suits in High Court being Suits Nos. 1683, 1720, 1735 and 1757 of 1939 for the said aggregate sum of Rs.1,80.000 and the interest thereon AND WHEREAS the said Mills have been advised to settle the said suits amicably AND WHEREAS the Calcutta Agency, Limited, by its Directors, S. N. Mitter or S. C. Mitter, having been and being still the Managing Agents of the said Mills have undertaken to reimburse the said Mills in respect of the decrees to be made in the said four suits in the manner hereinafter appearing NOW THESE PRESENT WITNESS AND IT IS HEREBY AGREED AND DECLARED. (i) That out of the commission of 3% payable by the said Mills to the said Agency under Regn. 131 of the Articles of Association of the Company, the Company shall have a paramount lien on and deduct and set off a moiety thereof against any payment which the said Mills may make in respect of the said decrees or any of them and/or costs of the said suits. (ii) The said moiety shall be one-half of the commission so payable less such sum as the Directors of the Mills may from time to time allow to be deducted."
(2.) Under the said agreement, the respondent company paid to the Mill Company Rs. 22,500 made up of Rs.18,107 as principal and Rs. 4,393 as interest in the accounting year. The assessee Company claimed this before the Income-tax Appellate Tribunal as a deduction permitted under S. 10 (2) (xv), Income-tax Act. The relevant part of that section runs as follows : "10. (1) The tax shall be payable by an assessee under the head 'Profits and gains of business, profession or vocation' in respect of the profits or gains of any business, profession or vocation carried on by him. (2) Such profits or gains shall be computed after making the following allowance, namely : * * * * * (xv) any expenditure (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."
(3.) In the statement of the case submitted by the Tribunal after reciting the fact of the incorporation of the company and the terms of the compromise mentioned above, the arguments urged on behalf of the assessee company have been recapitulated. The first argument was that under proviso 1 to S. 7, Income-tax Act, this payment was liable to be exempted. The Tribunal rejected that argument. On the reference, the High Court also rejected the same and it was not presented before us. The next argument of the respondent company was that in respect of us. 22,500 it was entitled to exemption under S. 10 (2) (xv), Income-tax Act, on the ground that the payment was an expenditure which was not in the nature of a capital expenditure or personal expenses of the applicant company but was in expenditure laid out wholly and exclusively for the purpose of its business. The assessees urged that if the applicant company did not agree to pay this amount, "Basanti Cotton Mills, Ltd., could have brought a suit against the company to realise this amount due on the hundis which would have exposed the applicant company to the public and in order to save themselves from the scandal and maintain the managing agency they agreed to the deduction of certain amounts from the managing agency commission due to it," and, therefore, their case fell within the principles of the decision of Mitchell v. B.W. Noble, Ltd., (1927) 1 K. B. 719 : (96 '. J. K.B. 484). The Tribunal found as facts: (1) That the applicant company agreed to pay off the decretal amount from the remuneration which they were entitled to get from the Basanti Cotton Mills. (2) The decree was passed against the applicant company evidently for certain misfeasance committed by its directors and the applicant company agreed to pay it off from its remuneration. (3) The books of account of Basanti Cotton Mills, Ltd., would show that they were paying the applicant company in full its remuneration and the books of the applicant company also show that it was entitled to its remuneration in full. (4) In the circumstances the Tribunal held that the expenditure was not laid out wholly and exclusively for the purpose of carrying on the business. (5) Besides the Tribunal was of the opinion that in this case it was not a revenue expenditure at all. As the payment had to be made towards liquidation of the decretal amount the Tribunal held, in the circumstances of this case, that it was a capital payment. On behalf of the respondent it was argued in the further alternative that the Privy Council decision in Bejoy Singh Dudhuria v. Commissioner of Income-tax, Bengal, 6 I. T. C. 449 : (A.I.R. (20) 1933 P. C. 145) Would cover the present case. The contention was rejected by the Tribunal.;