Balasubramanyam, Judicial Member - (1.)1 to 8. [These paras are not reproduced here as they involved minor issues.] 9. Now remains the ground (No. 5) which is substantial. The assessee claimed an expenditure of Rs. 99 lakhs as an admissible deduction in computing profits for income-tax purposes. The facts are as follows: - 10. Motor Industries Co. Ltd. (MICO) is engaged in the manufacture and sale of spark plugs and fuel injectors required for automobiles. It has its own sales houses which cover the entire South India and other regions including Bombay and Calcutta. For the Northern region comprising of Delhi and portions of States around, MICO was managing through the agency Ghaziabad Engineering Co. Pvt. Ltd. (GEC) which was the sole distributor. This arrangement was in operation since 1954 and the distribution agreement (not in writing) was being renewed every time. For the first time, an agreement in writing was made on 10-2-1967 which was to run for a period of five years. 11. The agreement of 1967 was to end on 9-2-1972. Before that, MICO had taken a policy decision to establish its own sales house in Delhi on pattern similar to that existed in Southern region. For reasons MICO did not desire to take over the territories formerly operated through GEC overnight. The take over was to be completed in a phased manner. On January 28,1972, MICO addressed a letter to GEC specifying the pattern of take over. 12. As per protocol dated 28-1-1972, the Northern region for which GEC was the sole distributor comprised of Delhi, parts of Uttar Pradesh, Madhya Pradesh, Rajasthan, Punjab & Haryana. They were divided into three parts. The 1st part was to be taken over for direct sales operation from February, 1972 as first phase. Under phase 2, few other parts of Northern region would be taken over by MICO from February, 1977. Under the 3rd phase, all the remaining parts of Northern region would come under MICO's direct sales control thereby ending the distribution system through GEC. A map specifying the areas to be taken over under the three stages was furnished. Delhi, Ghaziabad and other places were in the part that is to be taken over under the 3rd phase. 13. GEC was asked to acknowledge the acceptance of the protocol by returning its duplicate duly signed on its behalf. Record shows that such acceptance had been given by GEC and the map with the signature of the Managing Director of GEC had been sent to MICO. 14. An agreement dated 10-2-1972 had been entered into by MICO and GEC which was to run for a period of five years. This agreement specified the territory within which GEC was to be the sole distributor and it accorded with protocol dated 28-1-1972 by which certain parts are to be taken over under the 1st phase. Clause 13 therein read: CANCELLATION OF FORMER AGREEMENTS This agreement supersedes all agreements whether verbal or "written subsisting between the parties immediately prior to the date hereof relating to the sale and purchase of the said products for resale within the said territory or otherwise and such prior agreements are hereby cancelled and the Company shall be under no liability of any kind whatsoever for damages or otherwise in respect of the nondelivery from any cause whatsoever (including causes within the Company's control) of any of the said products which the Company shall during the term of any prior agreement have contracted to deliver. The agreement of 10-2-1972 was to end on 9-2-1977. If things had gone on as proposed in the protocol dated 28-1-1972, only certain parts of the Northern region would have been taken over by MICO under phase 2. Because of certain sales-tax concession available in Delhi, sales in this region had been abnormally high compared to sales in other territories especially taken over under phase 1. MICO thought fit to accelerate the take over of territories under phase 3 and to dissociate from GEC in marketing. The executive members of the Board proposed at the end of 1976 to take over the business of the entire Northern region from February, 1977 itself by setting up a sales house in Delhi. Negotiations had been made with GEC and after protracted discussion and deliberations, GEC had agreed for premature termination of their distribution agreement upon payment of compensation of Rs. 99 lakhs, the payment of which was to be spread over a period of three years. The proposal of the executive members was considered by the Board of Directors in their meeting held on 18-2-1977 and a resolution to this effect was passed accepting the proposal made by the executive members. As per the Board's decision, the first payment had been made in 1977 and for the balance a provision was made on the basis of accrued liability arising out of the contract. MICO treated in its accounts Rs. 99 lakhs as a revenue payment. 15. The main reason for the assessing officer to challenge the propriety of treating the payment as a charge on revenue was that the payment was voluntary or ex gratia, not motivated by business consideration. He also held that the payment, even if it was in pursuance of a legal obligation, should be on capital account. The Commissioner of Income-tax (Appeals) held that MICO was not obliged to renew the agreement after 9-2-1972 as per protocol dated 28-1-1972 inasmuch as it had been rendered ineffective in view of clause 13 of the agreement dated 10-2-1972. He held that GEC had no right against MICO and that the payment of Rs. 99 lakhs agreed to be made was ex-gratia and he agreed with the assessing officer that the payment was voluntary and motivated by considerations other than business. He also upheld the alternative ground of disallowance on the premise that the expenditure, at all events, was capital in nature. 16. The main thrust of the argument of Shri Dastur, learned counsel for the assessee, was that the protocol dated 28-1-1972 had not been superseded by clause 13 of the agreement dated 10-2-1972. We shall presently refer to various factual circumstances to which Shri Dastur made a pointed reference to demonstrate that the policy of take over as envisaged in the protocol dated 28-1-1972 was always in the minds of the parties to be respected. The learned departmental representative, Shri Alam, apart from relying upon the reasons given by the Commissioner (Appeals) in his impugned order, urged that there was no legal obligation to pay inasmuch as MICO had a right to terminate the sole distributorship. The twin questions that are defined by the submissions are: (a) whether clause 13 of the agreement dated 10-2-1972 had totally effaced the protocol dated 28-1-1972 proposing the scheme of take over, and (b) whether decision taken to pay Rs. 99 lakhs to GEC was in the best interests of the business of the company having regard to all factors that then obtained. 17. The first agreement in writing was in 1967, a copy of which is at page 15 of the compilation. Under this agreement, GEC had right of sale operation in the entire Northern region for a period of five years which had to terminate on 9-2-1972. In this agreement also there is a Clause (No. 12) which is identical to clause 13 of the agreement dated 10-2-1972. The question is whether such a clause incorporated in the agreement dated 10-2-1972 had the effect of completely obliterating the prior understanding between the parties. The Commissioner (Appeals) ignored all facts and the surrounding circumstances as not relevant and reference by MICO to protocol dated 28-1-1972 in its correspondence subsequent to February 1972, either under the erroneous belief as to the validity of this protocol after the agreement of February 1972 or otherwise, did not revive the protocol to life and that when the franchise agreement had expired, the question of paying any compensation to GEC did not arise at all in law. A reading of clause 13 of the agreement dated 10-2-1972 may, at the first blush, indicate that earlier agreements that existed between the parties had come to an end. We are not to limit our consideration only to the reading of clause 13 totally alienating ourselves from the surrounding circumstances. A certain situation had come to exist by the letter dated 28-1-1972 addressed by MICO to GEC which the latter had accepted. If the parties really intended to follow the policy set out in this protocol, then that contract is not to be thwarted by placing a narrow interpretation on clause 13 of the agreement dated 20-2-1972. Where there remains a doubt as to the true reading of a clause in a document, extrinsic evidence is certainly permitted to ascertain the real effect. Even evidence of acts done under that is a guide to the intention of the parties - See Abdulla Ahmed v. Animendra Kissen Miner AIR 1950 SC 15 and Union of India v. D.N. Revri & Co. AIR 1976 SC 2257. The Commissioner (Appeals), we are convinced, was in error in restricting his vision to reading of clause 13 only. 18. The earlier agreement of 1967 was to come to an end on 9-2-1972. Before that, MICO was seriously engaged in the matter of taking over the distributive side of business from GEC as a policy measure. It is only in that context MICO addressed GEC on 28-1-1972, whereby the scheme of take over was proposed. The steps of taking over were clearly set out. From the very nature of things, there must have been a thorough deliberation by both sides in concluding as to the manner of take over. The letter had been written to GEC, New Delhi, by MICO from Bangalore with the following request: Please return the duplicate copy of this letter duly signed by you in token of your acceptance of the contents of this letter. GEC, in turn, accepted the proposal and the annexed map was returned with the signature of P.N. Agarwal, Managing Director of GEC. Presumably, GEC must have signed some time in the early part of February 1972 and sent the acceptance letter to MICO at Bangalore. The parties were alive to the fact that the agreement of 1967 was to end on 9-2-1972. The parties made the agreement dated 10-2-1972 incorporating a clause as 13 which apparently superseded all earlier agreements, oral or in writing. A similar Clause (No. 12) was in the agreement of 1967. The parties had sufficiently deliberated before agreeing to the scheme of take over. If the parties were not willing to have a plan as to the manner of ending the sales in the Northern region through an agency (GEC), it was pointless to make one particularly when the agreement was about to expire on 9-2-1972. If it was the intention of the parties to reduce the protocol of 28-1-1972 to nullity within a couple of days, certainly a pointed reference thereto would have been made in the agreement dated 10-2-1972. It will be seen from the agreement of 10-2-1972 that the area of dealership operation was not throughout the Northern region as it was under the earlier agreement of 1967, but only limited to areas mentioned in phases 2 & 3. An omnibus agreement incorporating all the terms set out in the protocol dated 28-1-1972 could not have been made after the expiry of the agreement on 9-2-1972, for it would have gone against the teeth of Section 294 of the Companies Act. Shri Dastur's submission that the protocol dated 28-1-1972 only formulated a scheme of take over and that agreement dated 10-2-1972 was only a step at implementation of the scheme in reference to phase 2 in a manner conformably to law is eminently acceptable. 19. Intention of the parties is paramount. If the parties to the agreement really intended to respect the protocol dated 28-1-1972 notwithstanding clause 13 of the agreement dated 10-2-1972, then it cannot be said that MICO had no obligation in the matter of renewal of the dealership. The immediate conduct of the parties after 9-2-1972 gives a true indication that each side expected the other to respect the protocol dated 28-1-1972. We shall advert to certain circumstances which sheds certain light. 20. MICO had to obtain a loan from financial institutions and a copy of the agreement pertaining to dealership had to be furnished to them. In the loan agreement to be made, an incorporation referring to dealership agreement with GEC was necessary. The relevant adoption was intimated to GEC by addressing a letter to its Managing Director on 7-12-1972. In this letter (copy of it is at page 47 of the compilation), MICO affirms that it would try to do its utmost to abide by the indications given in their letter dated 28-1-1972. 21. GEC, in its letter dated August 25,1973, refers to the obligation on the part of MICO under the protocol dated 28-1-1972. Again, on 1-9-1973, MICO in its letter addressed to GEC, says that the former had no intention whatsoever from deviating from the commitment made by it in the letter dated 28-1-1972. MICO affirms that the original policy of take over is not disturbed notwithstanding its relationship with the financial institutions and that the question of renewal of the agreement would be taken up at the appropriate time in 1976 or 1977. Assuming for argument sake that earlier agreements between the parties had ceased to exist in view of clause 13 of the agreement dated 10-2-1972, which conclusion is impermissible, although, nothing would have prevented the parties from varying the terms and the spate of correspondence between the parties does show that MICO had led GEC to believe that the question of renewal of agreement would be favourably considered later in 1976 or 1977. The agreement dated 10-2-1972, it appears to us, merely covered day-to-day working and the business transaction between the parties vis-a-vis the dealership agreement which could not have exceeded five years and clause 13 was not intended to control any long term arrangement between MICO and GEC in the matter of policy of take over. 22. The Commissioner (Appeals) rejected a plethora of evidence touching the conduct of the parties which shows that protocol dated 28-1-1972 was very much alive even after the agreement dated 20-2-1972 and this is what he mentions in the order: ...The appellant is not justified in twisting the facts by making reference to its letter dated 1-9-1973 to GEC. In my opinion it cannot serve as an estoppel against MICO when the legal effect of clause 13 of the agreement is to supersede its earlier letter dated 28-1-1972. Mere inadvertant or unintentional reference in any subsequent correspondence between the parties cannot give life to the letter dated 28-1-1972 which became non-existent by virtue of clause 13 of the agreement dated 18-3-1972. It is well settled that a mere erroneous assumption exhibited in a statute as to the state of the existing law is ineffective to express an 'intention' to change the law. This principle is equally applicable to the interpretation of documents also. The subsequent letter of MICO dated 1-9-1973 proceeds on erroneous belief as to the previous letter dated 28-1-1972 and cannot alter the legal position. The approach of the Commissioner (Appeals) was plainly incorrect. In any agreement, the intention of the parties is paramount and that has to be ascertained not only by placing a fair interpretation on the clauses but also taking into consideration surrounding facts and circumstances particularly the immediate conduct of the parties after the agreement which may more eloquently speak on the disputed question. This is precisely the principle explained by the Supreme Court in Abdulla Ahmed's case (supra) and D.N. Revri & Co.'s case (supra). 23. The parties had to mould the agreement to accord with the requirement of law. Notwithstanding such indentures, the parties had always the clear understanding to respect the terms set out in the protocol dated 28-1-1972. GEC had emphasised this position in its letter to MICO dated June 11,1976. This fact is also clear from the several telex messages exchanged between the parties in 1976. 24. The need to take over the entire Northern region in 1977 itself, instead of going through the stages covering phases 2 & 3 as per protocol dated 28-1-1972, emerged pressingly. Territorial restrictions could not be applied to sole selling agents like GEC in view of the provisions of MRTP Act. GEC was in a way free to sell anywhere in India the products of MICO. With the sales-tax concession available in Delhi, the distributor in Delhi had an edge over those in the adjoining States and the advantage GEC had in its business operation in Delhi was such that there was a tremendous increase in the sales in Delhi compared to other areas. This problem did not exist earlier as there was short supply. For these reasons, MICO felt that renewal of the agreement again in February 1977 would be of a great disadvantage to the company. This is clear from the meeting of the Board of Directors held in November 1976. At the same time, MICO was interested that the take over should be smooth without giving rise to any sort of complication or precipitation particularly owing to long connection MICO had with GEC. In fact, the record shows, an instantaneous take over in toto would have placed MICO in practical difficulties. As the agreement between the parties dated 31-12-1976 indicates, MICO was to be provided by GEC with their marketing knowledge, handing over their well established net-work of trained sales and service outlets, certain other services including their office equipment, staff trained in the field, etc. Taking all such factors into consideration, the executive members suggested to the Board of Directors for premature termination of the distributorship agreement in 1977 instead of taking over in a phased programme as envisaged earlier in the letter dated 28-1-1972. The Board of Directors approved the proposal in their meeting held in May 1976 wherein MICO agreed to pay Rs, 99 lakhs for premature termination of the agreement. That decision was taken not only because it was a good economic proposition but also prompted by the fact that MICO would be free to market its products in the whole of Northern region without straining its relationship with the erstwhile agent (GEC) or inviting any other trouble in future trade. 25. Shri Dastur argued that renewal of the agreement after 1977 was, according to the Board of Directors, not an advantageous proposition from the business point of view. Had MICO refused to renew relying upon clause 13 of the agreement dated 10-2-1972, for argument sake, then GEC would have raised an action to compel MICO to abide by the policy of take over as per protocol dated 28-1-1972 and this would have not only exposed MICO to unnecessary litigation but also to a possible set back in the business particularly when MICO Was not in a position to effectively control the sales on its own in Delhi and other places. This is precisely the reason MICO sought certain services from GEC as per agreement dated 31-12-1976 (copy of this is at page 67 of the compilation). So, the commercial expediency was to pay some compensation at least in recognition of a possible right which GEC might have tried to enforce against MICO. In the face of several correspondence between the parties after 10-2-1972, it is not easy to say that MICO had an absolute right in the matter of granting or not granting dealership rights to GEC in regard to Delhi and other places. This is a clear pointer indicative of commercial expediency in the matter of paying compensation to GEC for ending their distribution agency instead of in phased programme as per protocol dated 28-1-1972 26. We have been referred to number of authorities by Shri Dastur. In the case of CIT. v. Ashok Leyland Ltd. [1972] 86 ITR 549 (SC), compensation paid for termination of managing agency was held to be an allowable deduction in computing the profits by the Supreme Court. So, too, in-the case of J.K. Cotton Mfrs. Ltd. v. CIT [1975] 101 ITR 221 (SC). An amount paid for termination of agency, intended to ensure smooth transition without interference by agents, was considered to be in the business interest of the assessee by the Bombay High Court in the case of CIT v. Glaxo Laboratories (India) (P.) Ltd. [1978] 114 ITR 110. Similar is the principle applied by the Bombay High Court in the case of Life Insurance Corporation of India v. CIT [1979] 119 ITR 900. 27. In Anglo Persian Oil Co. Ltd. v. IRC 16 TC 253, the Court of appeal considered the eligibility of a payment made in respect of cancellation of agency contract for going in the revenue field. The assessee, in that case, found paying commission vide agency contracts abnormally increasing and for cancellation of such agency contract a sum was agreed to be paid which, the Court of Appeal, negatived to be of capital in nature. By withdrawing the agency, Anglo Persian Oil Co. was doing the business itself instead of allowing the distributive side in the hands of agents. It was ruled that the company did not secure any enduring benefit and all the advantage and benefit the agency termination brought were of a revenue character. 28. It is pointed out by the Supreme Court in the case of Eastern Investments Ltd. v. CIT [1951] 20 ITR 1 and again by the Bombay High Court in the case of F.E. Dinshaw Ltd. v. CIT [1959] 36 ITR 114 that payment made on the ground of commercial expediency, if it was to facilitate the carrying on of the business of the assessee, should be treated on the revenue account. 29. The principle upon which an item would belong to capital or revenue has been neatly stated in Empire Jute Co. Ltd. v. CIT [1980] 124 ITR 1 (SC) and quoted with approval in Alembic Chemical Works Co. Ltd. v. CIT [1989] 177 ITR 377(SC). Enduring benefit is not the acid test. It is only where the advantage is in the capital field that the expenditure would be disallowable. "What is material to consider is the nature of advantage in a commercial sense. 30. In the instant case, by getting freed from GEC, MICO did not acquire any advantage in the capital field. It did not result in starting any new business, but enabled it continue its business without being hinged by agency contract so that they can have direct control with dealers and customers. That freedom secured only an advantage or benefit in marketing its goods directly which is only a change in the method of business. 31. After a close scrutiny of the record, we, first, hold that clause 13 of the agreement dated 10-2-1,972 did not have the effect of superseding the policy of take over set out in the protocol dated 28-1-1972 to which both sides had agreed. This agreement of 1972 was only in regard to distribution in regard to phase 2 particularly in the context of Section 294 of the Companies Act, and the parties did have in their mind that phase 3 was still to be gone through after 1977 to make the take over hundred per cent. In this setting, the Board of Directors were of the view that accelerating the take over by five years was commercially a good proposition and beneficial to the company to its greatest advantage since distributors in Delhi enjoyed sales-tax advantage as much as 17% compared to others in the neighbouring States and the distributors in Delhi were in a position to compete at a tremendous advantage over the distributors in the neighbouring States. This problem was first realised in 1976 or thereabouts. At the same time, MICO, because of the long association it had with GEC, wanted to ensure peace and avoid litigation at all costs and desired the change over to be a smooth affair. We have already noticed how MICO also needed certain assistance or help from GEC, when the former was to set up its own sales house in Delhi. The compensation paid to GEC in such circumstances to facilitate MICO in carrying on its business throughout the Northern region is properly chargeable to revenue. 32. Compensation agreed to be paid should be reasonable and the agreement must be bona fide. The remarks of the authorities below that payment had been made by motivated consideration is not a correct conclusion. 51% of the shares are held by Robert Bosch GmbH and financial institutions held to the extent of 25% and the balance 24% by the Indian public. Every step in the direction of taking over by the resident chairman of MICO was in consultation and with the concurrence of Robert Bosch. 33. One Raghunandan Saran, who was one of the promoters of MICO, was in the Board of Directorate up to 1954. He died in 1956. The shares held by him were transferred to P.N. Agarwal in 1957. P.N. Agarwal is the present Managing Director of GEC. P.N. Agarwal was never a director of MICO and the shares held by him were 0.07% [not 0.7% as mentioned by the Commissioner (Appeals)] of the total issued capital. There is hardly any scope to say that extraneous considerations had flowed in deciding to pay compensation to GEC. 34. The Board of Directors also had in their mind the possible business advantage they would have by setting up a sales house in Delhi five years in advance. The turnover of GEC from 1974 to 1976 in New Delhi and round about areas was nearly three times the turnover of the areas directly operated by MICO in Northern region. In business, profit or loss is unpredictable. MICO bearing in mind the past results hoped that accelerating the take over by five years would result in good profits which would have been of the order of Rs. 160 lakhs from 1977 to 1981. But the result was far brighter. The actual profit earned for the five years was Rs. 196 lakhs. It cannot be said that there was no commercial expediency in deciding to have direct control of business in the entire Northern region from 1977 itself. Not only the decision is bona fide, even the compensation paid is reasonable in terms. 35. Shri Alam stated that MICO had only paid Rs. 33 lakhs in this year and the other payments were yet to be made in future years. A contractual liability had accrued in the year of account to the extent of Rs. 99 lakhs and having regard to the system of accounting maintained by the assessee it is entitled to the full allowance in this year itself. 36. For the foregoing we hold that Rs. 99 lakhs agreed to be paid as compensation to is deductible while computing the taxable profits. The claim succeeds. 37. In the result, the appeal is allowed in part.