xG.OAK, C.J. - (1.) THIS is a reference under Section 66 of the Indian Income -tax Act, 1922 (hereinafter referred to as ' the Act'). The assessee is a public limited company, Messrs. J.K. Cotton ., Kanpur. The assessment year is 1944 -45. Formerly, a firm 'Juggilal Kamlapat' was the managing agent of the assessee -company. Under an agreement dated August 8, 1941, the managing agents were entitled to work for the assessee -company for a period of 20 years. The managing agents were to charge commission on sales at the rate of 21/2 per cent. The assessee decided to terminate the managing agency of firm Juggilal Kamlapat, and to employ Messrs. J. K. Commercial Corporation as new managing agents, who were to receive commission at the reduced rate of 2 per cent. In order to compensate the firm, Messrs. Juggilal Kamlapat, the assessee -company paid the former managing agents Rs. 2,50,000 as compensation. The assessee -company claimed this payment of Rs. 2,50,000 as permissible deduction under Section 10(2)(xv) of the Act. This claim of the assessee was rejected by the Income -tax Officer on the ground that the payment amounted to capital expenditure. This view was upheld in appeal by the Appellate Assistant Commissioner. The ultimate decision of the taxing authorities was upheld by the Appellate Tribunal, but on another ground. The Tribunal held that the expenditure was not incurred for the purpose of business, but for extra commercial reasons. The assessee applied for a reference to this court under Section 66(1) of the Act. That application was rejected. Upon an application under Section 66(2) of the Act, this court directed the Tribunal to refer certain questions of law to this court. Accordingly, the Appellate Tribunal, Allahabad, has referred four questions, of law to this court.
(2.) MR . C. S. P. Singh, appearing for the assessee, did not press questions. Nos. 1,2 and 3. It is not, therefore, necessary to reproduce those questions or answer them. Question No. 4 runs thus : ' Whether a sum of Rs. 2,50,000 paid by the assessee to the managing, agents for the termination of their managing agency is an expenditure admissible under Section 10(2)(xv) of the Income -tax Act ? ' The assessee claimed deduction under Clause (xv) of Section 10(2) of the Act. Clause (xv) is : ' 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.) THERE was no suggestion that the payment in question was in the nature of personal expenses of the assessee. So, in order to decide whether the payment is covered by Clause (xv) or not, two questions have to be considered. The first question is whether the expenditure was wholly and exclusively for the purpose of the business. The second question is whether the payment was in the nature of capital expenditure. These two questions will have to be discussed separately.;