G.K. MITTER, J. - (1.) THE questions referred to this Court under section 66(1) of the IT Act are as follows : "(1) Whether, on the facts and in the circumstances of the case, the payment of Rs. 2,53,166, to M/s Air Transport Ltd., the managing agents, was an expenditure laid out or expended wholly and exclusively for the purpose of the assessee's business within the meaning of s. 10(2)(xv) of the Indian IT Act? (2) Whether, on the facts and in the circumstances of the case, the payment of Rs. 50,000 to Shri K. K. Roy, the managing director, was an expenditure laid out wholly and exclusively for the purpose of the assessee's business within the meaning of s. 10(2)(xv) of the Indian IT Act?" THE facts are as follows : THE assessee is a company incorporated in the year 1945, having for its object, inter alia : (1) To establish, maintain and work lines of aerial conveyances, aeroplanes, seaplanes, flyingboats, helicopters, gliders, etc., and to provide air transportation between two or more places in India and between other places in and outside India to be selected from time to time by the company.
(2.) IT entered into an agreement with M/s Air Transport Limited in January, 1949, whereby the latter became the managing agent of the assessee for a period of 20 years at a remuneration of Rs. 3,000 per month as allowances and a commission of 10per cent of the net annual profits of the assessee as defined by s. 87C of the Indian Companies Act. The company also had several directors, one of whom was K. K. Roy, the managing director. Towards the close of the year 1952 and early in 1953, it became apparent that the Government of India would nationalise airways services all over India and that private undertakings like that of the assessee would have little or no business left to them. There was a meeting of the board of directors of the assessee on 30th Jan., 1953, wherein it was recorded that "the directors felt convinced that in the immediate future the undertaking of the company would be taken over by the Government more or less on the lines outlined by the managing director." IT should be noted that the managing director had made a report to the board in this connection giving them the result of the discussion he had with the authorities of the Government of India, "with regard to the acquisition of the company by the Government in the process of nationalisation of the Air Transport Industry." The minutes of the said board meeting further recorded that "it was also felt by the directors that in the event of the Government implementing their scheme of nationalisation, the directors should remain prepared for all consequences which would follow affecting not merely the shareholders of the company but also the managing agents, the managing director, the personnel and other operational agencies. The directors were advised that the managing agents under their agreement with the company were entitled to compensation in the event of premature termination by the company of their managing agency agreement. The managing agents are naturally anxious to be compensated in the manner provided in their agency agreement in the event of the company being taken over by the Government." Among the resolutions passed by the directors were the following : "(a) Resolved that in view of the uncertainties created by the impending scheme of nationalisation the subsisting managing agency agreement be terminated as from the 1st of March, 1953. (b) Resolved further that such compensation as may be determined by the company's auditors in terms of the subsisting managing agency agreement be paid to the managing agents. (c) Resolved further that the approval of the shareholders for such termination and consequent payment of compensation to them as provided in the managing agency agreement be obtained at an early date." There were two further resolutions regarding the managing director. "(a) Resolved that Mr. K. K. Roy, managing director of the company, be given a lump sum of Rs. 50,000 on the Government taking over this company, it being understood that Mr. Roy shall not be liable for income-tax on such payment and, even if he is made liable, the company shall compensate to the extent of the tax so payable. (b) Resolved further that this proposal of payment to Mr. K. K. Roy be also placed before the shareholders for confirmation at an early date." In pursuance of the above an extraordinary general meeting of the company was called on 28th Feb., 1953, wherein the following resolutions were passed : " Resolved that the action of the board of directors in terminating the appointment of M/s Air Transport Ltd., managing agents of the company, as such managing agents as from 1st March, 1953, in view of the impending nationalisation of the company and in sanctioning the payment of compensation for premature termination of their agency as may be determined by the company's auditors under the managing agency agreement be approved and confirmed. The meeting placed on record that the amount of compensation payable to the managing agents as determined by the company's auditors under the managing agency agreement (Ref. Auditor's letter dt. 27th Feb., 1953), which was read out before the meeting is Rs. 2,53,166-4-0. Resolved that the recommendation of the board of directors that a payment of Rs. 50,000 free of income-tax as a lump sum payment be made to Mr. K.K. Roy, the managing director of the company, in view of the impending termination of his association with the company due to nationalisation of the company as aforesaid, such payment being made only in the event of such nationalisation taking effect, be approved." In terms of the said resolution a sum of Rs. 2,53,166-4-0 was paid to the managing agents and a sum of Rs. 50,000 was paid to the managing director. The question before us is whether these two payments are deductible under s. 10(2)(xv) of the Act for computation of the profits of the company. This will depend on whether the expenses were incurred wholly and exclusively "for the purpose of the company." The revenue authorities have throughout held that the payments are not deductible. Before us it was argued that the Revenue authorities failed to assess the position correctly. It is admitted that on 1st Aug., 1953, the undertaking of the company including all its assets and its aircrafts were taken over by the Indian Airlines Corporation. The AAC in his order recorded that, thereafter, for a period of more than one and a half years the company did not transact any business at all and that the auditor's report on the accounts for the year ending 31st Dec., 1953, stated "as from 1st August, 1953, the undertaking of the company was taken over by the Indian Airlines Corporation under the Air Corporation Act, 1952." The AAC further recorded that "the printed balance-sheet as on 31st Dec., 1953, shows that the entire fixed assets valued at Rs. 17,03,472 were taken over by the Indian Airlines Corporation." He also recorded that in their report for the year 1953 the directors had stated that "though the operation of all scheduled services has been reserved for the Air Corporation, the Government have allowed the non- scheduled operators to carry on with their business. The company has secured a permit to operate air services on non-schedule basis. An arrangement has also been made with the Government to operate an air service to Andaman Islands for a period of three years. The company has recently purchased a Dakota Aircraft from the Indian Airlines Corporation. The prospects of non-scheduled and chartered operation in the domestic and international field are considered reasonably good." According to the AAC this report was given on 20th June, 1955, and it was only in that year that the assessee commenced air transport business on non-schedule basis. The printed accounts for the calendar year 1954 show that no business at all had been transacted in that year. The contentions urged before the AAC were repeated before the Tribunal and in particular that only the air transport business in respect of the scheduled lines had been taken over by the Government and that other activities of the assessee such as the operation of air freight transport between Calcutta and Assam had not been taken over and such business was continued by the assessee in subsequent years. The Tribunal however found from the evidence on record and specially the auditor's report for the year ending 31st March, 1953, that the entire undertaking of the company including all its fixed assets had been taken over by the Government as and from 1st Aug., 1953. The Tribunal agreed with the finding of the AAC that there was no air transport business left with the assessee after 1st Aug., 1953, until some time in 1955. The Tribunal found that so far as the managing director was concerned there was no agreement for payment of any compensation on termination of his services and payment to him was purely voluntary.
(3.) ACCORDING to the Tribunal "on the nationalisation of the airlines, the assessee-company had transferred its business, though perhaps under a compulsion, to the Indian Airlines Corporation. There was, therefore, no obligation on the part of the assessee-company to pay any compensation whatsoever to the managing agents. This compensation is also, . . . . . . . . ex gratia payment not necessitated by the needs of the business. It is therefore clear that the expenditure was incurred not for terminating a disadvantageous relationship in order to avoid future losses, but was a payment made voluntarily on the nationalisation of the business carried on by the assessee. The company did not get rid of them for reasons of trade." Our attention was drawn to an enclosure to the application before the Tribunal by the assessee under s. 66(1) of the Act and to certain statements of fact contained in an enclosure to the said application and printed at pages 41 to 60 of the paper- book. In particular reference was made to page 43 containing a statement of the assessee that "in the early part of the year 1954, it became apparent that the company would be allowed to carry on non-scheduled operations. In this view of the matter, it acquired office accommodation on 27th April, 1954. On 5th July, 1954, the Indian Airlines Corporation offered to the assessee-company to sell one Dakota. Thereupon, on 18th Aug., 1954, the company applied for a permit for non-scheduled operations and on 24th Sept., 1954, the Director General of Civil Aviation issued the necessary permit. The purchase of the Dakota was effected some time in 1955. In the meanwhile, in anticipation of the reopening of the non- scheduled operation, by a resolution dt. 5th July, 1954, the directors appointed Shri K. K. Roy as director-in-charge and the agreement made previously with M/s G. Basu was terminated except that they were to continue to handle the compensation matters.";