INDIAN COPPER CORPORATION LIMITED Vs. COMMISSIONER OF INCOME TAX
LAWS(PAT)-1960-2-20
HIGH COURT OF PATNA
Decided on February 17,1960

INDIAN COPPER CORPORATION LTD. Appellant
VERSUS
COMMISSIONER OF INCOME-TAX Respondents


Referred Judgements :-

IN RE: NEW BRITISH IRON CO.,EX PARTE BECK-WITH [REFERRED TO]
IN RE: DOVER COALFIELD EXTENSION,LTD. [REFERRED TO]
ATHERTON. V. BRITISH INSULATED AND HELSBY CABLES LTD. [REFERRED TO]
USHER'S WILTSHIRE BREWERY LTD. V. BRUCE [REFERRED TO]
SMITH V. INCORPORATED COUNCIL OF LAW REPORTING [REFERRED TO]
COOPER V. STUBBS [REFERRED TO]
ANGLO PERSIAN OIL CO.,LTD. V. DALE [REFERRED TO]
NEVIL AND CO. LTD. V. FEDERAL COMMISSIONER OF TAXATION [REFERRED TO]
ORR AND SONS V. COMMISSIONER OF INCOME-TAX,MADRAS [REFERRED TO]
OVERY V. ASHFORD DUNN AND CO. LTD. [REFERRED TO]
JAMES SNOOK AND CO.,LTD. V. BLASDALE [REFERRED TO]
EDWARDS V. BAIRSTOW [REFERRED TO]





JUDGEMENT

Ramaswami, C.J. - (1.)IN this case the assessee is a public limited company carrying on business in the raining of copper ore and manufacture of copper and brass in Ghatshila in the State of Bihar. For the assessment year 1953-54 the assessee claimed that a sum of 20,000 pounds equivalent to Rs. 2, 66, 677/-should be deducted as business expenses under the provisions of Section 10 (2) (XV) of the INdian INcome-tax Act. The sum of 20,000/ pounds was paid by the assessee to the London Directors as compensation for loss of office. The 'Company was registered in the United Kingdom and its affairs were looked after by a Board of Directors in that Company. IN course of time about 85 p.c. of the total shares passed to the hands of INdian nationals, and in accordance with the views of the majority of the shareholders the seat of management and control of the Company was transferred from the United Kingdom to INdia on 6-4-1952. This decision was taken by a special resolution at an Extraordinary General Meeting of the Company held on 26-3-1952. There was also an ordinary resolution passed at the same meeting of the Company to the effect that the present Directors should be paid as compensation for the loss of office the following amounts noted against their respective names: JUDGEMENT_544_ITR38_1960Html1.htm
IN pursuance of the resolution the amounts were paid to the respective Directors. It was claimed by the assessee that these amounts should be deducted for the purpose of income-tax under Section 10 (2) (XV) of the INdian INcome-tax Act. The INcome-tax Officer disallowed the claim on the ground that the expenditure was not laid out wholly and exclusively for the purpose of business. The matter was taken in appeal before the Appellate. Assistant Commissioner who affirmed the view of the INcome-tax Officer and dismissed the appeal. The assessee took the matter in appeal to the INcome-tax Appellate Tribunal but the appeal was dismissed on the ground that the expenditure was not laid out wholly and exclusively for the purpose of the business, and there was no contract bet when the Company and the Directors, for the payment of the amount.

(2.)UNDER Section 66(1) of the Indian Income-tax Act the Income-tax Appellate Tribunal has submitted the following question' of law for the opinion of the High Court:
"Whether on the facts and in the circumstances of the case, the sum of 20,000, equivalent to Rs. 2,66,677/ paid as compensation for loss of office to the London Directors was an admissible deduction under Section 10 (2) (XV) of the Indian In-come-tax Act."

It was submitted by the learned counsel on behalf of the assessee that the Appellate Tribunal was wrong in holding that there was no contract between the Directors and that Company with

Regard tp payment of remuneration. It was submitted that the Directors were entitled by the Articles of the Association to certain amount of fixed remuneration and as the Directors had a fixed term of office and as the term was cut short the Company was legally justified in making the payment to the outgoing Directors. In my opinion, the argument of learned counsel is well-founded and must foe accepted as correct. Articles 83, 84, and 85 of) tile Articles of Association of the Company are to the following effect:

83. The qualification of a Director shall be the holding of 2,000 shares in the Company. A Director may act before acquiring his qualification, but shall if he accepts office, be bound to become the registered holder of the same within two months after his appointment, failing which he shall vacate office.

84. At each ordinary meeting one-third of the Directors for the time being respectively, or if their number is not a multiple of three, then the number nearest to but not exceeding one-third shall retire from office, and the meeting at which any Director or Directors shall retire may fill up his or their places.

85. The Directors to retire shall be the Directors who have been longest in offices since the last election. As, between Directors of equal seniority, the Directors to retire shall (unless such Directors of equal seniority shall agree among themselves) he selected from among them by lot. A retiring Director shall be eligible for re-election." Article 94 states as follows;

" 94. The Directors shall be paid out of the funds of the Company as remuneration for their Services an amount at the rate of 250 per annum for each Director, with an additional sum at the rate of 150 per annum for the Chairman. The Directors shall also be entitled to receive by way of further remuneration in each year in which the net profits of the Company (including any sum of or sums carried to any reserve account) shall be more than sufficient to pay a dividend at the rate of 10 per cent on the average amount of the capital paid up on the issued shares of the Company during such year, an amount equal to 5 per cent of the profits remaining after calculating such dividend as aforesaid. The Directors shall also be en-titled to such further sums as the the Company may in General Meeting determine. The certificate of the Auditors of the Company as to the amount of such net profits shall be conclusive and binding on all members of the Company. The) further remuneration payable under this clause shall be divided amongst the Directors proportionate to the period of office held by them respectively during such year, and to the amounts hereinbefore mentioned as remuneration payable to the Directors and Chairman."

Article 95 is to the following effect:

95. The Directors shall be paid all then-travelling and other expenses, properly, and necessarily expended by them in and about the business of the Company, and if any Director shall be required to perform extra services or to go or to reside abroad or shall otherwise be specially occupied about the Company's business he shall be en- titled to receive a remuneration to be fixed by the Board, or at the option of such Director, by the Company in General Meeting, and such remuneration may be either in addition to or in substitution for his remuneration provided in the last preceding Article,"

It is manifest under these Articles that the Directors are entitled to certain fixed remuneration and that the Directors are also entitled to a fixed term of office; and as the term was cut short due to the transfer of the seat of control and management to India, the Company had legal justification to compensate the outgoing Directors for loss of office. It is a well established principle that the Article of Association of a Company form part of the contract between the shareholders inter set and if on the basis of these Articles the Directors were employed by the Company the terms of the Article; are embodied in and form part of the contract between the Company and its Directors.

In in re New British Iron Co., Ex parte Beck-with, (1898) 1 Ch. D 324 the Article of Association of a Company required its Directors to possess a share qualification and also provided that the remuneration of the board "shall be an annual sum of 1000 to be paid out of the funds of the Company". It was held by Wright J. that although the provisions in the Articles were only part of the contract between the shareholders inter se the provisions were, on the Directors being employee and accepting office on the footing of them, embodied in the contract between the Company and the Directors and that the remuneration was not due to the Director? in their character of members, but under the contract, so embodying the provisions, & that in the winding up of the Company the Directors were entitled to rank as ordinary creditors in respect of the remuneration due to them at the commencement of the winding up.

Reference should also be made to In re Dover Coalfield Extension, Ltd. (1907) 2 Ch. 76 where it was held that the remuneration paid by a Company under powers in its Article of Association to Directors was not profit derived from the use of his qualification shares, but payment for work done by him under his contract with the Company. I accept, therefore, the submission made by learned counsel on behalf of the assessee that there was a contract between the Company and its Directors and the compensation of 20,000 paid by the Company to the Directors for the loss of office was made under the terms of that contract. It was argued by the Standing Counsel of the Income-tax Department that under Article 98 the Company could have dismissed the Directors by an Extraordinary Resolution even before the expiry of the period of office. Article 98 states that "the Company may by Extraordinary Resolution remove any one or more of the Directors, before expiration of his or their period of office, and may by an ordinary Resolution appoint any other qualified person or persons in his or their stead."

But we cannot proceed on the assumption that the Company may have removed the Directors by an Extraordinary Resolution, though the Company has not done so. In the present case the Directors have not been dismissed by the Company by an Extraordinary Resolution and the question of tax liability cannot be decided upon any such assumption. As I have already stated, the payment of compensation to the outgoing Directors for the loss of office is legally justified under the terms of the contract between the Company and its outgoing Directors, and the Company is entitled to claim a deduction under Section 10 (2) (XV) of the Indian Income-tax Act.

An alternative argument was put forward by learned counsel on behalf of the assessee that even if there was no contract between the Company and its outgoing Directors, the payment of compensation was dictated by commercial expediency. It was pointed out by learned counsel that the amount was voted by the general body of shareholders at an Extraordinary Mooting. There was a special resolution voted by the shareholders at the Extraordinary Meeting namely, the decision for the transfer of the scat of control and management of the Company from United Kingdom to India. At the same meeting there was an ordinary resolution that the London Directors should be paid by way of compensation for loss of office a sum of 20,000. It was submitted on behalf of the assessee that the Company was benefited in four different ways by the transfer of the seat of control and management from United Kingdom to India.

It was pointed out that the expense of remuneration of Directors was halved because of the transfer of the seat of control and management to India. It was also pointed out that the travelling expenses of the Managing Directors attending meeting in India would be saved by putting an end to the term of the office of the London Directors. It was said by learned Counsel for the assessee that a sum of 48,000, represented the aeroplane fare of the London Directors for attending meetings for each year and by retirement of the London Directors this amount was saved to the Company. It was also submitted that the Company's business has prospered very much after the transfer of the seat of control to India. This fact was admitted in the order of the Tribunal in paragraph 5 at p. 47 of the paper book. It is also manifest that there is better supervision and control of business after the transfer of the seat of management to India.

It was also pointed out by learned counsel for the assessee that the London Directors had been in office for a long term of years and because of their experience and technical qualifications it was likely that they would be re-elected in future for an uncertain number of years. By asking the London Directors to retire and paying them compensation the Company was putting an end to an expensive method of carrying on business. It was an advantage from the commercial point of view for the Company to ask its London Directors to retire and the compensation paid to the London Directors was, therefore, a payment made wholly and exclusively in the interest of business. In my opinion, the argument put forward on behalf of the assessee Is correct. Even assuming that there was no contract, I am of opinion, that the payment of compensation made to the London Directors in the circumstances of this case was payment made for commercial expediency and would fall within the ambit of Section 10 (2) (XV) of the Indian Income-tax Act.

This view is borne out by a decision in Anglo Persian Oil Co., Ltd. v. Dale (1932) 16 Tax Cas 253. In that case the appellant company had entered into an agreement in 1910 and 1914 by which! it appointed another limited company as its managing agents to manage its business in Persia and in the East, for a period of years, upon the condition! that the agents should be remunerated by commission at specified rates. With the passage of time the amounts payable to the agents by way of remuneration increased far beyond the amounts originally contemplated by the company, and after negotiation between the parties the agreements were cancelled in 1922, and the agent company agreed to go into voluntary liquidation and the company agreed to pay to the agents 300,000 in cash.

This sum was in fact paid and the appellant company contended before the Special Commissioners of Income-tax that it was an admissible deduction in computing the company's profits for purposes of Income-tax and Corporation Profits-tax. The Special Commissioners rejected this contention, but it was held by the Court of Appeal that the payment to the agents was an admissible deduction for purposes of Income-tax and Corporation Profits-tax. At p. 269 of the report Lawrence, L. J. observed as follows:

"It is not open to doubt that under ordinary circumstances' where a trader, in order to effect a saving in his working expenses, dispenses with the services of a particular agent or servant, and makes a payment for the cancellation of the agency or service agreement, such a payment is properly chargeable to revenue; it does not involve any addition to or withdrawal from fixed capital; it is purely a working expense. The fact that the payment includes a sum in consideration of the agent or servant agreeing not to compete with his principal or employer after the determination of his employment (a stipulation frequently met with in these cases) does not alter the character of the payment.

In the present case, the sum paid to the agent for cancellation of his agreement, and the winding up of his concern was very large; but it has to be remembered that the annual profits of the company were enormous. Thus, in the year in which the payment was made, the profits amounted to just under 3,000,000, and the 300,000 in question was charged to revenue at the rate of 60,000 a year for five years. Moreover, according to the evidence a considerable economy and saving in working expenses resulted to the company from the cancellation of the agency agreement, and therefore it is not unreasonable to suppose that the increased revenue of the Company will more than cover the expenditure in question. But whether that be so or not does not affect the principle that such a payment is an income expenditure. Even if the Company had been mistaken in its policy, and by getting rid of its agent had increased the working expenses instead of diminishing them, the payment would still have been a mere working expense, and as such chargeable to revenue."

The principle to be applied to a case of this description has been stated by Viscount Cave in Atherton. v. British Insulated and Helsby Cables Ltd., 1926 10 Tax Cas 155 at p. 191 as follows :

"My Lords, I think it clear that the deduction from the profits of the above-mentioned sum of 31,784 is not prohibited by the First Rule applicable to cases I and II, which prohibits the deduction of a disbursement not being money wholly and exclusively laid out or expended for the purposes of the trade. It was made clear in the above cited cases of Usher's Wiltshire Brewery Ltd. v. Bruce, 1915 6 Tax Cas 393 at pp 429 and 436 and Smith v. Incorporated Council of Law Reporting, 1914 6 Tax Cas 477 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; and it appears to me that the findings of the Commissioners in the present case bring the payment in question within that description." For the reasons expressed by me I hold that in the circumstances of this case the payment made by the Company to the London Directors was made to put an end to an expensive method of carrying on business and so it was a payment made for commercial expediency and can be properly deducted under the provisions of Section 10 (2) (xv) of the Indian Income-tax Act.

It was however, submitted by the teamed Standing Counsel that if the payment was to be deducted under Section 10(2) (xv) of the Indian Income-tax Act, it must be made for the purpose of earning the profits and there must be a direct nexus between the payment of the amount and the earning of the profits.

It is, however, necessary to notice that in Section 10(2) (xv) of the Indian Income-tax Act the expression used is "any expenditure laid out or expended wholly and exclusively for the purpose of such business". This expression was introduced by the Amendment Act of 1939, and before the amendment the expression used was "incurred solely for the purpose of earning such profits". The formula now used in Section 10(2) (xv) is wider than the formula used before the 1939 amendment. In my opinion it is not necessary that there should be any direct correlation in point of time between the expenditure and the earning of any profits, I have already stated that a sum of money may be spent not because of necessity or with a view to direct and immediate benefit to business, but if the expenditure is made on the ground of commercial expediency and indirectly to facilitate the carrying on of die business; it may still be expenditure made wholly and exclusively for the purpose of the business and so fall within the ambit of Section 10 (2) (xv) of the Indian Income-tax Act. This view is borne out by the decision of the Australian High Court in Nevil and Co. Ltd. v. Federal Commissioner of Taxation, (1937) 56 Com-W LR 290 where Latham, C.J. observed at page 301 as follows :

"No expenditure strictly and narrowly considered, in itself actually gains or produces income; It is an outgoing, not an incoming. Its character can be determined only in relation to the object which the person making the expenditure has in view. If the actual object is the conduct of the business on a profitable basis with that due regard to economy which is essential in any well conducted business, then the expenditure (if not a capital expenditure) is an expenditure incurred in gaining or producting the assessable income. If it is not a capital expenditure it should be deducted in ascertaining the taxable income of the taxpayer." The same view has been expressed by the Madras High Court in Orr and Sons v. Commissioner of Income-tax, Madras, 1959-35 ItR 556 : (AIR 1959 Mad 372).

Xx Xx XxXx

(3.)ON behalf of the Income-tax Department reliance was placed upon two decisions, Overy v. Ashford Dunn and Co. Ltd., 1933 17 Tax Cas 497" and James Snook and Co., Ltd. v. Blasdale, 1952 83 Tax Cas 244. These cases are, however, distinguishable and the principle laid down in these cases does not govern the present case. In (1933) 17 Tax Cas 497 the respondent Company, whose three Directors were also sole shareholders, was engaged in a trade in which the control of the raw materials and of markets had passed into the hands of another Company. By an agreement dated 19-12-1929, the latter Company agreed to purchase from the shareholder of the respondent Company all their shares and, in accordance with 'the provisions in the Articles of Association of the respondent Company the vendors, on completion of the sale, vacated their officer as Directors.
The agreement provided that the vendors were not within ten years to engage in a competing business, that they were to be entitled to all book debts and were to discharge all liabilities of the respondent Company up to 30-11-1929, and, in particular, were to keep indemnified both the respondent Company and the purchasers against all claims by the Directors, officers or servants of the Company for loss of fees or profits arising out of the agreement. At an extraordinary meeting of the respondent Company held immediately before the completion of the sale of the shares a resolution was passed providing for the payment to the retiring Directors of a specified sum as compensation for loss of office.

It was contended for the respondent Company that the payment made in compensation for loss of office was a proper deduction in computing its profits for income-tax purposes, on the ground that it was a sum expended with a view to a direct and immediate benefit to the Company's trade. It was held by the Court of Appeal that the deduction, could not be allowed as the payment was a distribution of the Company's profits. It was observed by Finlay, J. that instead of receiving the money as compensation for loss of office the Directors could have well resolved and determined that the amount should be allowed as dividend. It could, therefore, make no difference if the same result was reached by declaring the sum as being compensation for loss of office.

The substance of the thing remained exactly the same, namely, that it was a payment made out of profits and was not a deduction to be made before the profits were arrived at. The material facts of this case are wholly different and the ratio of (1933) 17 Tax Cas 497 cannot apply to the present case. In (1952) 33 Tax Cas 244 there was an agreement for the sale of shares of the appellant company in which there was a clause that the purchaser would procure the appellant Company to pay compensation for loss of office to the Directors and the Auditor of the Company who, under the agreement, were to resign. It was held by the Court of Appeal that the compensation for loss of office was part of the bargain between the incoming shareholders and outgoing shareholders and that there was no payment made in the trading interest of the Company. It was, therefore, held that the compensation paid was not an allowable deduction in computing the Company's profits. In the present case the material facts are manifestly different and the principle laid down in (1952) 33 Tax Cas 244 has no application.

The argument was stressed by the learned Standing Counsel for the Income-tax Department that the question at issue in this case is a question of fact and the High Court has no jurisdiction to interfere with the finding of the Income-tax Appellate Tribunal on this question. It was contended by learned Counsel that the question whether the payment was an admissible deduction under Section 10 (2) (xv) of the Indian Income-tax Act is purely a question of fact and the finding of the Income-tax Appellate Tribunal on this point ought not to be disturbed. I do not accept this argument as correct. The question at issue in this case is a mixed question of law and fact.

The question is whether upon the facts found by the Appellate Tribunal the case comes within the ambit of Section 10(2) (xv) of the Indian Income-tax Act. In a case of this description the High Court has jurisdiction to interfere if it appears that the Tribunal has misunderstood the statutory language of Section 10 (2) (xv), because a proper construction of the statutory language is a matter of law. The High Court has also the jurisdiction to interfere if the Tribunal has come to a finding of fact for which there is no evidence, or the finding, of fact is inconsistent with the evidence or if it is contrary to it.

In Edwards v. Bairstow; (1955) 3 W. L. R. 410 it was held by the General Commissioners, in the circumstances of that case, that there was not an adventure in the nature of trade to justify an assessment to income-tax under Case I of Schedule D to the Income Tax Act, 1918. The finding of the General Commissioners was 'reversed by the House of Lords, who took the view that the facts found led inevitably to the conclusion that the transaction was an adventure in the nature of trade and that the Commissioners' inference to the contrary should be set aside. It was observed by Lord Radcliffe in the course of his judgment that without any misconception of law appearing on the face of the case stated, the facts found may be such that no person acting judicially and properly instructed as to the relevant law could have come to the determination reached; the Court may then intervene, having no option but to assume that some misconception of law is responsible for the decision. At page 425 of the report Lord Radcliffe has observed as follows:

"I think it possible that the English courts have been led to be rather over-ready to treat these questions as 'pure questions of fact by some observations of Warrington and Atkin L. JJ. in Cooper v. Stubbs, 1925 2 KB 753, If so, I would say, with very great respect, that I think it a pity that such a tendency should persist. As I see it the reason why the Courts do not interfere with Commissioners' findings or determinations when they really do involve nothing but questions of fact is not any supposed advantage in the Commissioners of greater experience in matters of business or any other matters. The reason is simply that by the system that has been set up the Commissioners are the first Tribunal to try an appeal, and in the interests of the efficient administration of justice their decisions can only be upset on appeal if they have been positively wrong in law. The Court is not a second opinion, where there is reasonable ground for the first. But there is no reason to make a mystery about the subjects that Commissioners deal with or to invite the Courts to impose any exceptional restraints upon themselves because they are dealing with cases that arise out of facts found by Commissioners. Their duty is no more than to examine those facts with a decent respect for the Tribunal appealed from and if they think that the only reasonable conclusion on the facts found is inconsistent with the determination come to, to say so without more ado."

It was also observed by learned counsel in the course of his arguments that the Appellate Tribunal has misdirected itself in several matters before reaching its conclusion. In the first place, the Appellate Tribunal was wrong in holding that there was no contract between the Directors and the Company with regard to the terms of office and the payment of remuneration. It was also pointed out that the Appellate Tribunal was wrong in saying that the business stopped in the United Kingdom and payments to the outgoing Directors were made in view of cessation of business and so the payments could not be allowed as trading expenses. It was also pointed out by learned counsel that the Appellate Tribunal was wrong in holding that the transfer of seat of control of the Company from the United Kingdom to India has benefited only the shareholders and there was no benefit to the Company. I think that the submission of the learned counsel is right and, in my opinion, all the circumstances appearing in the case lead to one conclusion, viz., that the payment of compensation to the outgoing London Directors was a payment made for commercial expediency and that the finding of the Appellate Tribunal to the contrary is inconsistent with the evidence and contradictory to the evidence and so it must be held that the Appellate Tribunal has misdirected itself in law in reaching that conclusion. In my opinion the present case is governed by the principle laid down by the House of Lords in (1955) 3 WLR 410 to which I have already referred.

For the reasons I have expressed I hold that the payment of 20,000, equivalent to Rs. 2,66,677/, paid as compensation for loss of office to the London Directors is an admissible deduction under Section 10 (2) (XV) of the Indian Income-tax Act. I would, therefore, answer the question of law referred by the Appellate Tribunal in favour of the assessee and against the Income-tax Department. The assessee is entitled to the costs of this reference. Hearing fee Rs. 250/.

Kanhaiya Singh, J.



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