COMMISSIONER OF INCOME TAX WEST BENGAL Vs. CALCUTTA AGENCY LIMITED

JUDGEMENT

(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:

(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 :

(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,