Judgment

HEGDE, J. :- The Commissioner of Income-tax, Madras is appealing against the decision of the Madras High Court in a Reference under Section 66 (2) of the Indian Income-tax Act, 1922 (to be hereinafter referred to as the Act) after obtaining certificate of fitness from the High Court.

2. The question before the authorities under the Act was whether the payment of Rs. 2,50,000/- made by the respondent-assessee which will hereinafter be referred to as the "company" for the termination of managing agency is an allowable deduction in computing the total income of the company for 1956-57. The Income-tax Officer as well as the Appellate Assistant Commissioner rejected the claim of the Company that it was a Revenue expenditure but the Tribunal in appeal upheld the contention of the Company. Aggrieved by the decision of the Tribunal, the Commissioner demanded a case to be stated for obtaining the opinion of the High Court on the question:

"Whether on the facts and in the circumstances of the case the payment of Rs. 2,50,000/- made for the termination of Managing Agency is an allowable deduction in computing the total income of the assessee company for 1956-57."

3. The Tribunal refused to state the case taking the view that its findings are findings of fact. Thereafter the Commissioner moved the High Court under S. 66 (2) and at the instance of the High Court, the Tribunal stated the case and submitted the aforementioned question of law to the High Court. But the High Court answered that question in the affirmative and in favour of the Company.

4. Let us now have a look at the facts. The assessee was a Public Limited Co., originally known as Ashoka Motors Ltd. It was incorporated on September 7, 1948. The Articles of Association of the Company authorised it to carry on various businesses, such as manufacturers, assemblers, dealers, hirers, repairers of motor cars, motor-cycles, motor buses, lorries, trucks etc. In particular it authorised the Company "to import into India Austin Cars and other Austin products, to assemble Austin products from their components, to undertake the progressive manufacture in India, of such parts of Austin products as can under suitable provisions for such manufacture be manufactured thereto, supply Austin products and parts to accredited distributorship for resale to the public in India and to provide adequate facilities for the prompt servicing of Austin products in India."

5. The Company appointed Car Builders Limited, as their managing agents under an agreement dated October 18, 1948 for a term of 14 years from the date of its registration. The managing agents were to be paid at the rate of Rs. 2,000/- per mensem as office allowance and 10 per cent of the annual profits with a minimum of Rs. 18,000 per annum in case of inadequacy or absence of profits.

6. Initially the business of the Company consisted in the assembly and sale of Austin cars and Leyland Trucks. During the year 1952, the Government of India referred the question of establishing an Automobile Industry in India to the Tariff Commission. The Company prepared and submitted a comprehensive memorandum to the Tariff Commission for the manufacture of Leyland Trucks. It also participated in the proceedings of the Tariff Commission. The Government instructed the Company to take take up the manufacture of Leyland Commercial Vehicles. From April 1954, the Company ceased to assemble Austin Cars in view of the Government decision and engaged itself in the manufacture of Leyland Commercial Vehicles. The progress of the scheme was reviewed by all the Directors on January 24, 1955 when the Union Minister for Commerce and Industry was also present. In the course of the discussion, the Union Minister suggested to the Company to invite Leylands to provide capital as and when required till their holding bore to the existing paid up capital in the ratio of 40/45 to 50/55 per cent subject to a maximum of half a million pounds. The Company was asked to raise th