Authored By : L.W.J. Costello, John Lort Williams

L.W.J. Costello, J.

1. This matter comes before us by way of a case stated bythe Commissioner of Income Tax on his own motion under sec. 66 (1) of theIncome Tax Act (XI of 1922). The Commissioner has referred for the judgment ofthe Court a question of law arising in the course of proceedings under sec. 33of the Act in regard to the 1931-32 assessment of Imperial Chemical Industries(India), Ltd. The Commissioner of Income Tax has put the matter in this form:"Whether payments amounting to Rs. 10,000 described by the assessees ascompensation to ex-agents, but found in fact to be: (a) in part ex gratia giftmade in recognition of past services, (b) in part payments with a view tosecure willing cooperation in the course of taking over the agency business;and (c) in part payment as consideration for an undertaking not to compete withthe assessees business after the termination of the agency are or are notexpenditure allowable in charge under sec. 10 (2) (ix) of the Act." Sec.10 (2) deals with the manner in which profits or gains are to be computed forthe purpose of assessment of income-tax, and it contains an enumeration of theallowances which the assessees shall be entitled to make or, to put it moreaccurately perhaps, the deductions which the assessees are entitled to makebefore a net sum is arrived at upon which income-tax becomes payable, and insub-paragraph (ix) we find as a permissible allowance or deduction "anyexpenditure, not being in the nature of capital expenditure, incurred solelyfor the purpose of earning such profits or gains." The Court is,therefore, asked by the Commissioner of Income Tax to decide in effect whetherthe payment of Rs. 10,000 was one which could be taken into account by way ofdeduction for the purpose of arriving at the net sum upon which income-taxwould be payable in respect of the tax year 1931-32.

2. This matter originally came before the Court on the 12thFebruary, 1934. Some question was then raised by Learned Counsel on behalf ofthe assessees as to whether or not he might be able to avail himself of theprovisions contained in sub-paragraph (viii-a) of sec. 10 (2).Thatsub-paragraph makes allowable a deduction for any sum paid to an employee asbonus or commission for services rendered, where such sum would not have beenpayable to him as profits or dividend, if it had not been paid as bonus orcommission: provided that the amount of the bonus or commission is of areasonable amount with reference to: (a) the pay of the employee and theconditions of his service, (b) the profits of the business for the year inquestion, and (c) the general practice in similar businesses. Mr. Isaacs,appearing on behalf of the assessee on the 12th February, 1934, invited theCourt to refer the matter back to the Commissioner of Income Tax in order thathe might determine the findings of fact necessary for the purpose of enablingthe Court to form an opinion as to the applicability of sub-paragraph (viii-a),and on this occasion we have had before us the supplementary statement of thecase, as it is described, made under sec. 66 (4) of the Act. In that statementthe Commissioner of Income Tax has expressed certain opinions and indeedarrived at certain conclusions of fact, upon the question whether the sum ofRs. 10,000 would be an admissible deduction under sub-paragraph (viii-a). TheCommissioner of Income Tax points out in his supplementary statement of thecase that that sub-paragraph or as he calls it sub-section, only came intooperation on the 4th April, 1930, and consequently, as it follows, that onlyexpenditure of the kind contemplated by the sub-paragraph which has beenincurred since the 4th April, 1930, would fall within the operation of thissubparagraph. Any expenditure incurred before that date had not, at the timewhen made, a deductible character and no subsequent change in law could give itsuch a character.

3. We do not think it necessary for the purpose of disposingof this matter to express any opinion as to whether that view of theCommissioner of Income Tax was correct or not, nor indeed to express anyopinion at all as to whether or not the sum with which we are here concernedcould properly be treated as an admissible deduction under the provisions ofsub-sec. (viii-a), because in our opinion the matter can be decided as originallyasked by the Commissioner of Income Tax, solely with reference to theprovisions of sub-sec. (ix) of sec. 10 (2) of the Act.

4. In order to make it quite clear what the point is whichhas been submitted for determination by the Court, it is necessary that Ishould recite the relevant facts which show the circumstances in which, and theconditions under which, the payment in question came to be made by theassessees. The Commissioner points out that the payments in issue relate to twoagencies of the assessees, that is of the Imperial Chemical Industries (India),Ltd., one at Madras and the other at Colombo. It appears that the assesseessucceeded a company known as Messrs. Brunner Mond and Company (India), Ltd., inthe tax-year 1928-29. I presume the Commissioner of Income Tax means that thebusiness of Messrs. Brunner Mond & Co. was taken over by or absorbed intothe undertaking known as Imperial Chemical Industries (India), Ltd. Messrs.Brunner Mond & Co., on 9th February, 1933, had entered into what isdescribed as a del credere commission agency with a firm known as Parry andCompany, Madras. That agreement contained inter alia the following clause:"Either party may, by notice to the other, terminate this agreement, andsix months after the receipt of such notice this agreement and the agencyhereby constituted shall cease except so far as concerns the rights of eitherparty in connection with acts, matters or things done or matters to be donebefore such termination." That was cl. 14 of the agreement, and cl. 15 wasas follows: "After the determination of this agreement the agents shallhave no claim against the principal for any commission in respect of anysubsequent sales made by the principal within the agents districts tocustomers originally introduced to them by the agents."

5. The Commissioner of Income Tax puts the history of thematter in this way: "The business of which the assessee is one subsidiarywas re-organised in 1927, on the constitution of the parent company--ImperialChemical Industries, Ltd. (United Kingdom). It was then decided that theconcern would conduct its own business throughout India. Messrs. Parry andCompany were given a preliminary intimation of this policy in a letter of 4thFebruary, 1927 (copied as Annexure A). This letter states inter alia that theagreed notice would be given in due course: that the agents had consented tothe assessee setting up his organisation during the currency of the notice(though the agents would draw full commission throughout); that possibly theagents would be given the agency at certain outports for some further period;and "As compensation to a certain extent for the loss of our agency weshould be willing to pay you the sum of Rs. 500 per month for 5 years to bereckoned from the date of the expiry of the notice terminating the agency, or alump sum of Rs. 30,000 if you preferred it: provided that you would agree notto enter into competition with us in the products you are now handling on ourbehalf during the five years referred to. This would not preclude you fromcontinuing to sell Paint; for which we understand you hold other agencies thanours . . . ."

6. The letter concludes with the assessees proposal thathis own employees would meantime, be assisted towards getting a thoroughinsight into the working of the business prior to taking over, and thanked theagents for "the very kind reception you have given to our proposals andfor the assistance you are prepared to render to facilitate the opening of ourown offices."

7. On 8th February, 1927, the agents replied accepting theproposals (in the letter copied as Annexure B), including their appreciation of"the friendly and generous attitude which has guided thesenegotiations."

8. By a letter of 14th June, 1927 (copied as Annexure C),the assessee gave due formal notice of termination of the agreement with effectfrom 31st December, 1927.

9. By agreement with the assessee the agents debited intheir running account of 28th December, 1927, the lump sum of Rs. 30,000; butthe assessee distributed the charge in his revenue accounts, passing Rs. 4,500through the books on 30th September, 1928, and Rs. 6,000 annually since then;so that Rs. 6,000 falls in the accounts for the year ending 30th September,1930, under the present assessment; that is of course the assessment for thetax-year 1931-32. Then the Commissioner of Income Tax says: "It may benoted for information that the commission (gross) payable to Messrs. Parry andCompany had been approximately

Rs.

1925

.......

26,300

1926

.......

31,650

1927

.......

34,750

10. Then the Commissioner deals with the position as betweenImperial Chemical Industries (India), Ltd. and their Ceylon agents. He says:"There was a similar agreement with Messrs. Hayley and Kenny of Colombo,dated 16th February, 1923; and it included the clauses quoted above. Thepreliminary notice to them was given by a letter of 12th March, 1929 (copied asAnnexure D) which stated; inter alia that "as compensation for the loss ofthis Agency and an indication of our appreciation we should pay you a lump sumof Rs. 20,000 on the understanding that you would not handle our products fromcompetitive sources without previously obtaining our permission, which wouldnot be unreasonably withheld; also that you would render us every possibleassistance in establishing our own office in Colombo; and it was agreed thatyou would permit one of our European Assistants to work in your office for suchperiod as we desire, probably 6 months, in order to become thoroughlyacquainted with the buyers of our products and with depots that have beenopened."

11. The agent replied by letter, dated 21st March, 1929(copied as Annexure E) accepting the proposals and noting inter alia: "Wetake this opportunity of thanking you for offering us the sum of Rs. 20,000 incompensation for the loss of the Agency .... We agree not to handle yourproducts from competitive sources without your permission, which, we note withthanks, would not unreasonably be withheld."

12. By a letter of 15th June, 1929, the assessee gave dueformal notice of termination of the agency with effect from 31st December,1929, as upon the terms laid down in the above correspondence. Then theCommissioner says: "There was a subsequent letter of 3rd December, 1929,in which the agents, being informed that the assessees manager would arrive on5th January, 1930, stated that they would have pleasure in giving him allassistance to take up the threads of their business in Ceylon."

13. The sum of Rs. 20,000 appears to have been debited bythe agents in their accounts with the assessee on some date prior to 1stJanuary, 1930. The assessee passed Rs. 4,000 through his books annually on thisaccount, beginning with 30th September, 1930, under the present assessment. Itmay be noted for information that the agents receipts of commission (gross)were approximately--

Rs.

1928

.......

9,300

1929

.......

9,600

1930

.......

4,070;

the latter sum being allowed for 4 months of the year afterthe formal expiration of the agency.

14. Then comes the material statement in the case withregard to the total sum of Rs. 10,000. In paragraph 5 the Commissioner says:"The amount thus charged in this period in respect of the two agenciestotalled Rs. 10,000."

15. It appears that the Agents held and kept stocks of theassessees goods: and in the course of the change over of the business,transferred the stocks to the assessee as convenient. Then in paragraph 5 (b)the Commissioner says: "The assessees case throughout the assessment andin his application to the Commissioner for revision was as follows (quoted fromhis letter of 5th October, 1931) :--

We still contend that this compensation is from our point ofview an allowable business expense. The payment of the compensation depended onan agreement that the ex-agent would not compete with our products and thisagreement, we argue, changed the payment from an ex gratia one to a definitebusiness one.

16. Then he says: "No other ground was raised withinthe time permissible to the assessee; but it appears that eventually mypredecessor decided to leave the case to await the decision of the High Courtin the Anglo-Persian case 37 C. W. N. 430 (1933) mentioned above." TheCommissioner here refers to his statement in paragraph 2 of the case where hesays:--

Your Lordships decided in the matter of the Anglo-PersianOil Company (India), Ltd. 37 C. W. N. 430 (1933) on the 8th February, 1933,that a certain payment as compensation for loss of agency whereby that Companyrelieved itself of future annual payments of commission chargeable to revenueaccount, was an allowable charge.

In referring that case the Commissioner accepted theCompanys description of the payment without criticism or detailed examination.The decision is represented by the present assessee to cover the facts of hiscase. I am satisfied that it does not; but the issue is of general importanceand frequent recurrence, and it is very desirable that it should be fullydetermined with the authority of your Lordships judgment.

17. Now, it is to be observed, therefore, at the outset thatthe Imperial Chemical Industries (India), Ltd., as the assessees, werecontending that the payment of the sum of Rs. 10,000 ought to be taken as anallowable business expenditure, because the payment depended on an agreementand was not in the nature of ex gratia payment to their former agents. Thelearned Commissioner of Income Tax has thought fit to split up the sum of Rs.10,000 into three parts, and to allocate each of those parts to certainobjects. As I have already pointed out, he says that it has been found in factthat the sum of Rs. 10,000 was (a) in part, an ex gratia gift made inrecognition of past services, (6) in part, payment with a view to securewilling co-operation in the course of taking over the (agency business, and (c)in part, payment as consideration for an undertaking not to compete with theassessees business after the termination of the agency. The learnedCommissioner has apparently based that view upon the interpretation Which hehimself has placed upon the letters which passed between the assessees orrather Messrs. Brunner Mond & Co., their predecessors and Messrs. Parry& Co. of Madras, and the correspondence between Messrs. Brunner Mond &Co. and Messrs. Hayley and Kenny of Colombo.

18. As regards what I will call the Madras agencycorrespondence, we find in the letter of 4th February, 1927, which is Annexure"A," the result of the negotiations between the company and theirMadras agent, summarized as follows :--

(1) You will allow any members of our European staff, whomwe may detail for the purpose, to work on our business in your office duringthe continuance of the agency.

(2) As the time approaches when we consider that our staffwill shortly be in a position to run the business independently, we shall giveyou the six months notice required under your Agency agreement.

(3) You will not oppose the opening of our office or officesin Madras or elsewhere during the period of the notice. This will, of course,not affect your position as regards) commission, which will be payable untilthe notice expires.

19. Paragraphs (4) and (5) are not very material, but inparagraph (6) it is stated:--

We informed Mr. Wood that as compensation to a certainextent for the loss of our agency, we should be willing to pay you the sum ofRs. 500 per month for five years to be reckoned from the date of the expirationof the notice terminating the agency or a lump sum of Rs. 30,000, if youpreferred it, provided that you would agree not to enter into competition withus in the products you are now handling on our behalf during the five yearsreferred to.

20. The last paragraph contained the following words quotedby the Commissioner in his summary of events:--

We wish you to accept our sincere thanks for the very kindreception you have given to our proposals, and the assistance you are preparedto render to facilitate the opening of our own offices.

21. In answer to that letter, Messrs. Parry & Co. wroteon the 8th February, 1927, as follows:--

We accept your proposals and terms as recorded in yourletter under reply, and give you our assurance that you will receive from usall the co-operation and help which it is possible for us to give to yourrepresentatives before the transfer is made, and to your Company thereafter.

22. In the Colombo Agency correspondence Messrs. BrunnerMond & Co., in their letter of the 12th March, 1929, recording the resultof the verbal negotiations which had taken place, say as follows :--

We confirm the conversation which took place between Messrs.Hayley and Simpson and Mr. Nicholson and the undersigned on the 7th instantwhen we advised that owing to the necessity for the development of ourinterests all through the near and the far East, it was essential that weshould open our own office in Ceylon in the near future. It was placed onrecord that this in no way reflected on your handling our agency in the past aswe were extremely satisfied with the attention you had given to our interestsand the willingness you showed at all times to co-operate with us in developingthe sales of the products entrusted to your charge, It was agreed that ascompensation for the loss of this Agency and an indication of our appreciationwe should pay you a sum of Rs. 20,000- on the understanding that you would nothandle our products from competetive sources without previously obtaining ourpermission which would not be unreasonably withheld, also that you would renderus every possible assistance in establishing our own office in Colombo and itwas agreed that you would permit one of our European Assistants to work in youroffice for such period as we desire, probably 6 months, in order to becomethoroughly acquainted with the buyers of our products and with depots that havebeen opened. It was also agreed at your special request that the amount fixedas compensation should be paid to you when our European Assistant was attachedto your office.

23. Those proposals were accepted by the Colombo Agents intheir letter of the 21st March, 1929. It will be seen from that correspondencethat the real position was that Messrs. Brunner Mond & Co., as predecessorsof Imperial Chemical Industries (India), Ltd., were making an arrangementwhereby instead of conducting their business and: providing for the sale oftheir products through agency firms in Madras and Colombo, they would in futureconduct their business through their own offices and their own staff in thosetwo centres respectively. In brief, the position was that although Messrs.Brunner Mond & Co. were entitled to, put an end to the agency agreementupon a bare six months notice and nothing more, they, by the arrangement theyhad made, secured for themselves certain advantages which otherwise might nothave endured to them, if they had merely exercised their strict legal rightsand terminated the agencies and had done nothing more; The advantages whichwere obtained may be summarised thus: They were to be entitled to take stepsfor establishing their own organization during the currency of the notice whichwas putting an end to the functioning of their previous agencies: they were tobe entitled to have their European assistants installed in the offices of theirold agents in order that those assistants might familiarize themselves withbusiness conditions in the areas in which they were going to work. Lastly, andthis perhaps is even of greater importance than the other advantages, there wasto be no competition at all as regards the Madras area for a period of fiveyears and as regards the Ceylon area only to a very limited degree, that is tosay, so far as they chose to give express permission to sell products similarto their products. It seems to me that these were highly valuable advantageswhich the assessees were obtaining for themselves by means of the paymentswhich were made and to be made, totalling altogether the two sums of Rs. 30,000and Rs. 20,000.

24. Now, as I have pointed out, the Commissioner has thoughtfit to split up the total consideration money, if I may so describe it, intothree parts, and he has made a tripartite division of his own accord, and hehas, so far as one can see, without any justification whatever decided that theactual sum of Rs. 10,000 with which we are immediately concerned, ought to betaken to be referable to the three objects which he has set out at thebeginning of the case he has stated. He has even gone beyond that in fact,because at the end of the case he has said: "I would allocate 60 per centof the payments to ex gratia rewards, 10 per cent, to restrain futurecompetition, and 30 per cent, towards facilitating the transfer." It isnot easy to say, or indeed to imagine, on what possible hypothesis or upon whatbasis the Commissioner of Income Tax has arrived at those percentages. Quiteclearly on the evidence, that is to say, on the evidence furnished by thecorrespondence which the Commissioner himself had set out as annexures to thecase, it is quite impossible to discover anything which would warrant thesplitting up of this sum into definite aliquot parts as the Commissioner haddone, or even to warrant its being split up and designated as being referableto the three matters which the Commissioner described as payments as ex gratiarewards, for restraint of future competition and towards facilitating thetransfer. In our opinion, there was Absolutely no evidence at all upon whichthe Commissioner of Income Tax could have come to that conclusion. But what isfar more important for the purpose of the determination of the case now beforeus, is that there was nothing in the pure facts of the case as set out by theCommissioner in the paragraph headed "Facts," which justified him intaking the view that any part whatever of the Rs. 10,000 was payment in thenature of an ex gratia gift made in recognition of past services. On thecontrary, the assessees, or rather their predecessors say quite definitely andcategorically in paragraph (6) of their letter of the 4th February, 1927, thatthe sum which they were willing to pay was as compensation to a certain extentfor the loss of the agency, that is to say, they were prepared to pay the sumof Rs. 30,000 to make up to a certain degree the remuneration which Messrs.Parry & Co. would otherwise have earned as agents of Messrs. Brunner Mond& Co. But it is to be noted that they expressly said that that paymentwould only be made, provided there was an undertaking on the part of theex-agents not to enter into competition with them for a period of five years.

25. It is true that when dealing with the Colombo Agency,Messrs. Brunner Mond & Co. did say in their letter of the 12th March, 1929,in effect, that the payment of Rs. 20,000 was as compensation for the loss ofthis agency, and as an indication of their appreciation. But there again thepayment was to be made on the understanding that the ex-agents would not handletheir (the Companys) products without obtaining their previous permission. So,I think, it can equally well be said in respect of the Colombo Agency that thepayment which Messrs. Brunner Mond & Co. were prepared to make was for thedirect purpose of securing certain definite advantages to themselves, and, if Imay so put it, to smooth the way as regards their future business operations inthe territories theretofore worked by Messrs. Parry & Co. of Madras andMessrs. Hayley and Kenny of Colombo respectively.

26. The learned Advocate-General has argued very forciblythat it is not competent for us to travel outside the very circumscribedposition demarcated for us by the Commissioner of Income Tax by the form of thequestion of law which he has submitted to the Court. As I have already pointedout, the main and indeed the fundamental question upon which the opinion of theCourt is sought, is contained in the question whether payments amounting to Rs.10,000 are or are not expenditure liable in charge under sec. 10 (2) (ix) ofthe Act. If the learned Commissioner had stated the question simply in thatform, no objection could have been taken by the learned Advocate-General onbehalf of the Income Tax authorities, to our answering it, even with a plain"yes" or "no." But the position is complicated by the factthat the Commissioner of Income Tax has purported to make certain findings offact with regard to the character or, perhaps more accurately, the purpose ofthe payment which was made, in that he has divided it up in the way I havealready described. The learned Advocate-General says that the Court must takethe findings of fact as they are stated by the Commissioner, and either expressan opinion upon those findings or say that it is impossible to express anyopinion, because the findings of fact are not warranted by the evidence uponwhich they were based, and it is not competent to us to look at the realsituation and to give a decision or judgment founded upon what appears to us tobe the real position, having regard to all the circumstances and all the factsas revealed by the evidence which the Commissioner has put before us. I havealready stated that in our opinion there was no justification for what theCommissioner says he has found as a fact, namely, the splitting up of the sumof Rs. 10,000, or the finding that it was made in part as an ex gratia gift inrecognition of past services. The learned Advocate-General says thatnevertheless we must answer such part of the question as we can upon thosefindings, and reject the rest, or else say that it is impossible to deal withthis reference at all.

27. The learned Advocate-General has quoted a number ofauthorities, notably the case of The Tata Iron and Steel Company, Limited v.The Chief Revenue-Authority, Bombay L. R. 50 I. A. 212; S. C. I. L. R. 47 Bom.724; 28 C. W. N. 307 (1923), where it was apparently decided that the decisionof the Court given upon a reference under sec. 51 of the Indian, Income Tax Act(VII of 1918) which was the forerunner of the present sec. 66of the Act of1922, is not a judgment within the meaning of Chapter 39 of the Letters Patentof the Bombay High Court, so as to give rise to a right to appeal. TheAdvocate-General argued that that decision which was one of the JudicialCommittee of the Privy Council, was based upon the view that the Court, whendealing with References under the Income Tax Act, was only functioning in anadvisory or consultative capacity, and that, therefore, the High Courts inIndia when dealing with References under the Indian Income Tax Act, have notthe same powers with regard to an examination of the facts upon which thereference is founded as have the Kings Bench Division of the High Court inEngland. It seems to me, however, that the decision in The Tata Iron and SteelCompany, Limited v. The Chief Revenue-Authority, Bombay L. R. 50 I. A. 212; S.C. I. L. R. 47 Bom. 724; 28 C. W. N. 307 (1923) proceeded much more upon thefooting of the passage in the judgment, of Lord Atkinson at page 223 of thereport, where his Lordship says: "The decision of the High Court does notin any way enforce the discharge of that liability, that is, the amount of thetax-payers liability. It would appear clear to their Lordships that the wordjudgment is not here used in its strict legal and proper sense. It is not anexecutive document directing something to be done or not to be done, but ismerely the expression of the opinions of the majority of the Judges who heardthe case, together with a statement of the grounds upon which those opinionsare based. It amounts only to a ruling that a certain deduction claimed by atax-payer to be allowed from the sum for which he has been already assessed toincome-tax is not permissible." I cannot hold, therefore, that the case ofThe Tata Iron and Steel Company, Limited v. The Chief Revenue-Authority, BombayL. R. 50 I. A. 212; S. C. I. L. R. 47 Bom. 724; 28 C. W. N. 307 (1923) is anyreal authority for saying that it is not open to this Court to examine foritself the whole of the case which is put before it by the Commissioner ofIncome Tax under sec. 66 (1) of the Act. If that part of the case whichcontained a statement of what has been found as a fact, merely containedconclusions on questions of pure facts, then and in that event no doubt itwould not be open to this Court to go behind) the statement of facts, if onlyfor the reason that there would be no material upon which it was possible forit to do so. But in the present instance what the Commissioner of Income Taxsays he has found as facts is actually a series of conclusions which arefounded partly on pure facts and partly on inferences which he has drawn fromthose facts. The pure facts in the present instance are the matters set out inparagraphs 3 and 4 of the case, and what he has stated in the opening paragraphas having been found as a fact specially as regards item (a), is really theinferences which the Commissioner has drawn from the bare facts which he hasstated in paragraphs 3 and 4. In those circumstances, it seems to me that weought to deal with this case upon the principles which are contained in apassage in the judgment of the Master of the Rolls in the case of TheGramophone and Typewriter, Ltd. v. Stanley [1908] 2 K. B. 89 at p. 95; 5 TaxCases 358, where his Lordship said: "The question arises on a case statedby the Commissioners. It is undoubtedly true that, if the Commissioners find afact, it is not open to this Court to question that finding unless there is noevidence to support it. If, however, the Commissioners state the evidence whichwas before them, and add that upon such evidence they hold that certain resultsfollow, I think it is open, and was intended by the Commissioners that itshould be open, to the Court to say whether the evidence justified what theCommissioners held. I am satisfied that the case stated by the Commissionersfalls under the latter head. They have carefully stated the evidence but theyhave not, in my opinion, to use the words found in one of the authorities,"stated the Appellants out of Court." There is also a passage in thejudgment of the Master of the Rolls in the case of The American Thread Companyv. Joyce [1912] 6 Tax Cases 1 at p. 30 which is in these words "In findingquestions of pure fact, the tribunal is a tribunal without appeal. It isperfectly true that if it finds facts where there is no evidence, that becomesa matter of law, and we can set aside the finding." Reference may also bemade to the case of The Commissioners of Inland Revenue v. Frank BernardSanderson [1921] 8 Tax Cases 38, where it was held by the Court of Appeal thatthe evidence before the Special Commissioners did not justify the conclusion offact that an enforceable agreement for sale had existed between the partiesprior to a written agreement (of 12th October, 1916). Lastly, we have a verydefinite indication of the way the Court ought to act where it is not satisfiedthat the inferences drawn by the Commissioner from the pure facts of the caseis warranted by the evidence which he himself has set before the Court, in thejudgment of Rowlatt, J., given by him when sitting at first instance in thecase of The Anglo-Persian Gil Co., Ltd. v. Dale [1931] 16 Tax Cases 253 at p.262 where he said: "There is no sort of question so far of any question offact. I do not question what they say about the facts, or claim a jurisdictionto question that it was an enduring benefit by getting rid of an onerouscontract. All that I say is that it does not go far enough. When I look at thefacts, so far, all I see is one thing, that it is getting rid of a paymentwhich falls to be charged, to the revenue account every year, namely, paymentof commissions to people who run the business." In the previous paragraphhe had said with reference to the judgment of the Lord Chancellor in the caseof Atherton v. British Insulated and Helsby Cables, Ltd. [1923] 10 Tax Cases192: "What Lord Cave is quite clearly speaking of is a benefit whichendures, in the way that fixed capital endures; not a benefit that endures inthe sense that for a good number of years it relieves you of a revenue payment.It means a thing which endures in the way that fixed capital endures. It is notalways an actual asset, but it endures in the way that getting rid of a leaseor getting rid of onerous capital assets or something of that sort as we havehad in the cases, endures. I think that the Commissioners, with great respect, havebeen misled by the way in which they have taken enduring to mean merelysomething that extends over a number of years. I do not quite understand howthe view that they appear to have taken is consistent with the numerouscases." Then the learned Judge proceeded to deal with the case almost asif the whole matter was at large and he was in a position to form his ownjudgment upon the whole of the materials then before him. All these cases towhich I have just referred and certain other cases are collected and discussedin Sundarams Book on the law of Income Tax at p. 1037 (Et. Seq.).

28. In the light of all those authorities, I think what weought to do in the present instance is to give a decision which will operate byway of guidance to the Commissioner of Income Tax upon the pure facts of thecase as disclosed in the evidence which the Commissioner himself has put beforeus and upon which the matter really arises. Upon that view, the burden is eastupon us of deciding whether or not payments amounting to a sum of Rs. 10,000made by the assessee in the year 1931-32 are properly deductible by them underthe provisions of sec. 10 (2) (ix).I have enumerated what appears to be theseveral advantages which were being derived by the assessees from the expenditureof the sum in question and the later instalments which in total would make upthe two sums of Rs. 30,000 and Rs. 20,000. It can scarcely be disputed, Ithink, that whatever may be the way in which one regards the payment from thepoint of view of relief from income-tax, there is no doubt whatever that thepurpose and the intent with which those payments were made was to facilitateand promote the business interests of the assessees in the two areas in Madrasand Ceylon and, therefore, without any expansion or extravagance of language,one can quite easily hold that it was an expenditure incurred solely for thepurpose of earning profits or gains by the undertaking concerned and, indeed,the learned Advocate-General, who has argued this matter very fully andcogently on behalf of the income-tax authorities, has scarcely troubled himselfto contest that aspect of the matter. On the contrary, he has conceded thatwhat was being done, at any rate as regards the operations which theCommissioner of Income Tax has placed under (b) and (c) of paragraph 1, was tonurture and protect what the learned Advocate-General has described--though inmy opinion, inaccurately described--as a new business. I do not think it canproperly be said on any aspect of the matter that what Messrs. Brunner Mond andCompany (India), Ltd., or the Imperial Chemical Industries (India), Ltd., weredoing was to found a new business; what they were doing was to take into theirown hands for the purpose of conducting by means of their own employees abusiness which theretofore had been carried on through the instrumentality ofthe Firms in Madras and Colombo. They were not nurturing or protecting a newbusiness, but they were making, in my judgment, an outlay of a certain sum ofmoney in order to facilitate their own future operations. In thosecircumstances, it seems to me unarguable to suggest that the assessees weredoing anything else than making payment for the purpose of acquiring forthemselves an enduring benefit which would result in increased profits orgains.

29. The real question which has been canvassed before us inthis case and the actual point upon which we have to express our opinion is,whether or not the expenditure was of the kind which falls within the provisocontained in the words within the parenthesis in sub-sec. (ix). Those words are"not being in the nature of capital expenditure." Paraphrasing thewhole of sub-sec. (ix), a proposition can be formulated thus: It is permissiblethat an allowance shall be made for an expenditure which has been incurredsolely for the purpose of earning profits or gains of any business, providedthat such expenditure is not an expenditure in the nature of a capitalexpenditure. Stated in a different form, the problem which we have to solve iswhether or not the payment of the sum of Rs. 10,000 was a payment which oughtto be charged to capital account in the books/of the assessees or couldproperly be chargeable to revenue account. The assessees, themselves havecontended, as the Commissioner has admitted in paragraph 5 (b) of the case,that the payment was a definite business one and the Commissioner has stated inthe course of his narrative in paragraph 3 of the statement of the case thatthe assessees have distributed the charge in their revenue accounts, passingRs. 4,500 through the books on 30th September, 1928 and Rs. 6,000 annuallysince then; so that Rs. 6,000 falls in the accounts for the year ending 30thSeptember, 1930: that is in respect of the payment made to the Madras Firm andpresumably the position was the same as regards the payment to the ColomboFirm, because the Commissioner makes no material distinction though he puts thematter slightly differently by saying, "The assessee has passed Rs. 4,000through his books annually on this account beginning with 30th September, 1930,under the present assessment." Presumably he is there referring to therevenue account. There is no doubt that the question whether any particularpayment should properly be described as in the nature of capital expenditure ornot is one of considerable difficulty and perplexity and even as recently astest year the present Master of the Rolls, in giving judgment in the analogouscase of Golden Horse Shoe (New), Ltd. v. Thurgood [1934] 1 K. B. 548 at p. 560made the following observation: "After careful consideration of thepresent case in the course of which my mind has fluctuated on either side, Ithink it is to be decided upon its own facts--that none of the tests suggestedafford a strict rule of guidance." We are disposed to take the same viewand to say, after a very careful consideration of the whole of the authoritieswhich have been put before us, that it is not possible to lay down any hard andfast rule or to enunciate a rigid and scientific principle which can be appliedas a criterion when this particular point comes up for determination. Thedecided cases, however, do of course afford a considerable assistance. InVallambrosa Rubber Co. v. Farmer [1010] Scotch Cases 519, 525: 5 Tax Cases 529,Lord Dunedin suggested one test to be applied and that is whether or not thepayment was of a kind which would be made "once and for all" by wayof a lump sum. Obviously that is not a test which would afford any greatassistance in the majority of the cases coming before the Court and in regardto that particular test, Viscount Cave, who was then Lord Chancellor, in thecase of British Insulated and Helsby Cables v. Atherton [1926] A. C. 205 at p.213 made this comment: "In Vallambrosa Rubber Co. v. Farmer [1010] ScotchCases 519, 525: 5 Tax Cases 529, Lord Dunedin, as President of the Court ofSession, expressed the opinion that in a rough way it was not a bad criterionof what is capital expenditure--as against what is income expenditure--to saythat capital expenditure is a thing that is going to recur every year; and nodoubt this is often a material consideration. But the criterion suggested is,not, and was obviously not intended by Lord Dunedin to be, a decisive one inevery case; for it is easy to imagine many cases in which a payment, thoughmade once and for all would be properly chargeable against the receipts forthe year. Instances of such payments may be found in the gratuity of 1,500paid to a reporter on his retirement, which was the subject of the decision inSmith v. Incorporated Council of Law Reporting for England and Wales [1914] 3K. B. 674 and in the expenditure of 4,994 in the purchase of an annuity forthe benefit of an actuary who had retired, which in Hancock v. General Reversionaryand Investment Co. [1919] 1 K. B. 25 was allowed, and I think rightly allowed,to be deducted from profits." Then the Lord Chancellor said: "When anexpenditure is made, not only once and for all, but with a view to bringinginto existence an asset or an advantage for the enduring benefit of a trade, Ithink that there is very good reason (in the absence of special circumstancesleading to an opposite conclusion) for treating such an expenditure as properlyattributable not to revenue but to capital." Then he says that there isconsiderable authority for that view and he cites various cases. He held thatthe case he was then dealing with which was concerned with the establishment ofa pension fund for the clerical and technical salaried staff of the Appellantsfell within the same principle, and, he came to the conclusion that such anexpenditure was in the nature of capital expenditure and, accordingly, that thededuction of the amount from profits was rightly held by the Court of Appealnot to be admissible. The opinion of the Lord Chancellor was shared by twoother members of the House, Lord Atkinson and Lord Buckmaster. But Lord Carsonand Lord Blanesburgh gave dissentient judgments and some of the passages inLord Blanesburghs judgment are very material and useful for our presentpurpose. At p. 236 his Lordship said with reference to the matter then underdiscussion: "In no sense of the word capital, circulating, working orfixed, did this expenditure involve any withdrawal. It was made out of grossreceipts in a year in which, working capital and, a fortiori, fixed capital,remaining intact, a large surplus still emerged. Nor, in my judgment, did theexpenditure in any relevant sense create a new asset of the company of thenature of a fixed capital asset or any other." And referring to what LordJustice Scrutton had said when the case was before the Court of Appeal, LordBlanesburgh made this comment: "The learned Lord Justice does not moreclosely describe this so-called asset, nor, fixed though it was, did he attachto it a name by which it could be recognised. He did not suggest that itresulted in an enhanced goodwill. He could not, in my judgment, have done sowith reason, because it has never, I think, even been suggested that acontented personnel is an element in goodwill, whatever else it may be. In thatstate of things it has occurred to me, my Lords, that the existence ornonexistence of this so-called asset might fairly be submitted to the prosaictest of asking what in a liquidation would be forthcoming in respect of it whena liquidator essayed his statutory duty to realise the companys assets anddivide the proceeds amongst his constituents. Certainly no part of the fund.That in its entirety is completely alienated. And I can myself think of nothingelse. Moreover, my Lords, a reference to the authorities shows, it seems to me,clearly that it is by reference to no such shadowy conceptions that the wordsof the statute "employed as capital" have to be interpreted. Such thingsas a purchase of goodwill involving a capital expenditure might come withinthem: Smith & Son v. Moore [1921] 2 A.C. 13 an excess profits dutycase." Then he quotes various other instances.

30. Now, the passage which I have quoted from LordBlanesburghs judgment suggests two further tests in addition to thoseindicated by Lord Dunedin and Lord Cave. The first test is this: Did theexpenditure involve any withdrawal of capital It would seem that in the casewith which we are concerned the payment of Rs. 10,000 involved no withdrawal ofcapital. Indeed, there is no evidence before us that it did anything of thekind. On the contrary, it was debited to the revenue account.

31. The other test suggested by Lord Blanesburgh is theprosaic test: What would be forthcoming in a liquidation as a result of theexpenditure which has been made In the present instance, again, as my learnedbrother pointed out repeatedly in the course of the argument, if there were anyquestion of selling or even valuing what the assessees had acquired as a resultof the expenditure of Rs. 10,000, the answer would have to be "There wasnothing they could sell and nothing that anybody could accurately value."What may have been of considerable or even of immense value to them for thepurpose of their business operations in Madras and Colombo, had no material ormarket value and there was nothing which would in any sense properly bedescribed as an addition to the assets of the company. In applying these tests,some little difficulty is created by the latter part of the criterion suggestedby Lord Cave, because he seems to have been of the opinion that a payment oughtto be regarded as capital expenditure, if it resulted in the acquisition of anyenduring benefit or advantage to the business of the persons or firm making thepayment. The difficulty to a large extent, if not wholly, disappears, however,upon a perusal of the judgment of Lord Justice Romer in the case ofAnglo-Persian Oil Co. v. Dale [1932] 1 K. B. 124 at p. 145. The observations ofthe learned Lord Justice are so important for our present purposes that I takeleave to quote at length several passages from his very illuminating judgment.Referring to the English Income Tax Act, His Lordship said: "So far as theAct itself is concerned, one is therefore left without guidance as to thedeductions that are permissible, but with the mind somewhat unsettled by reasonof the list of prohibited deductions as to what, in the view of thelegislature, is to be considered for the purposes of income-tax the balance ofthe profits or gains. In these circumstances, it is not surprising that thecases in which the Court has been called upon to say whether some particulardeduction is or is not permissible, should have been numerous and not always easyto reconcile with others in which the facts were not dissimilar. Nor is itsurprising that learned Judges should have applied tests which, howeversatisfactory for the purpose of solving the particular problem before them,should turn out to be inconclusive or insufficient when applied to the facts ofanother case. The law applicable to such cases as the present was, it seems tome, placed beyond the realms of controversy. The boundary line betweendeductions that were permissible and those that were not, had previously beenuncertain and difficult to follow. As regards the large majority of deductions,there was and could be no conceivable doubt. They were clearly on one side ofthe line or the other. But as regards a comparatively small number, it was difficultto say on which side of the line they fell. This was particularly the casewhere, as in the present one, an expenditure is not a recurring one, but ismade once and for all. It was pointed out by Lord Cave in Athertons case[1926] A. C. 205 at p. 213 that an expenditure, though made once and for all,may nevertheless be treated as a revenue expenditure." And he then addedthis: "But when an expenditure is made, not only once and for all, butwith a view to bringing into existence an asset or an advantage for theenduring benefit of a trade, I think that there is very good reason (in theabsence of a special circumstance leading to an opposite conclusion) fortreating such an expenditure as properly attributable not to revenue but tocapital." Then, Lord Justice Romer states his explanation of Lord Cavesobservations in these words: "It should be remembered that the expenditureis to be attributed; to capital if it be made with a view to bringing anasset or advantage into existence. It is not necessary that it should have thatresult. It is also to be observed that the asset or advantage is to be for theenduring benefit of the trade. I agree with Rowlatt, J., that by enduringis meant enduring in the way that fixed capital endures. An expenditure onacquiring floating capital is not made with a view to acquiring an enduringasset. It is made with a view to acquiring an asset that may be turned over inthe course of trade at a comparatively early date." Then he continued:"Nor, of course, need the advantage be of a positive character. Theadvantage may consist in the getting rid of an item of fixed capital that is ofan onerous character, as was pointed out by this Court in Mallet v. StavelyCoal and Iron Co. [1928] 2 K. B. 405. Then comes a very important passage:"This being the test to be applied in such cases as the present, it isobvious that the question whether an expenditure made once and for all is or isnot to be treated as chargeable to capital and not revenue, is one of fact only.Being a question that the Commissioners are eminently qualified to answer, itis to be hoped that in future they will answer it by reference to the languageof the test laid down by Lord Cave, and not as though they are deciding aquestion of law. Too often in the past, the Commissioners have found that aparticular sum is or is not a permissible deduction. That is a question of lawor, at any rate, mixed law and fact. If they will find that the expenditure inquestion was or was not made, as the case may be, with a view to bringing intoexistence some asset or advantage for the enduring benefit of the trade, theirfinding will be one of fact, and if there be some evidence upon which; thefinding can reasonably be made, it will not be subject to review in the Courts."That passage might very well be taken to heart, if I may say so with respect,by the Commissioners of Income Tax in this country. If the Commissioner in thepresent case had contented himself merely with a finding of fact on the linessuggested by Lord Justice Romer, what he has decided could not have been opento question by this or any other Court. I have already expressed my opinionthat in the present case there was no evidence on which the learnedCommissioner of Income Tax could have come to the conclusion he did on matterswhich were really questions of mixed law and fact.

32. In our judgment the principles laid down in the case ofThe Anglo-Persian Oil Co. v. Dale [1932] 1 K. B. 124 at p. 145 (theapplicability of which to the present case the Commissioner of Income Taxdisputes) are quite wide enough to provide the answer to the real and paramountquestion which is before us. In that case the facts were that in 1914 theAnglo-Persian Oil Co. entered into an agreement with a firm called Strick Scottand Co., Ltd., under which the latter were appointed agents of the company tomanage its business in Persia and the East for a term of ten years. It appearsthat the remuneration paid to these agents proved larger and more onerous thanhad been anticipated by the company; accordingly in the year 1922 the companyentered into an agreement with Strick Scott & Co., Ltd., whereby it wasagreed that the agency should be terminated, that Strick Scott & Co. shouldgo into liquidation and wind up their business and that they would not start oract in or about any business connected with petroleum in a certain area inPersia, while in return the company should pay Strick Scott & Co. a sum of3,00,000. That sum was paid and the agency was terminated. The money wastreated in the companys accounts as a revenue payment and was charged torevenue in instalments of 60,000 for five years. The company claimed that thiscourse was correct and justified the deduction from its annual expenses asbeing one incurred for seeking the profits and gains. The Inspector of Taxesdisputed this course and he claimed that the 3,00,000 ought to be treated asan expenditure on capital account, as being an expenditure which brought to anend an onerous contract and secured to the company a freedom from charges whichwould otherwise have continued for some years. The Commissioners of Income Taxaccepted the latter argument and held that the sum of 3,00,000 was not anadmissible deduction in computing the profits and gains of the company for theyear ending 31st March, 1923, and adjusted the figures of the assessment forthe years ending 5th April, 1923, 1924, 1925 and 1926. Accordingly Mr. JusticeRowlatt, when the matter came before him, held that the sum was an admissiblededuction. His judgment from which I have already quoted in another connectionand which is reported in Anglo-Persian Oil Co. v. Dale [1931] 16 Tax Cases 253at p. 262 is very germane to our present problem. At the battom of page 262,the learned Judge said: "What he, the Attorney-General, says is that thisis not merely a question of getting rid of an annual expense in the form ofcommission, and he says also, as I understand him, to paraphrase his words:This is clearing the ground of the agency and embarking upon a neworganization, in this district, of the business, by having your ownorganization and your own servants. Now in what way would that operate Itmight mean that you simply start with your own servants without any expenditureat all, or might mean that you buy the good-will of somebody who has got aright to stay there and with whom you could not compete without paying themout--I understand it was suggested that there was something of that sort inthis case, perhaps--or you might, as I say, expend money in the way of capitalto get your service on its feet. What I feel here is that there is not a traceof any such thing. There is no evidence of it--none. There is not any evidence,and it was not suggested before the Commissioners as I understand it, that anypart of this sum was paid for the purpose of acquiring anything analogous togoodwill on the part of these people. Of course they had to be paid for thevalue of their rights for ten years to receive this money."

33. Now the Advocate-General has argued before us that thatpassage of Mr. Justice Rowlatt, so far from being of assistance to theassessees, really tells in favour of the Income Tax authorities, because, saidthe Advocate-General, what Messrs. Brunner Mond & Co. or Imperial ChemicalIndustries (India), Limited were doing was to acquire a new business or, at anyrate, to acquire the goodwill of somebody elses business. I have alreadyexpressed the opinion that upon the facts--just as Mr. Justice Rowlatt felt inthe case of Anglo-Persian Oil Co., Ltd. v. Dale [1932] 1 K. B. 124 at p. 145,what I feel here is that there is no trace of anything of the kind. There is noevidence at all that the assessees were acquiring a new business or taking overany business other than their own business. They were merely taking over theirown business, and they were not acquiring any goodwill belonging to anybodyelses concern.

34. As I have already stated, Mr. Justice Rowlatt was ofopinion that the payment of 3,00,000 in the Anglo-Persian Oil Co., Ltd., wasan admissible deduction. On appeal the Court of Appeal held, even afterapplying the test laid down by Lord Chancellor Cave in the case of Atherton v.British Insulated & Helsby Cables, Ltd. [1928] 10 Tax Cases, 192 that thepayment in question did not bring any asset into existence, nor could itproperly be said that it brought into existence an advantage for the enduringbenefit of the companys trade within the meaning of the expression used byLord Cave. Accordingly, the Court of Appeal held that the payment was a revenuepayment, and so deductible by that company when ascertaining its net profitsfor the purpose of paying tax.

35. It seems to me that that decision of the Court of Appealin a case where a company had bought out its agents--with a view to runningtheir own business by their own staff--by means of the payment of the enormoussum of 3,00,000, must be taken by us as being ample authority for holding thatthe payment of a comparatively small sum of Rs. 10,000, the subject-matter of thepresent proceedings, was a revenue payment and so was properly deductible bythe Imperial Chemical Industries (India), Ltd., when arriving at their profitfor the purpose of income-tax.

36. I think also that the whole matter is put beyond allquestion, by the decision in the recent case which I have already mentioned,viz., Golden Horse Shoe (New), Ltd. v. Thurgood [1934] 1 K. B. 548 at p. 560,because in that case what was acquired was something tangible which as a matterof first impression might easily be considered to be in the nature of assetswhich ought to be properly comprised within the denomination of fixed capital.The Golden Horse Shoe (New), Ltd. had been formed for the purpose of acquiringthe right to take away and re-treat Very large dumps of residual depositsresulting from the working of a gold mine. These residual deposits were called"tailings," These tailings were known to contain a certain amount ofgold, and by some new process of treatment some of this gold was recovered andsold by the company. It was held by the Court of Appeal, reversing the decisionof Mr. Justice Finlay, that as the tailings were raw material already won andgotten, the amount expended in acquiring them was in the nature of anexpenditure on the raw material of the companys trade, and therefore that forthe purpose of assessing the companys profits or gains, the cost of thetailings treated during the period of assessment was a proper deduction fromthe proceeds realized by the sale of the gold extracted.

37. Lord Justice Romer said: "The question to bedecided in this case is whether the dumps are to be regarded as fixed capitalor as circulating capital. If they are the former, it is conceded by theAppellants that the assessment made on them is correct. If on the other hand,they are floating or circulating capital, it is conceded that the cost of themto the Appellants must be debited in the profit and loss account, the accountbeing credited with the cost price of what was left of the dumps at the end of theyear of assessment. The dumps, in other words, must be dealt with in the profitand loss account as stock in hand has to be dealt with in the profit and lossaccount of any other trader." Then the learned Lord Justice said:"The reason for this distinction being drawn between fixed and floating orcirculating capital is not far to seek."

38. In the present instance, in my opinion, it cannot besaid that the payment which was made was one other than one in the nature of apayment out of circulating capital; and it is obvious that the expenditure didnot result in the acquisition of anything of a kind which could rightly bedescribed as a new asset or as an addition to the fixed capital of the company.The acquisitions derived from the payment were metaphysical rather thanphysical.

39. We came back to the point of view described by LordHanworth, the present Master of the Rolls in Golden Horse Shoe (New), Ltd.[1934] 1 K. B. 548 at p. 560, when he said at page 560 of the report: "Thetest of circulating as contrasted with fixed capital is as good a test in mostcases to my mind as can be found; but that involves the question of fact: Wasthe outlay in the particular case from fixed or circulating capital" Thatis,--only to say once more that the matter really resolves itself in the lastresort into a question of fact in each particular case, and there is no suretouch-stone which can be applied universally to solve a problem of the kindinvolved in the general proceedings.

40. We, accordingly, hold that in this case the payment ofRs. 10,000 made by Imperial Chemical Industries (India), Limited, and debitedto their revenue account for the year ending 30th September, 1930 and comingfor assessment, into the tax year 1931-32, was an allowance they were entitledto make under the provisions of sec. 10 (2) (ix) of the Income Tax Act of 1922,or to use the precise language of the question submitted to us, the paymentamounting to Rs. 10,000 described by the assessees as compensation to ex-agentswas expenditure allowable in charge under sec. 10 (2) (ix) of the Act. Theassessees will have the costs of this Reference.

John Lort Williams, J.

I agree.

.

In Re: Imperial Chemical Industries (India) Ltd. (19.07.1934 - CALHC)