1. MAHMUD, J.----This is a reference by the Income-tax Appellate Tribunal (Karachi Bench), Karachi under section 66(1) of the Income-tax Act. 1922 (hereinafter referred to as the Act) at the instance of the Commis--sioner of Income-tax (West), Karachi, of a question of law said to arise from the decision of the Appellate Tribunal dated 28-12-67 relating to the assessment year 1964- 65.
2. By an agreement dated 18th April 1960, the respondent, Excide Batteries of Pakistan Limited appointed Forbes, Forbes Campbell & Co. Ltd. Of Karachi (hereinafter referred to as the soling agent) as its sole-selling agent for the distribution of its `Excide' Batteries for the territories of Sind` Baluchistan and Khairpur, which provided for termination of the agency by three months' notice on either side. At the end of 1962, the respondent) decided to change its system of distribution of its batteries by appointing several main dealers in the said territories on different rates of commission, who would be required to distribute the respondent's batteries exclusively.; Accordingly, the respondent gave three months' notice of termination of the agency to the selling agent on 17-11-62.
But, as the respondent was desirous of implementing the new distributing system immediately, it offered to pay compensation for loss of commission which the selling agent would have earned during the notice period, which was calculated at Rs. 25,000.' The letter terminating the agency further stated that "we regret that for, reasons which we discussed, we are unable to continue to offer you your present terms since these would be more favourable than those given to other main dealers. Nevertheless, in consideration of your loss of profits, we have offered you the sum of Rs.
60,000 provided that you accept our offer to become a main dealer." The selling agent accepted the offer and accordingly, the respondent paid the two sums of Rs. 25,000 and Rs. 60,000 to the selling agent. The respondent claimed allowance of both the sums as business expenditure under section 10(2)(xvi) of the Act. The Income-tax Officer allowed the sum of Re. 25,000 as a revenue expenditure but disallowed the sum of Rs. 60,000. He rejected the contention of the respondent and held that the latter sum was paid to the selling agent as an ex gratis payment without any commercial necessity for making the payment, which the selling agent was neither entitled to claim nor the respondent was obliged to pay under the agency agreement.
3. The respondent preferred a direct appeal to the Appellate Tribunal. The Appellate Tribunal upheld the contention of the respondent and held that the respondent had paid the amount in dispute purely for commercial expediency and in the interest of the smooth running and betterment of the respondent's business and like the other sum of Rs. 25,000 already allowed by the Income-tax Officer, the sum in dispute was also an expenditure of a revenue nature which was properly admissible to deduction. Accordingly, the Appellate Tribunal allowed the respondent's appeal.
4. The Commissioner of Income-tax, therefore, applied for a reference to the High Court under section 66(1) of the Act for referring the following question of law for decision :---- "Whether on the facts and in the circumstances of the case the Tribunal was justified in allowing the payment of Rs. 60,000 to Messrs Forbes, Forbes Campbell & Company Limited, as of revenue nature, particularly when it has been held to be a receipt of capital nature in the hands of the receipient Company, by the Tribunal in their decision of I. T. A. No. 1992 of 1964-65, dated 22-11- 1966?"
5. The above question of law makes a reference to the previous decision of the Appellate Tribunal dated 22-11-1966 in I. T. A. No. 1992 of 1964-65, relating to the assessment of the selling agent for the same assessm ent year, by which the Appellate Tribunal held that this very sum of Rs. 60,000 in dispute, was a capital receipt in the hands of the selling agent. The Appellate Tribunal, therefore, felt that the question, whether the same sum paid by the respondent also partakes of the same character, being a mixed question of fact and law, should also be referred to the High Court for decision, particularly as a reference has already been made by the Appellate Tribunal relating to the said amount in the hands of the selling agent and claimed by it to be a capital receipt (which is the subject-matter of I. T. R. No. 4 of 1970). The question has, therefore, been referred to us for decision.
6. Section 10(2)(x v;) of the Act, under which the respondent claimed the amount of Rs. .60,000 as an admissible deduction reads as follows :--- "10(2)(xvi).-Any expenditure (not being in the nature of capital expendi--ture or personal expenses of the assessee) laid out or expended only and exclusively for the purpose of such business, profession or vocation."
7. The finding as to the true nature and character of the disputed payment, being an inference of law on the evidence, the main question is whether the finding by the Appellate Tribunal is supported on the evidence, that the amount paid by the respondent was expended for commercial necessity and in order to ensure smooth running of the new distribution of the respondent. If this finding is correct, it would be clearly a revenue expenditure and admissible as a deduction in computing the profits of the respondent under section 10 of the Act. In determining whether a particular item of expenditure is capital or revenue disbursement, several considerations have to be borne in mind. But, the question ultimately is 0 be determined on the facts and circumstances of each case. One of the main tests which will serve as a guide and which may be adopted, has been laid down by Viscount Cave in the leading case of Atherton v. British Insulated and Halsby Cables Limited (l) at pp. 191, 192' which has been followed subsequently by several Courts in the sub-continent. The noble Lord observed; "It was made clear in the above-cited cases of Usher's Witshire Brewery v. Bruce & Smith v.
Incorporated Council of Law Reporting 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;------ But when an expenditure is made, not only once and for all but with a view to bringing into existence an asset or an advantage for the enduring benefit of a Trade, I think that there is very good reason (in the absence of special circumstances leading to an opposite conclusion) for treating such an expenditure as property attributable not to revenue but to capital."
7-A. Upon a proper consideration of the terms of offer of payment of the disputed amount mentioned in the notice of termination, we are inclined to agree with the finding of the Appellate Tribunal that the payment of the amount was made for commercial expediency and in the interest of the smooth running and betterment of the respondent's business. It appears that although part of the consideration for making payment of the amount to the selling agent was to compensate it for loss of profits resulting from the termination of the agency, the major part of it was a consideration for the offer of accepting to become, a main dealer of the respondent. As stated in their letter, the amount as offered on condition and provided that the selling agent agreed to act as a main dealer of the respondent. 3 Otherwise, the same would not have been payable. It is clear from the terms of the letter that the respondent was terminating the agency with the utmost reluctance and yet wanted the selling agent to become a main dealer, no doubt because the respondent wanted to retain the services of the selling agent and obtain the benefit of its experience and knowledge with a view to the smooth running and betterment of his business. The payment was, therefore, not gratuitous or an ex gratia payment but one made purely for commercial necessity and expediency. The expenditure was, therefore, of a revenue nature. As stated earlier, part of the consideration for payment of the amount was compensation for terminating the sole selling agency which was being terminated in the interest of the respondent and for reasons of trade. In these circumstances, the amount was expended wholly and exclusively for the purpose of the business and, as such, was admissible as a deduction as a revenue disbursement. The mere fact that this amount in the hands of the selling agent is treated as a capital receipt, it does not follow that the payment may not be a revenue payment from the point of view of the payer. Thus, while in Anglo-Persial Oil Co. Ltd. v. Commissioner of income-tax (2) the amount paid by the Oil Company to the managing agentas compensation for loss of office was allowed as a revenue disbursement, as it was in the interest of the Oil Company to terminate the agency in view of its decision to change the system for distribution of its product. The same sum in the hands of the managing agent was held to be capital receipt by the Privy Council in the case of Commissioner of Income-tax, Bengal v. Shaw Wallace & Company (AIR1932PC138). In fact, we have held in I. T. R. No. 4/1970 that this very sum of Rs. 60,000 in the hands of the selling agent was rightly held to be capital receipt and we have answered that question in the affirmative.
9. Mr. Saleem Akhtar, learned counsel for the respondent referred to the case of Commissioner of Income-tar, Bombay North v. Chandulul Keshavlal & Co. ((1960)38ITR601) in which the respondent managing agent agreed to remit a portion of its remuneration in view of the stringent financial position of the managed Company. It was held that the portion of the commission remitted by the managing agent was for reasons of commercial expediency being linked up with a view to put the managed Company on a sounder position and thereby earn a larger commission in future. He also referred to Commissioner of Income-tax, Madras v. Ashok Leyland Ltd. (1971 PTD 674) a decision of the Madras High Court which was upheld by the Indian Supreme Court in (1972) 86 I T R 549, in which it was held that compensation paid for termination of managing agency, which had become superfluous owing to change in the business of the assessee-Company, was revenue expenditure and was allowable as a deduction in computing the profits of the assessee-Company.
10. Mr. Mansoor Ahmed Khan, learned counsel for the Commissioner, contended that the disputed amount was paid to the selling agent in order to secure an agency and obtain an enduring benefit, namely an improved system of distribution and, therefore, it was a capital expenditure, and in support thereof, learned counsel cited Henderson v. Meade-King Robinson & Co. Ltd. (22 Tax Cas.
97). That case is, however, distinguishable because on the evidence it was found that the object of the expenditure was solely for the purpose of containing a continuance of the selling agency and that there was no other motive. There is not only no material on record to support the contention but it was also not the case of the Department that the object of the expenditure was solely to obtain the dealership of the selling agent. On the contrary, the case of the Department was that it was an ex gratia payment without any commercial necessity for it. We are, therefore, unable to accept this contention of learned counsel for the Commissioner.
11. For the foregoing reasons, we would answer the question referred to us in the affirmative and hold that the Appellate Tribunal was justified in allowing the payment of Rs. 60,000 to Messrs Forbes, Forbes Campbell & Company Limited as a revenue expenditure. The Commissioner will bear the costs of this reference.