Kalpesh Classes

Retrenchment compensation​​ 

Where a liability to make a payment arises not in the course of the business nor for the purpose of carrying on the business but springs from the transfer of the business, it is not a properly debitable item in the profit and loss account, and is not deductible.​​ Deduction on account of retrenchment compensation under section 25FF of the Industrial Disputes Act is not admissible, since the right to such compensation arises from determination of employment, or from the transfer of the undertaking - CIT V/s. Gemini Cashew Sales corporation [1967] 65 ITR 643 (SC).

Remuneration to promoters​​ 

Expenditure incurred for remunerating the persons who have promoted a company is not in law a revenue expenditure admissible under section 37(1) - Lakshmiratan Cotton Mills Co. Ltd. V/s. CIT [1969] 73 ITR 634 (SC).

Compensation payments​​ 

Payment for breach of contract in respect of purchase of machinery is made to avoid a larger capital expenditure that would not have served the interests of the assessee. Such a payment necessitated by the cancellation of the contract for purchase due to changed circumstances is clearly in the nature of capital expenditure - Swadeshi Cotton Mills Co. Ltd. V/s. CIT [1967] 63 ITR 65 (SC).

Remuneration to employees / directors​​ 

It is an erroneous proposition to content that as soon as an assessee has established two facts, viz., the existence of an agreement between the employer and the employee and the fact of actual payment, no discretion is left to the ITO except to hold that the payment was made wholly and exclusively for the purpose of the business. It would still be open to the ITO to take into consideration all the relevant factors which will got to show whether the amount was paid as required to section 37(1). It is manifest that the ITO is entitled to examine the circumstances of each case to determine for himself whether the remuneration paid to the employee or any portion thereof was properly deductible under section 37(1) - Swadeshi Cotton Mills Co. Ltd. V/s. CIT [1967] 63 ITR 57 (SC).

Warding of competition​​ 

Payment made to rival dealer to ward off competition in business would constitute capital expenditure if the object of making that payment is to drive an advantage by eliminating the competition over some length of time;​​ the same result would not follow if there is no certainty of the duration of the advantage and the same can be put to an end at any time. How long the period of contemplated advantage should be in order to constitute enduring benefit would depend upon the circumstances and facts of each case - CIT V/s. Coal Shipments (P) Ltd. [1971] 82 ITR 902 (SC).