COMMISSIONER OF INCOME TAX Vs. ASHOK LEYLAND LIMITED

JUDGEMENT

(1.) THE Ashok Leyland Limited, Madras, the res-pondent herein, is a public limited company which was originally incorporated on September 7, 1948, under the name and style of " Ashok Motors Limited " under the Indian Companies Act, 1913. Apparently the change in name of the company was effectuated due to change in circumstances, which we shall presently animadvert to. Its business previously consisted in importing motor accessories marketed by " Austins " of the United Kingdom, assembling Austin cars and trucks and selling them as such. Under the articles of the company, it was authorised to carry on business as manufacturers, assemblers of, dealers in, hirers, repairers, cleaners, stores, warehousers of motor-cars, motor-cycles, cycle-cars, motors, scooters, motor-buses and lorries, trucks, tractors, cycles, bicycles and carriages, launches, boats and ships, aeroplanes, hydroplanes arid other vehicles and conveyance of all descriptions for carrying passengers or other personal goods, commodities, produce, cargoes and other things on land or sea or by air (all hereinafter comprised in the term motor and other things) whether propelled or assisted by means of petrol, spirit, steam, gas, electrical, animal or other powers and all engines, chassis, bodies, turbines, tanks, tools, implements, accessories, and other things, materials and products used for, in or in connection with motors and other things. Inter alia, the articles enabled it to import into India Austin cars and other Austin products and to undertake progressive manufacture in India of such parts of Austin products and, for the purpose, an express provision was made in the articles, which is the charter of the company, to appoint Car Builders Limited, a private limited company, as its managing agents. Pursuant thereto, an agreement dated October 18, 1948, was entered into between the company and the managing agents. Inter alia, the agreement provided that the managing agents shall be so appointed for a period of fourteen years from September 7, 1948, and that the agreement is irrevocable unless it be as provided in Section 87B of the Indian Companies Act, 1913 ; but in the event of the winding up of the company for the purpose of and with the object of transferring its business to another company, the transferee company shall retain the managing agents on the same terms for the unexpired period, and in case the company is wound up otherwise, the agreement shall terminate, but subject to the right of the managing agents to recover compensation and damages for such premature determination of the contract of service. No doubt, the managing agents are obliged to faithfully and diligently discharge their duties as may from time to time be entrusted to them by the company.

(2.) DURING the year 1951, the company secured the all-India rights for distribution, assembly and progressive manufacture of Leyland trucks, etc. In fact, the company, in the year, assembled and delivered 1,262 cars and 366 trucks They were apparently both Austin and Leyland types as is spen from annexure " A" which reflects the directors' report over the affairs of the company for the year 195 I. The company was not sanguine about the expeditious establishment of a motor manufacturing industry in India, due to the poor demand for cars and commercial vehicles at that time. It Wiis hopeful of positive results by reason of its association with Austins which by then was amalgamated with Nuffield, another top ranking manufacturing concern. In 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 for the manufacture of Leyland trucks and took active interest in the Government sponsored scheme. Apparently, Austins were not interested in setting up such a manufactory. The Deputy Secretary to the Government of India, in his letter dated September 28, 1953, expressed the approval of the programme as drawn up by the company by the Government of India, which visualised a technical collaboration between the company and Leyland Motors Limited, United Kingdom. Having thus involved themselves in this scheme, the company ceased to assemble Austin cars and this was in strict conformity with the decision of the Government whereby the assesses was to confine its activities to the progressive manufacture of Leyland commercial vehicles only. With this background and a denned phased programme before it, the company resolved even on June 19, 1954, to terminate the managing agency agreement and to pay them a sum of Rs. 2,50,000 in full and final settlement and discharge of all accounts and claims for compensation for loss of office or otherwise. The above resolution was produced before us which we have perused as it was necessary in the interests of justice to do so. The company could not, however, make considerable progress in implementing the manufacturing scheme approved by the Government of India, The then Minister for Commerce and Industry, in a conference held for the purpose, expressed so and suggested that Leylands should be invited to provide capital as and when required, subject to certain conditions, and alternatively assured the company that in case such financial assistance was not forthcoming, the Government would in such a contingency arrange the required capital subject to such conditions as may be necessary or required. The Minister made it clear that the Government, in any event, would accept such a contingent liability only if the managing agency is abolished. It is at this stage that the Minister was informed that the company had decided to terminate the managing agency agreement on payment of compensation and that steps are being taken to finalise the matter (annexure " B " dated January 24, 1955). The board promptly, and indeed on the same day when the above conference was held, resolved to take up the matter with Leylands in the United Kingdom. In order to substantiate their bona fides and anxiety in the subject, the company, on January 29, 1955, terminated the managing agency agreement as per annexure " C ". The immediate object of this agreement as set out therein is to carry out its technical collaboration programme with Leylands and also to keep up to their understanding with the Government of India and for providing itself with the required capital for the enterprise. The company, for reasons known to it, avoided a reference to the board's resolution on June 19, 1954, to cancel the managing agency agreement, though it is vaguely referred to in the jurat of the agreement. The fact, however, is indisputable that the managing agency was terminated on January 29, 1955, and a sum of Rs. 2,50,000 paid in full quit and final discharge of all claims of the managing agents. The later events that happened led to a consummation of the past decisions and eventually the company changed its style to " The Ashok Leyland Limited " and duly entered into the finance agreement and the technical collaboration agreement with Leylands on December 5, 1955. The above narrative has become necessary in order to appreciate the relative contentions of the parties before us, the department maintaining that the sum of Rs. 2,50,000 paid by the company is a capital expenditure and the company asserting that it has to be charged to the revenue and, therefore, an allowable expenditure.

(3.) RELIANCE was placed on the dicta of Lord Sands in Commissioners of Inland Revenue v. Granite City Steamship Co. Ltd., 1927 13 TC 1, 14, of Bowen L.J. in City of London Contract Corporation v. Styles, 1887 2 TC 239, 243, of Viscount Cave L.C. in Atherton v. British Insulated and Helsby Cables Ltd., [1925] 10 T.C. 155, and that of Lord Haldane in John Smith & Son v. Moore, 1920 12 TC 266. In conclusion, the Supreme Court was of the view that, :