AIRWAYS INDIA LTD Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) THE questions referred to this Court under section 66(1) of the IT Act are as follows :

(2.) IT entered into an agreement with M/s Air Transport Limited in January, 1949, whereby the latter became the managing agent of the assessee for a period of 20 years at a remuneration of Rs. 3,000 per month as allowances and a commission of 10per cent of the net annual profits of the assessee as defined by s. 87C of the Indian Companies Act. The company also had several directors, one of whom was K. K. Roy, the managing director. Towards the close of the year 1952 and early in 1953, it became apparent that the Government of India would nationalise airways services all over India and that private undertakings like that of the assessee would have little or no business left to them. There was a meeting of the board of directors of the assessee on 30th Jan., 1953, wherein it was recorded that "the directors felt convinced that in the immediate future the undertaking of the company would be taken over by the Government more or less on the lines outlined by the managing director." IT should be noted that the managing director had made a report to the board in this connection giving them the result of the discussion he had with the authorities of the Government of India, "with regard to the acquisition of the company by the Government in the process of nationalisation of the Air Transport Industry." The minutes of the said board meeting further recorded that "it was also felt by the directors that in the event of the Government implementing their scheme of nationalisation, the directors should remain prepared for all consequences which would follow affecting not merely the shareholders of the company but also the managing agents, the managing director, the personnel and other operational agencies. The directors were advised that the managing agents under their agreement with the company were entitled to compensation in the event of premature termination by the company of their managing agency agreement. The managing agents are naturally anxious to be compensated in the manner provided in their agency agreement in the event of the company being taken over by the Government." Among the resolutions passed by the directors were the following :

(3.) ACCORDING to the Tribunal "on the nationalisation of the airlines, the assessee-company had transferred its business, though perhaps under a compulsion, to the Indian Airlines Corporation. There was, therefore, no obligation on the part of the assessee-company to pay any compensation whatsoever to the managing agents. This compensation is also, . . . . . . . . ex gratia payment not necessitated by the needs of the business. It is therefore clear that the expenditure was incurred not for terminating a disadvantageous relationship in order to avoid future losses, but was a payment made voluntarily on the nationalisation of the business carried on by the assessee. The company did not get rid of them for reasons of trade."