Pre-acquisition payments tied to agency rights are not deductible as working expenses of profit earning.

Payments made by managing agents to third parties under binding pre-acquisition agreements were not deductible as business expenditure. Although the commission from the principal formed part of business receipts, the obligation to pass on a quarter of it was a condition of acquiring the agency business and the right to earn profits, not an outlay incurred in the actual process of earning them. The liability existed even if the business made a loss, and it was not payment for goods, services, or transactions in the conduct of the business. On the proper commercial test, the sums were not working expenses laid out solely for profit earning, so deduction was disallowed.

---

---

Issues: Whether the amount paid by the managing agents to third parties under binding agreements, as a condition attached to the acquisition of the agency business, was deductible as expenditure incurred solely for the purpose of earning the profits or gains of that business.

Analysis: The commission received from the principal was part of the business receipts, but the obligation to pay a quarter of it to the third parties was independent of whether any profit was made and continued even if the business as a whole resulted in a loss. The payments were undertaken as part of the consideration for acquiring the agency business and the right to earn profits, not as outlays made in the actual course of earning those profits. They were not payments to creditors for goods or services, nor did they arise from transactions in the conduct of the business. On the proper commercial test, the sums were not part of the working expenses or expenditure laid out as part of the process of profit earning.

Conclusion: The deduction was not admissible, as the payments were not expenditure incurred solely for the purpose of earning the profits or gains of the business.

---