Commercially necessary financing payment held revenue expenditure, not capital outlay, because it preserved the profit-earning apparatus.

A payment made by managing agents to co-sharers under a financing arrangement was treated as revenue expenditure, because it was commercially necessary to obtain finance, preserve the profit-earning apparatus, and earn the balance of commission. The court held that the obligation arose in the course of the agency business and was not a capital outlay for acquiring a source of income. As the payment was a recurring diversion out of commission received from year to year, it was allowable as expenditure under the income-tax law and not capital expenditure, with the answer given in favour of the assessee.

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Issues: Whether the payment made to the co-sharers out of the managing agency commission was allowable as expenditure under Section 10(2)(ix) of the Indian Income-tax Act, 1922, or was capital expenditure.

Analysis: The payment was made as part of the arrangement by which finance was procured for the company in financial difficulty, and the managing agents entered into the obligation in the course of carrying on their agency business. On a commercial view, the payment was incurred to enable the agents to continue and preserve the profit-earning apparatus of the agency and to earn the balance of the commission. It was not a capital outlay for acquisition of a source of income, but a recurring payment out of revenue commission received from year to year. The assignment of the commission portion to the lender also supported the view that the amount no longer formed part of the assessees' income in the relevant sense.

Conclusion: The payment was allowable as revenue expenditure and was not capital expenditure; the answer was in favour of the assessee.

Ratio Decidendi: A payment made as part of a commercially necessary arrangement for financing the business, incurred in the course of earning managing agency commission and not for acquiring a source of income, is deductible as expenditure laid out solely for earning profits and is not capital expenditure.

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