Commercial expediency allows deduction for bona fide payment on termination of a managing agency to reduce recurring business liability.

Compensation paid on bona fide premature termination of a managing agency agreement was treated as business expenditure deductible under section 10(2)(xv) of the Indian Income-tax Act. The arrangement was found to be a commercial transaction entered into to enable the company to take over management through its board and to end a recurring managing agency commission liability. As there was no material showing a device for distribution of profits, gratuity, or any improper purpose, and the payment was supported by internal approval and shareholder sanction, the expenditure satisfied the test of commercial expediency and was allowable as incurred wholly and exclusively for business.

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Issues: Whether compensation paid by the assessee company to the managing agents on premature termination of the managing agency agreement was an admissible deduction as expenditure laid out wholly and exclusively for the purposes of business under section 10(2)(xv) of the Indian Income-tax Act.

Analysis: The termination of the managing agency was examined as a commercial transaction entered into by the managed company with the object of taking over its management through its board of directors and of relieving itself from the recurring liability of managing agency commission. On the facts found, the arrangement was not shown to be a device for distribution of profits or a gratuitous or oblique payment. The compensation was reasonable, the decision was supported by the company's internal process and shareholder approval, and no evidence established lack of bona fides or improper purpose. Applying the test of commercial expediency, an expenditure voluntarily incurred in order indirectly to facilitate the carrying on of the business may still be wholly and exclusively for the business.

Conclusion: The compensation of Rs. 18 lakhs was an admissible deduction under section 10(2)(xv) of the Indian Income-tax Act and the answer was in the affirmative, in favour of the assessee.

Ratio Decidendi: Payment made on bona fide termination of a commercial arrangement to enable the assessee to take over management and reduce recurring business liability is deductible if incurred on grounds of commercial expediency and not as a device for profit distribution or an improper purpose.

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