Commercial expediency supports business deduction for settlement payment made to terminate a disruptive managing agency arrangement.

Expenditure incurred bona fide on grounds of commercial expediency to end a managing agency arrangement that threatened the future conduct of the business was treated as laid out wholly and exclusively for business purposes. The court applied the test under section 10(2)(xv) of the Indian Income-tax Act, 1922, and held that a direct or immediate benefit was not necessary where the payment was made voluntarily to facilitate business operations or prevent future commercial loss or inconvenience. On the facts, the settlement payment and connected legal, travelling and incidental costs were deductible, and the reference was answered in favour of the assessee.

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Issues: Whether the payment of Rs. 3 lakhs made to the managing agents, together with the connected legal, travelling and costs expenditure, was laid out wholly and exclusively for the purpose of the assessee's business and therefore allowable as a deduction under the income-tax law.

Analysis: The governing test under section 10(2)(xv) of the Indian Income-tax Act, 1922, is whether the expenditure was incurred wholly and exclusively for the purposes of the business, viewed from the standpoint of commercial expediency and ordinary commercial trading. Expenditure need not secure a direct and immediate benefit if it is made voluntarily and bona fide to facilitate the carrying on of the business or to terminate a trading relationship that threatens future losses or commercial inconvenience. On the facts, the payment was made under a genuine settlement to end a dangerous and disruptive managing agency arrangement, and the surrounding circumstances did not show that the payment was motivated by generosity or any improper purpose.

Conclusion: The payment of Rs. 3 lakhs and the connected expenses were held to be deductible as expenditure laid out wholly and exclusively for the purposes of the business, and the questions referred were answered in the affirmative in favour of the assessee.

Ratio Decidendi: A payment made bona fide on grounds of commercial expediency to terminate a business arrangement that jeopardises the future conduct of the business is expenditure wholly and exclusively laid out for the purposes of that business.

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