Revenue expenditure for terminating onerous business contracts is deductible when paid for commercial expediency.

A payment made to terminate an onerous managing agency contract was treated as revenue expenditure because it did not create any capital asset or enlarge the company's profit-earning structure. The payment was made to free the business from recurring contractual liabilities and improve commercial efficiency, which satisfied the test of business expediency. On that basis, it was held to have been laid out wholly and exclusively for the purposes of the assessee's business and therefore deductible under section 10(2)(xv).

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Issues: Whether the sum of Rs. 1,25,000 paid to the managing agents for termination of the managing agency agreement was capital expenditure or revenue expenditure, and if revenue expenditure, whether it was laid out wholly and exclusively for the purposes of the assessee's business so as to be deductible under section 10(2)(xv).

Analysis: The payment was made to secure termination of a continuing managing agency carrying recurring annual obligations of remuneration and commission. It did not bring into existence any capital asset, nor was it intended to enlarge or alter the profit-earning structure of the company. The surrounding circumstances showed that the payment was part of a business arrangement to free the company from an onerous contractual liability and enable it to carry on its business more economically. Judged from the standpoint of business expediency, the outlay was one which a prudent businessman could make in good faith for the company's advantage.

Conclusion: The payment was revenue expenditure and was wholly and exclusively laid out for the purposes of the assessee's business; it was deductible under section 10(2)(xv).

Ratio Decidendi: A payment made to terminate an onerous business contract and thereby free the assessee from recurring trading liabilities, without creating a capital asset or enduring advantage in the capital field, is revenue expenditure deductible if incurred wholly and exclusively on grounds of commercial expediency for the business.

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