Compensation for cancelling machinery purchase contracts was capital expenditure, not deductible as business revenue outlay.

Compensation paid for cancelling contracts to purchase textile machinery was treated as capital expenditure because it was incurred to avoid acquiring a capital asset and to prevent a larger capital outlay. The payment was not made in the ordinary course of business to earn profits, nor to further, protect, or continue day-to-day business operations. It therefore fell on the capital side and was not deductible as expenditure wholly and exclusively for business purposes under section 10(2)(xv) of the Income-tax Act, 1922.

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Issues: Whether compensation paid for cancellation of contracts to purchase textile machinery was deductible as expenditure wholly and exclusively for the purpose of business under section 10(2)(xv) of the Income-tax Act, 1922, or was capital expenditure.

Analysis: The compensation was paid to avoid taking over machinery that would have constituted a capital asset and to prevent larger capital outlay. The payment was not incurred for earning profits in the ordinary course of business, nor for furthering, protecting, or continuing day-to-day business operations. It was directed towards avoiding an unnecessary investment in capital assets and therefore fell on the capital side rather than as a revenue outgoing.

Conclusion: The payment was capital expenditure and was not deductible under section 10(2)(xv) of the Income-tax Act, 1922.

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