Sham compensation agreements cannot support a business deduction when evidence shows a colourable scheme to withdraw profits tax-free.

Compensation paid to selling agents and a managing agent was treated as a non-deductible business outgoing because the agreements were found on evidence to be sham and colourable. The court noted that the sequence of appointments, contractual terms, timing of the mill sale, compensation demand, and rapid resolutions and payments pointed to a connected design controlled by the same interests. On that factual basis, the claimed expenditure was not a genuine commercial payment under section 10(2)(xv) of the Income-tax Act, 1922, and the deduction was disallowed.

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Issues: Whether the compensation paid to the selling agents and managing agent was an allowable deduction under section 10(2)(xv) of the Income-tax Act, 1922, or whether the agreements and consequent payments were sham or colourable transactions devised to withdraw funds tax-free before liquidation.

Analysis: The arrangement of successive appointments, the contractual terms, the timing of the sale of the mills, the demand for compensation, and the rapid sequence of resolutions and payments showed a connected design controlled by the same interests. The Tribunal's finding that the appointments and compensation agreements were not genuine commercial transactions but part of a scheme to appropriate the assessee's profits was supported by the evidence. In such a case, the claimed compensation could not be treated as a genuine deductible outgoing under section 10(2)(xv).

Conclusion: The compensation payments were rightly disallowed, and the finding that the transactions were sham and colourable was upheld against the assessee.

Ratio Decidendi: A payment claimed as business expenditure is not allowable where the underlying agreements are found, on evidence, to be sham or colourable transactions designed to withdraw profits tax-free.

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