Termination of burdensome finance arrangements treated as revenue expenditure, with deduction limited to amounts actually paid and related legal costs allowed.

Payment made to terminate finance agreements and remove recurring trading liabilities was treated as revenue expenditure because it freed the business from burdens affecting its operations and did not secure a capital asset or enduring capital benefit. Deduction, however, was confined to the instalments actually paid in the relevant years, rather than the full contingent sum. Legal expenses connected with the suit, compromise, and related finance arrangements were also held deductible as revenue expenditure, as they formed part of the same business settlement.

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Issues: (i) Whether the compensation of Rs. 3,00,000 paid under the consent terms for termination of the finance agreements was deductible as revenue expenditure or was capital in nature; (ii) whether the legal expenses incurred in relation to the suit and the compromise were deductible.

Issue (i): Whether the compensation of Rs. 3,00,000 paid under the consent terms for termination of the finance agreements was deductible as revenue expenditure or was capital in nature.

Analysis: The agreements were found to be finance arrangements intended to enable the company to carry on its business, though they imposed heavy recurring liabilities by way of interest and commission and contained security rights in favour of the lenders. The termination payment was made to remove those trading disadvantages and to free the assessee from liabilities affecting the smooth conduct of its business. The advantage obtained was not treated as the acquisition of any capital asset or an enduring benefit of a capital character.

Conclusion: The compensation was held to be revenue expenditure, but the allowance was restricted to the instalments actually paid in the relevant years, namely Rs. 60,000 each year.

Issue (ii): Whether the legal expenses incurred in relation to the suit and the compromise were deductible.

Analysis: The solicitors' fees for preparing the finance agreements were accepted as revenue expenditure, and the remaining legal expenses connected with the compromise were treated consistently with the character of the termination payment, since they were incurred in relation to the same business arrangement and its settlement.

Conclusion: The legal expenses were held to be deductible as revenue expenditure.

Final Conclusion: The reference was answered in favour of the assessee on the deductibility of the instalments actually paid and the connected legal expenses, but against the assessee on allowing the entire contingent sum of Rs. 3,00,000 as such.

Ratio Decidendi: A payment made to terminate a burdensome commercial arrangement and remove trading disadvantages is revenue expenditure if it does not secure a capital asset or an enduring benefit of a capital character; a deduction is allowable only to the extent of the liability actually discharged in the relevant year.

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