Commercial expediency supports deduction of compensation paid to end an expensive management arrangement and improve business efficiency.

Compensation paid to outgoing directors for loss of office was treated as a deductible business expense under section 10(2)(xv) of the Indian Income-tax Act, 1922. The payment was made after management shifted from the United Kingdom to India and was aimed at ending an expensive business arrangement. Because the articles fixed the directors' remuneration and tenure, the arrangement was treated as contractual in nature; even apart from contract, the payment was justified by commercial expediency as it reduced recurring expenditure and improved business supervision. The provision was read broadly, and a direct link with immediate profit was not required. The deduction was allowed as not capital in nature.

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Issues: Whether compensation paid to outgoing directors for loss of office was an admissible deduction as business expenditure under section 10(2)(xv) of the Indian Income-tax Act, 1922.

Analysis: The payment was made after the seat of management was shifted from the United Kingdom to India and the company sought to end an expensive mode of carrying on business. The articles of association fixed the directors' remuneration and term of office, and on that footing the outgoing directors were treated as having been engaged under a contractual arrangement with the company. Even apart from contract, the payment was held to have been dictated by commercial expediency because it facilitated the business, reduced recurring expenditure, and improved the conduct and supervision of operations. The statutory formula was wider than the earlier test of expenditure incurred solely for earning profits, and a direct nexus with immediate profit was not necessary.

Conclusion: The compensation was an allowable deduction under section 10(2)(xv) and the answer to the reference was in favour of the assessee.

Ratio Decidendi: A payment made to terminate an expensive business arrangement and to facilitate the efficient carrying on of the business, if not capital in nature, is deductible as expenditure laid out wholly and exclusively for the purpose of business.

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