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Income‑tax Reference No. 558 of 1972, decided on 10th April, 1984.

‑‑‑S. 10(2)(xvi)‑‑Revenue expenditure‑‑ Assessee reaching an agreement with his dealer and allowing sum of rupees one lac as an ex gratia payment as mark of mutual goodwill‑‑As a matter of fact payment had been made in order to avoid counter‑claim of rupees three lacs made by dealer for reducing his area of distribution from whole of Pakistan to southern part of West Pakistan and to get rid of dealer from northern part of territory‑‑Payment of one lac was made to avoid greater loss i.e. rupees three lac claimed by dealer with a view to smooth running and betterment of business of company to extent of northern territory‑ Held, payment of rupees one lac was made for commercial purposes and in interest of good running of business and hence it was clearly a revenue expenditure‑‑Question answered in affirmative.

1978 P T D 191 rel.

Sheikh Haider for Applicant.

A.A. Sharif for Respondent.

Date of hearing: 10th April, 1984.

The Commissioner of Income Tax has submitted the following question for decision of this Court:

"Whether on the facts and in the circumstances of the case the Income Tax Tribunal was justified in holding the payment of Rs.1,00,000 ex gratis by Messrs CIBA (Pakistan) Limited, Karachi, to their agents Messrs Eastern Pharmaceutical Distributors was a revenue expenditure allowable under Section 10(2) (xvi) of the Income Tax Act."

2. The brief facts giving rise to the question are that Messrs Eastern Pharmaceutical Distributors were acting as Distributors of the respondent for the whole of Pakistan under an agreement, dated 7‑9‑1951. By a subsequent agreement, dated 22‑8‑1961 this distributorship was reduced to the southern part of West Pakistan. There were certain negotiations in this respect as the distributors were resisting the reduction in the territorial area. They set up a claim against the respondent in this behalf for a sum of Rs.3,53,000 for non‑payment of proper commission for earlier years. Ultimately an agreement was arrived at by which the territorial area was reduced and the distributors were paid a lump sum of Rs.1,00,000 ex gratis as a mark of mutual good will. The Income Tax Officer refused deduction of this amount in the case of the respondent. When, however, the matter reached the Tribunal, it was held that the payment was on account of commercial expediency made wholly and exclusively for the purpose of the business of the respondent and that it did not secure any enduring benefit to the respondent. It was accordingly held that this was an admissible revenue deduction within the meaning of section 10(2)(xvi). The Tribunal's finding was based on the fact that the respondent felt that the distributors were not efficiently performing their job and in order to give a fillip to their business they ultimately arrived at the decision to reduce their territory and when this action was resisted they settled the matter by making a payment of Rs.1,00,000. The Tribunal, therefore, was of the opinion that this payment should be for no other purpose than the purpose of the business itself although it was termed as ex gratia payment in the agreement.

3. A similar matter had been disposed of by a bench of this Court in 1978 P T D 191 (192, 193, 194) and on the facts and in the circumstances of the case it was held that the assessee having terminated the agency of its dealer with utmost reluctance and yet wanting to retain 'the dealer as main dealer to get benefit of his experience and knowledge with a view to smooth running and betterment of its business, payment to the dealer was not made ex gratia, but was made purely for commercial necessity and expediency, hence it was a revenue expenditure. In that case the sums of Rs.25,000 and Rs.60,000 had been paid by the assessee to their dealer as compensation for loss of commission and in those circumstances the said decision had been made.

4. The facts and circumstances of the present case are that although the agreement by which Rs.1,00,000 had been paid by the assessee to their dealer as an ex‑gratia payment as a mark of mutual goodwill on the signing of the agreement. But as a matter of fact the payment had been made in order to avoid the counter claim of Rs.3,00,000 made by the dealer and in order to get rid of the dealer from the northern part of the territory, and therefore, it was a payment made in order to avoid greater losses and with a view to smooth running and betterment of the business of the company to the extent of its northern territory. It was, therefore, obviously a payment made for commercial purposes and in the interest of good running of the business and hence it was clearly a revenue expenditure. The question is, therefore, answered in the affirmative.

M. Y. H. Question answered in affirmative.

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