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TMI Blog1961 (1) TMI 6X X X X Extracts X X X X X X X X Extracts X X X X ..... salary was Rs. 10,572. He also had an income of Rs. 500 from shares in certain joint stock companies. On December 20 1945, he entered into a contract with Bengal Nagpur Coal Co. Ltd. for raising coal from Bhaggatdih Colliery, Jharia, and actually started his business from January 1, 1946. Evidently he did not have the requisite funds for his business and, therefore, in order to finance it, he entered into an agreement with the Mohini Thapar Charitable Trust on February 25, 1946. The trust is a public charitable trust, which was created by Lala Karam Chand Thapar, who constituted himself as the managing trustee. The relevant terms of this agreement between the appellant and the trust were that the trust was to advance a sum up to Rs. 11 lakhs the contract was to be " carried in accordance with the policy " settled between the appellant and the trust ; the trust could withdraw its money at any time and stop further advances ; the trust was not to be liable for any losses ; the appellant was to send monthly returns to the trust and the seventh clause was " that in consideration of the trust having agreed to finance my said contract business up to Rs. 11 lakhs I have agreed to pay to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ddition to interest was an absurdly large sum which with the interest paid worked out at about 400% interest. The High Court also took into consideration the fact that the appellant was an employee of Lala Karam Chand or his company. Put in their own words the High Court observed " having regard to the relationship between the parties and having examined the clauses of the agreement of February 25, 1946, between the assessee and the board of trustees I am of the opinion that the real legal position in this case is that there is a joint adventure between the parties, a quasi partnership which falls something short of partnership and that the arrangement between the parties was that the amount of profits should be ascertained and then they shall divide it up in certain specified proportions. " The payments, therefore, did not fall within section 10(2)(xv). The question was, therefore, answered in the negative and against the assessee. The appellant has come in appeal to this court by special leave. As far as the record goes at the relevant time the appellant was a person of comparatively small means. No doubt he was getting a salary of Rs. 10,572 a year and had about Rs. 500 from h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... us approach to the question. The case has to be decided according to the tenor of the document as it stands and the circumstances of the case. The genuineness of the document has not been challenged though an effort was made by the Revenue to so construe the document and so read the facts as to make both the amounts liable to tax in the hands of the appellant. As to what is a deductible expense has to be viewed in the circumstances of each case. In Commissioner of Income-tax v. Chandulal Keshavlal this court observed that, in deciding whether a payment of money is a deductible expenditure, one has to take into consideration the question of commercial expediency and the principles of ordinary commercial trading. If the payment or expenditure is incurred for the purpose of the trade of the assessee it does not matter that the payment may enure for the benefit of a third party. Another test laid down in that case was whether the transaction is properly entered into as apart of the assessee's legitimate commercial undertaking in order to facilitate the carrying out of its business and it is immaterial that a third party also benefits thereby. Thus, in cases like the present one, in o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as a deduction under the provisions corresponding to section 10(2)(xv). Lord Macmillan observed at page 251 : "A payment out of profits and conditional on profits being earned cannot accurately be described as a payment made to earn profits. It assumes that profits have first come into existence. But profits on their coming into existence attract tax at that point and the revenue is not concerned with the subsequent application of the profits." But these observations have been later on explained in other cases to which reference will be made presently. In Union Cold Storage Co. Ltd. v. Adamson the assessee leased lands and premises abroad reserving a rent. of pound 9,60,000. It was also provided in the deed that if at the end of the financial year it was found that after providing for this rent the result of the company's operations was insufficient to pay, interest on charges and debentures etc., the rent for the year was to be abated to the extent of the deficiency. In computing its profits the assessee company claimed the sums of rent paid in two respective years. They were held not payable out of the profits or gains and were allowable deduction's. At page 318 Rowlatt, J., ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... producing profits in the conduct of the business. Dealing with Pondicherry Railway case Lord Macmillan said: "In the Pondichery case the assessees were under obligation to make over a share of their profits to the French Government. Profits had first to be earned and ascertained before any sharing took place. Here the obligation of the appellants to pay a quarter of the commission which they receive from the Tata Power Co. Ltd. to F. E. Dinshaw Ltd. and Richard Tilden Smith's administrator is quite independent of whether the appellants make any profit or not." And at page 209 Lord Macmillan said : " In short, the obligation to make these payments was undertaken by the appellants in consideration of their acquisition of the right and opportunity to earn profits, that is, of the right to conduct the business, and not for the purpose of producing profits in the conduct of the business." At page 209 the Privy Council accepted the following test laid down by Lord President in Robert Addie & Sons Collieries Ltd. v. Commissioners of Inland Revenue, where it was observed : "What is 'money wholly and exclusively laid out for the purposes of the trade' is a question which must be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hen it is not, it was said at pages 277-278 that if a company had made an apparent net profit and then had to pay to a director as a contractual recompense, the net profit would be the difference between the two but if there was a contract to pay a commission on the net profits of the year it must necessarily be held to mean as net profits before the deduction of the commission. In British Sugar Manufacturers Ltd. v. Harris the assessee company agreed to pay two other companies a certain percentage of its annual profits after deduction of expenses and debenture interest in consideration of their giving to the assessee company the full benefit of their technical and financial knowledge and experience. Certain payments were made in pursuance of that agreement and it was held that payments under the agreement were permissible deductions in computing the assessee company's profits. Dealing with the Pondicherry Railway case, at page 107, the learned Master of the Rolls said : "It is to be observed that Lord Macmillan in that paragraph was quite clearly using the word 'profit' in one sense and one sense only he was using it in the sense of the 'real net profit' to which Lord Maugham ..... X X X X Extracts X X X X X X X X Extracts X X X X
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