TMI Blog1961 (1) TMI 6X X X X Extracts X X X X X X X X Extracts X X X X ..... 1-1961 - Judge(s) : J. L. KAPUR., M. HIDAYATULLAH., J. C. SHAH JUDGMENT The judgment of the court was delivered by KAPUR, J.--These appeals by the assessee are brought against two judgments and orders of the High Court of Judicature at Patna in income-tax references under section 66(2) of the Income-tax Act answering the questions in the negative and against the assessee. The questions were : " (1) Whether on the facts and circumstances of this case Rs. 72,963-12-0 was a revenue expenditure deductible under section 10(2)(iii) or under section 10(2)(xv) of the Indian Income-tax Act ? (2) Whether on the facts and circumstances of this case Rs. 76,526-1-3 was a revenue expenditure deductible under section 10(2)(iii) or under section 10(2)(xv) of the Indian Income-tax Act ? The facts of the appeals are these : The appellant was an employee of M/s. Karam Chand Thapar Bros. and for each of the accounting years relating. to the assessment years 1947-48 and 1948-49 his 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 c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the payments were not for the purpose of the business and that taking into account the nature of the accounts, the nature of the payments and the relationship between the parties, it could not be said that the amounts were wholly and exclusively laid out for the purpose of the business and, therefore, rejected the claim. In the statement of the case the Tribunal has said that the average amount which had been advanced by the trust to the appellant in the first year was Rs. 18,100 and the payments made to the trust in the two years were, therefore, a share of profits and not expenditure laid out wholly and exclusively for the purposes of the business. The High Court approached the question from the same angle. It was of the opinion that the question should be determined on principles of ordinary commercial trading and because the managing trustee was in a dominating position and only a small sum of money, i.e., Rs. 18,100 on an average, had been advanced, the payment of Rs. 72,963 in addition 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 emplo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y. The agreement between the appellant and the trust has to be considered in the context, of those circumstances and if taking all the surrounding circumstances into consideration the trust found it necessary to have control over the working and over the finances and had offered stringent conditions it is not a matter which can be considered to be abnormal. Another matter which was taken into consideration by the Tribunal was that the amounts claimed as deductible items were shown as a share of profits of the trust which had been debited in the appellant's profit and loss appropriation account or in other words the appellant as per his account admitted that it was an appropriation of the profits to the trust. The Tribunal thus was of the opinion that the interest to be received by the trust was 11/16 part of the profits of the appellant's business and that the method of accounting clearly showed that the appellant was only parting with the share of profits. This, in our opinion, is an erroneous 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 chall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the business. See also Strong v. Woodifield. These cases, therefore, show that if any amount is expended which is commercially expedient and is expended for the purpose of earning profits it is a deductible expenditure. In support of their opinion the High Court relied upon the cases hereinafter mentioned but in our opinion they do not apply to the facts and circumstances of this case. The first case referred to is Pondicherry Railway Co. v. Commissioner of Income-tax. In that case the assessee company, incorporated in the United Kingdom, obtained a concession for constructing a railway in the territories of Pondicherry. The assessee company was to pay to the French Government 1/2 of its net profits. The French Government on its part gave land on which the railway was to be built free of charge and also agreed to pay a subsidy. The question for decision in that case was whether the monies paid by the assessee company to the French Government, i.e., half of its net profits, were allowable 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 accur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fits were made or not. Later on two persons D and S advanced funds to Tata Power Co. on the condition that in addition to the interest payable to them by Tata Power Co. they should each receive from Tatasons Ltd. 12 1/2% of the commission earned by Tatasons Ltd. Tatasons Ltd. assigned their entire right to the assessee company and the Tata Power Co. entered into a new agency agreement with the assessee company and the assessee company received a commission, and out of that paid 1/4 to D and S. Relying on Pondicherry Railway case the Bombay High Court held that that was not an allowable deduction as expenditure incurred solely for earning profits. On appeal the Privy Council held that Pondicherry case did not govern the case. The nature of the transaction was held to be this that the obligation to make the payments was undertaken by the assessee company in consideration of its acquisition of the right to property to earn profits, i.e., of the right to conduct the business, and not for the purpose of 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the facts of each case on a commercial basis. In Indian Radio and Cable Communications Co. Ltd. v. Commissioner of Income-tax it was observed that it was not universally true to say that a payment the making of which is conditional on profits being earned cannot properly be described as an expenditure incurred for the purpose of earning such profits. Lord Maugham in explaining the judgment in the Pondicherry Railway case said at page 278 : " To avoid misconception it is proper to say that in coming to this conclusion they have not taken the view that the case is governed by the decision in Pondicherry Railway Co. Ltd. v. Commissioner of Income-tax, though that case no doubt throws light on the nature of the problem which has to be solved in the present case. It should perhaps be added that a sentence in the judgment in that case has been explained, if explanation was necessary, by Lord Macmillan in the subsequent case of Adamson v. Union Cold Storage Co. " As to when a deduction is claimable and when 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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