DHARMAVIR DHIR Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) IN Miscellaneous Judicial Case No. 679 of 1950 the assessee is Sri Dharamvir Dhir, who carries on the business of coal -raising under an agreement with the Bengal Nagpur Coal Company limited. The assessment year is 1947 -48 and the accounting year is from 1 -1 -1946, to 31 -12 -1946. The assessee is an employee of Messrs. Karamchand Thapar and Brothers Limited, and for the accounting year he was paid a salary of Rs. 10,572/ -. The assessee had also an income to the extent of Rs. 500/ - from certain shares in joint Stock Companies. The contract for raising coal is dated 20 -12 -1945, but the assessee actually commenced the business of coal raising from 1 -1 -1946. There was an agreement between the assessee and the Mohini Thepar Charitable Trust (hereinafter called the trust) on 25 -2 -1946, by which the Trust agreed to advance to the assessee a sum of Rs. 1 1/2 lakhs on payment of interest at the rate of 6 per cent per annum and also an additional amount equal to 11/16th of the profit. The terms of the agreement are contained in a letter dated 25 -2 -1946, written by the assessee to the Board of Trustees. The letter of the assessee reads as follows:

(2.) UNDER section 66 (2) of the Income -tax Act the Appellate Tribunal has submitted the following question of law for the opinion of the High Court: "Whether on the facts and circumstances of this case Rs. 72,963/12/ - was a revenue expenditure deductible under section 10 (2) (iii) or under section 10 (2) (xv) of the Indian Income -tax Act -

(3.) IN the course of hearing of these references Mr. S. N. Dutta on behalf of the assessee did not submit that the amounts in question could be deducted under the provisions of S. 10(2) (iii) of the Income -tax Act, but the learned Counsel pressed the argument that the amounts should be deducted under S. 10(2) (xv) as expenditure incurred by the assessee wholly and exclusively for the purpose of the business. The opposite viewpoint was presented by Mr. Tarkeshwar Prasad appearing on behalf of the Income -tax Department. It was submitted that the payment of the amounts by the assessee was tantamount to sharing of profits and was not expenditure exclusively incurred for the purpose of the business of the assessee. The question at issue, therefore, is - what is the real nature of the transaction? Is it a contract for mere division of profits between the assessee exclusively for the purpose of business before the divisible profits are ascertained? The question at issue is one of substance and not one of "form.I think that the answer to the question must depend on the language of the contract and the circumstances of each particular case and the question must also be determined on principles of ordinary commercial trading. In the present ease it is manifest from the terms of the agreement that the managing trustee is in a dominating position.It is expressly provided in clause (3) that the trust shall be at liberty to call back the money at any time and to stop further finances on giving a week's notice. Under clause (4) it is in the absolute discretion of the trust to withdraw the facility for credit and to stop future advance after giving a week's notice. Clause (8) provides that all stores, stock -in -trade, outstandings and book debts and other assets in the business shall stand charged and be a security for due repayment of the monies due to the trust. Clause (5) states that the trust would not be responsible for any losses or damages sustained by the assessee in respect of the coal raising contract.It is also mentioned by the Appellate Tribunal in the statement of the case that the average amount of the loan advanced by the trust was Rs. 18,100/ - and against a loan of such an amount it is absurd to make payment of a sum of Rs. 72,963/ - in addition to Rs. 1,086/ -. The payment of this amount would work out at more than 400 per cent of the capital advanced, and the principle of ordinary commercial trading would not countenance such an excessive payment. In the course of hearing Mr. S. N. Dutta on behalf of the assessee said that the calculation of the Appellate Tribunal was wrong and that the average amount of capital provided by the trust for the accounting year was Rs. 44,192/ -. Such an argument was apparently not advanced when the case was heard before the Appellate Tribunal and it is expressly stated by the appellate Tribunal in the last paragraph of the statement that the parties agreed that all the facts had been correctly stated in the case and there was no omission of any material fact. It is not, therefore, possible to accent the figure given by learned Counsel in the course of argument. Even assuming that the figure given by learned Counsel is correct, the amount of profit paid works out at more than 170 per cent, which cannot, therefore, be said to be a proper payment in a commercial sense. It is also necessary to mention that the assessee was an employee of Messrs Karamchand Thapar and Brothers Limited and was receiving a remuneration of Rs. 10,000/ - a year. I have already said that Karamchand Thapar was the settler and at the same time was the managing trustee of Mohini Thappar Charitable Trust. Having regard to the relationship between the parties and having examined the clauses of the agreement of the 25th February, 1946 between the assessee and the board of trustee, I am of 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. In such a case there is no payment amounting to business expenditure falling within the ambit of section 10 (2) (xv) of the Income -tax Act and the payment of ll/16th of the profits under clause (7) of the agreement to the trust by the assessee cannot be held to be expenditure solely and exclusively for the purpose of the business within the meaning of section 10 (2) (xv) of the Income -tax Act.The view that I have taken as to the construction of the contract between the parties is borne out by a decision of the Judicial Committee in a similar case, the Pondicherry Rly. Co. Ltd. v. Commissioner of Income -tax, Madras, 5 ITC 363 : (AIR 1931 P. C. 165) (A). In that case the French Colonial Government had agreed to contribute land free of charge to the Pondicherry Railway Company to construct a railway and to pay it a subsidy and the Pondicherry Railway Company in turn covenanted to pay to the French Colonial Government a share of the profits. It was argued before the Judicial Committee on behalf of the Pondicherry Railway Company in that case that inasmuch as the Pondicherry Railway Company as a condition of making any profits must pay over one half of them to the French authorities and could never itself reserve the whole profits, the payment so made was of the nature of a rent payable by the company or a charge on the undertaking. The argument was rejected by Lord Macmillan. who took the view that the contract between the parties showed that the French Colonial Government shall "participate in the success of the undertaking" and that any deduction by the company of what it pays to the French Colonial Government was not permissible. The material facts in the present case are of similar character.