1968 PLP 717 (PTD)

RAY, J.‑The assessee entered into an agreement with H. Manory Ltd., hereinafter referred to as the company, on May 5, 1948, whereby the assessee agreed to finance the company in its business and the latter agreed to pay the assessee 50 percent. of the profits to be earned in that business. The assessee was short of funds and entered into an agreement in writing with Ratiram Tansukhroy on October 7, 1948. The agreement between the assessee and Messrs Ratiram Tansukhroy, hereinafter referred to as the financier, provided that the financier would advance moneys to the assessee for the purpose of financing the business of H. Manory Ltd. and further that the financier would render services and help as might be required by the assessee in connection with the business. The agreement further provided that in consideration of help to be rendered by way of arranging finance and/or further services the assessee would pay to the financier interest at the rate of 42 percent. per annum on all the amounts that might be advanced by the financier together with 50 percent. of the share of the net profits which would be received by the assessee from H. Manory Ltd., that is to say, that such profits would be shared between the assessee and the financier in the following manner: (a) The assessee would retain 50 percent. of the actual net profits to be received by the assessee from H. Manory Ltd.; (b) The financier would be paid the remaining 50 percent. of the net profits. Before the execution of the 7th October 1948, agreement between the assessee and the financier, the assessee had obtained an advance of Rs. 50,000 and Rs. 17,500 on May 24, 1948, and June 7, 1948, respectively, in order to pay the said amounts to the com pany. The financier negotiated a loan of Rs. 1,00,000 advanced to the assessee by Premier Stores Supplying Co., in the month of June 1948, and the said amount was advanced by the assessee to H. Manory Ltd. The assessee closed its accounts on December 31, 1948. During that year the assessee received Rs. 1,76,875 as 50 percent. of the share of profits from H. Manory Ltd. Out of that amount the assessee paid Rs. 87,937‑8‑0 being the 50 percent. of the said amount to Ratiram Tansukhroy. Similarly, in the calendar year, 1949, relevant for the present case, the assessee received Rs. 1,62,155 as 50 percent. share in the profits of H. Manory Ltd. and paid Rs. 81,078 to Ratiram Tansukhroy. The contention of the assessee was that the transaction bet ween Ratiram Tansukhroy, the financier, and the assessee was a joint venture and the alternative contention was that the amount paid to Ratiram Tansukhroy was admissible as a deduction under section 10(2)(xv) of the Income‑tax Act. In other words, the assessee contended that the amount was paid as an expense in the matter of finance received by the assessee from Ratiram Tansukhroy and for negotiation of the loan from Premier Stores Supplying Co. and, therefore, it was a business expense. The Tribunal found that it was not a joint venture. The Tribunal held that only the interest payable by the assessee to Ratiram Tansukhroy was admissible under section 10(2)(iii) of the Act but the payment of a moiety of the profits was only a diversion of the profits after they were earned by the assessee and as such was not allowable as a deduction under section 10(2)(xv). The question of law that has been referred on these facts and circumstances is as follows: "Whether, on the facts and in the circumstances of this case, the payment of the sum of Rs. 81,078 to Ratiram Tansukhroy was an expense admissible as a deduction under section 10(2) (xv) of that Act?" Counsel for the assessee relied on the decision of the Supreme Court in the case of Dharamvir Dhir v. Commissioner of Income‑tax ((1961) 42 I T R 7 (S C)) in support of the contention that the assessee agreed with H. Manors Ltd. to finance the business of the com pany in tea chests and inasmuch as the assessee was short of funds in financing the said business the assessee entered into an agreement with Ratiram Tansukhroy whereby the latter agreed to finance the assessee and, therefore, the payments made by the assessee to Ratiram Tansukhroy out of profits earned by the assessee were an item of expense in the course of the business. Dharamvir, an employee of Messrs Karamchand Thapar & Bros., entered into a contract with Bengal Nagpur Coal Co. Ltd. for raising coal. Dharamvir did not hold sufficient funds for his business and, therefore, he entered into an agreement with Mohini Thapar Charitable Trust. Lala Karam Chand Thapar was the managing trustee. Under the terms of the said agreement Dharamvir agreed to pay to the trust in addition to interest the sum of 11/16th of the net profits of the business. Dharamvir claimed the said payment of profits as a deduction under section 10(2) of the Income‑tax Act: The Supreme Court in the case of Commissioner of Income-tax v. Chandulal Keshavlal ((1960) 30 I T R 601) said that in deciding an allowance under section 10(2)(xv) of the Act the test was whether it was a legitimate commercial undertaking in order to facilitate the carrying on of the business. In other words, the emphasis is on commercial expediency and commercial trading in ascertaining the nature and character of the expense claimed as an allowance in the course of the business. In Dharamvir's case the trust advanced to Dharamvir large sums of money which ranged on an average from Rs. 1,97,000 to Rs, 3,17,000 spread over six years. It was, therefore, held that in a commercial sense the payment of 11/16th of the profits of the business by Dharamvir to the trust was an expenditure wholly and exclusively laid out for the purpose of the assessee's business. In the present case the assessee received in the months of May and June 1948, the sums of Rs. 50,000 and Rs. 17,500 by two cheques drawn by one Kothari in the names of Onkarmal Jagadish Prosad and Sitaram Maheshwari. In the books of Ratiram Tansukhroy identical amounts were shown to have, been received in cash from Jagadish Prosad and Maheshwari and were shown as passed on to the assessee carrying interest at the rate of 42%. In the, month of June 1948, a loan is arranged by Ratiram Tansukhroy and it was a direct transaction between the assessee and Premier Stores Supplying Co. Ltd., which lent the amount of Rs. 1,00,000 to the assessee. On these facts it is manifest and it has been so found that no money in fact was advanced by Ratiram Tansukhroy himself to the assessee. It is true that an agreement in writing was made on October 7, 1948, between the assessee and Ratiram Tansukhroy for arranging the finance and in the said agreement it is recited that Ratiram Tansukhroy, the financier, agreed to advance moneys to the assessee for the purpose of carrying on the business of financing H. Manory Ltd. But it is again found as a fact that the assessee could not produce any evidence to show that any agreement was contemplated at the time of the loans in the months of May and June 1948, that the assessee would part with half the profits in addition, to paying interest on the loans. Furthermore, it has been found that Ratiram was not a genuine financier because he could not himself advance moneys. The conditions in the written agreement show the sham position of Ratiram Tansukhroy as a partner and, therefore, the date of joint venture was rejected by the Tribunal. In the case of Chandulal Keshavlal reference was made to the decision of the Supreme Court in the case of Eastern Invest ments Ltd. v. Commissioner of Income‑tax ((1951) 20 I T R 1), where a private limited company, with a share capital of Rs. 2,50,00,000 of which shares of the value of Rs. 50,00,000 were held by A and the rest by his nominees, being in need of money resolved to reduce its share capital by Rs. 50,00,000 by taking over Rs. 50,00,000 worth of shares and issuing to A debentures of the face value of Rs. 50,00,000 carrying interest at the rate of 5 percent. The High Court did not allow the interest on debentures as an allowable expenditure. The Supreme Court held that the transaction was of a commercial nature and it was said that in the absence of a suggestion of fraud or an oblique motive, if the transaction was of a nature which was entered into in the course of the business and was of a commercial nature, then it should be a deductible allowance. In the present case no moneys were advanced by Ratiram and the moneys alleged to be advanced were so done by others before the written agreement in the month of October 1948. It has been found as a fact that the assessee himself between the months of May and September 1948, advanced approximately the sum of Rs. 14,00,000 and the contribution, if any, of Ratiram Tansukhroy was at the most Rs. 1,67,

500. On this fact the equal sharing of profits appears to be commercially improvident and un-business like. In the absence of any actual advance of money the payment of 50 percent. of the profits is beyond business‑sense and is unjustifiable from a commercial point of view. It has also been found as a fact that Ratiram Tansukhroy showed loss in the relevant year. Therefore, the effect of the written agreement would be that Ratiram would take advantage of his loss and he would not be liable to pay tax and the assessee would not have to pay on the entire profits if the sum is allowed as a deduction. Counsel for the assessee contended that there was no finding by the Tribunal that the transaction is not genuine and further that the books of Ratiram showed that he in fact lent the money or arranged the loan of Rs. 1,67,500 by the month of June and the assessee by the 23rd or the 24th June advanced Rs. 2,35,898 to H. Manory Ltd., and therefore the financing by the assessee should be held to be in the carrying out of the business: The Tribunal upheld the order of the Income‑tax Officer and of the Appellate Assistant Commissioner and confirmed the disallowance for the reasons given by the Income‑tax Officer and the Appellate Assistant Commissioner. But the acceptance of the said reasons was contended by counsel for the assessee not to be a finding of fact by the Tribunal. I am unable to accept that contention. The Tribunal agreed with the finding that there was not a joint venture between the assessee and Ratiram Tansukhroy. It has been not a genuine partner and further that Ratiram did not act as a financier and was not to be treated as a partner. If the partnership be eliminated then the question is whether the payment of a share of profits is an item of expense incurred legitimately for commercial purpose in the course of the business. First, the pre‑eminent fact is that Ratiram Tansukhroy himself never advanced any money. Secondly, the alleged arrangement of loans by Ratham Tansukhroy amounted to even less than the 25 percent. of the advance made by the assessee to H. Manory Ltd. Thirdly, there is no evidence that at the time of the loans or arrangement of the loans in the months of May and June 1948, there was an agreement contemplated between the assessee and Ratiram Tansukhroy that the assessee would pay 50 percent. of the profits paid to him by H. Manory Ltd. to Ratiram Tansukhroy. Fourthly, it is commercially improvident that a businessman agrees to pay interest at the rate of 4 percent. And though the lender does not advance any money that is required for the purpose of the business the lender will yet have 50 percent. of the profits. In the decision of A. W. Walker & Co. v. Commissioner of Inland Revenue ((1920) 3 K B 648), a firm borrowed a sum of 4,000 for the purpose of its trade and business and in consideration thereof agreed to pay to the lender the, yearly sum of 200 and, in addition, 3/20th of the profits made by the firm each year in excess of 1,000' but not exceeding 3,

000. The firm made 3,000 profits and, accordingly, paid the lender in addition to the 200 a further sum of

300. It was held that the 300 was not interest on money borrowed for the purpose of trade or business but was a distribution of the share profits and that therefore in calculating the profits of the firm for the pur pose of excess profits duty a deduction could not be allowed in respect of that sum. The reason as to why distribution of profits is not ordinarily deductible, whereas interest is so deductible is that though both sums are paid as a consideration for the loan the two sums stand on entirely different footings. Rowlatt, J. said: "The persons who lent this money receive interest on the money lent which is payable to them as a debt, and for that pur pose it is immaterial whether the business prospers or languishes, they also receive a share of what the business earns. That is not interest; it is simply a share of the profits." In Walker's case the contract gave the lender a share of the profits without any rights or liabilities of the partners and therefore it was held to be a mere distribution of profits. In the present case the substance of the transaction is to be looked at. The assessee was obliged to pay interest at the rate of 42 percent. for loans. The stipulation to pay 50 percent. of the share of the profits was not for the purpose' of fostering the busi ness but appears to be for the oblique purpose of distribution or bifurcation of profits so that the profits received by the assess from H. Manory Ltd. were reduced for the purpose of obtaining the advantage of avoidance of tax liability on the same. The question is therefore answered against the assessee. The Commissioner of Income‑tax is entitled to the costs. G. K. MITTER, J.‑ I agree. Order accordingly.