Deductibility under Section 10(2)(xv): payment characterized as profit distribution lacking commercial substance, therefore not deductible.

Payment to a purported profit sharer was held not deductible under Section 10(2)(xv) because the sums advanced were from third parties, the formal postdated agreement lacked commercial substance, and there were no genuine advances by the payee; the arrangement operated as a diversion or distribution of profits rather than an expense incurred wholly and exclusively for carrying on business, so the payment is not allowable as a business deduction.

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Issues: Whether the payment of Rs. 81,078 made by the assessee to Ratiram Tansukhroy was an expense admissible as a deduction under Section 10(2)(xv) of the Income-tax Act, 1961.

Analysis: The facts show that the moneys advanced to the assessee in May-June 1948 were provided by third parties and not actually advanced by Ratiram; the written agreement of October 7, 1948, postdated those advances and there is no evidence that at the time of the loans the assessee and Ratiram contemplated a contract to part with half the profits. Ratiram could not himself advance the substantial funds and his contribution, if any, was minimal relative to the advances by the assessee. The arrangement to pay 50% of profits to Ratiram, absent real advances or commercial justification, is commercially improvident and operates as a diversion or distribution of profits rather than an expense incurred wholly and exclusively for carrying on the assessee's business. Authorities distinguishing genuine commercial arrangements leading to deductible payments from mere profit-sharing or sham arrangements were applied to conclude that the payment was not a deductible business expense.

Conclusion: The payment of Rs. 81,078 to Ratiram Tansukhroy is not an expense deductible under Section 10(2)(xv) of the Income-tax Act, 1961; the question is answered against the assessee.

Ratio Decidendi: A payment characterized as a distribution or diversion of profits, made in the absence of genuine advances or commercially justified arrangements, is not an expenditure "wholly and exclusively" laid out for the purpose of carrying on business and therefore is not deductible under Section 10(2)(xv) of the Income-tax Act, 1961.

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