Profit-linked payment under a composite agreement was not deductible as business expenditure because it was not incurred solely to earn income.

A payment of half-share of net profits under a composite commercial agreement was not allowable as a deduction in computing taxable income. It was not treated as rent, because the arrangement conferred several advantages, including control and conduct of the combined undertaking, and the amount was payable only if profits were earned. The agreement was closer to a joint adventure for a term of years than to a lease, so the payment was not shown to be expenditure incurred solely for earning the assessee's income. The statutory test for business expenditure was therefore not satisfied, and the deduction failed.

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Issues: Whether the half-share of net profits payable under the agreement was an allowable deduction in computing taxable income, as expenditure incurred solely for the purpose of earning income.

Analysis: The payment was not described as rent and could not be treated as such on the terms of the arrangement. It formed part of a composite consideration for several advantages obtained under the agreement, including control and conduct of the combined undertaking, and was payable only if profits were earned. The arrangement was closer to a joint adventure for a term of years than to a lease, and the payment was not shown to be expenditure incurred solely for earning the income of the assessee. The statutory test for allowance of business expenditure was therefore not satisfied.

Conclusion: The deduction was not allowable and the answer to the referred question was against the assessee.

Ratio Decidendi: A payment out of profits is not deductible as business expenditure unless it is shown to have been incurred solely for the purpose of earning the income in question; where the payment is part of a composite commercial arrangement conferring multiple advantages, it is not allowable as a deduction.

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