Profit-sharing payments and capital advances were not deductible, as profits were appropriated and loans were found to be partnership capital.

A profit-sharing payment payable only after profits were ascertained was treated as an appropriation of profits, not as rent or revenue expenditure incurred solely to earn income, so the deduction was disallowed under the 1922 Act. Advances made to two persons were also held not to be deductible as interest on borrowed capital, because the tax authorities had found them to be additions to partnership capital rather than a separate loan, and that factual finding was not open to interference in reference proceedings. The assessment was therefore left undisturbed against the assessee.

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Issues: (i) Whether the amount paid under the profit-sharing arrangement was an allowable deduction either as rent or as expenditure incurred solely for the purpose of earning profits under Section 10(2) of the Income-tax Act, 1922; (ii) Whether the amounts advanced to the two persons were deductible as interest on borrowed capital or were in substance additions to partnership capital.

Issue (i): Whether the amount paid under the profit-sharing arrangement was an allowable deduction either as rent or as expenditure incurred solely for the purpose of earning profits under Section 10(2) of the Income-tax Act, 1922.

Analysis: The payment was not fixed rent but a variable share of net profits payable only after profits were ascertained and after specified deductions. A payment of this character is an application or distribution of profits rather than expenditure incurred in the process of earning them. The arrangement also gave the assessee the benefit of carrying on the business with a special advantage, so the payment could not be treated as rent or as revenue expenditure laid out solely for earning income.

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

Issue (ii): Whether the amounts advanced to the two persons were deductible as interest on borrowed capital or were in substance additions to partnership capital.

Analysis: The character of the advance was treated as a question of fact on which the income-tax authorities had found that it formed part of the capital of the firm and was not a separate loan. In such a situation, there was no basis for interfering with that finding in reference jurisdiction.

Conclusion: The amounts were not deductible as interest on borrowed capital and the answer was against the assessee.

Final Conclusion: Both referred questions were answered adversely to the assessee, leaving the assessment undisturbed and the revenue position intact.

Ratio Decidendi: A payment that represents a share of profits payable only after profits are earned and ascertained is an appropriation of profits, not deductible expenditure incurred for earning those profits; a factual finding that an advance is capital rather than a loan is not open to interference in reference proceedings.

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