1958 (2) TMI 47 - HC - Income Tax

Payments to Trust not Deductible as Business Expenses under Indian Income-tax Act

The High Court held that the payments made to the trust were not deductible as revenue expenditure under section 10(2)(iii) or section 10(2)(xv) of the ... - Issues Involved:1. Whether the amounts of Rs. 72,963-12-0 and Rs. 76,526-1-3 paid to the trust were deductible as revenue expenditure under section 10(2)(iii) or section 10(2)(xv) of the Indian Income-tax Act.Issue-wise Detailed Analysis:1. Deductibility under Section 10(2)(iii) of the Indian Income-tax Act:The assessee initially claimed that the payments made to the trust were deductible as interest under section 10(2)(iii) of the Income-tax Act. However, during the hearing, the assessee's counsel did not pursue this argument. The Income-tax Officer, Appellate Assistant Commissioner, and Appellate Tribunal had previously disallowed the claim, stating that the agreement was not genuine and bona fide, and the stipulated interest rate was excessively high, working out to more than 400% of the capital advanced. Consequently, the High Court did not consider this section for deduction.2. Deductibility under Section 10(2)(xv) of the Indian Income-tax Act:The primary argument presented by the assessee was that the amounts should be deductible under section 10(2)(xv) as expenditure incurred wholly and exclusively for the purpose of the business. The opposing viewpoint, presented by the Income-tax Department, was that the payments were tantamount to sharing of profits and not expenditure incurred exclusively for business purposes. The High Court examined the nature of the transaction to determine whether it was a contract for mere division of profits or a payment made exclusively for business purposes before the divisible profits were ascertained.Nature of the Transaction:The High Court analyzed the agreement's clauses and the relationship between the parties. It was evident that the managing trustee was in a dominating position, with the trust having the liberty to call back the money, stop further finance, and secure all business assets as collateral. The High Court noted that the average loan advanced by the trust was Rs. 18,100, and against such an amount, paying Rs. 72,963 was commercially unreasonable, amounting to more than 400% of the capital advanced. Even if the average loan amount was Rs. 44,192, as argued by the assessee's counsel, the payment still worked out to more than 170%, which was not commercially justifiable.Joint Adventure or Quasi-Partnership:The High Court concluded that the arrangement between the assessee and the trust was akin to a joint adventure or quasi-partnership, where the profits were to be divided in specified proportions. The payment of 11/16th of the profits to the trust was not considered an expenditure incurred exclusively for business purposes but rather a division of profits.Relevant Case Law:The High Court referred to the Judicial Committee's decisions in Pondicherry Railway Company Limited v. Commissioner of Income-tax and Indian Radio and Cable Communications Company Ltd. v. Commissioner of Income-tax. In both cases, payments made as a share of profits were not considered deductible as business expenditure. The High Court also distinguished the present case from Commissioner of Income-tax v. Tata Sons Ltd. and Vithaldas Thakordas and Company v. Commissioner of Income-tax, where the payments were justified on commercial grounds and were deductible.Conclusion:The High Court held that the payments of Rs. 72,963-12-0 and Rs. 76,526-1-3 could not be considered revenue expenditure deductible under section 10(2)(iii) or section 10(2)(xv) of the Indian Income-tax Act. The question referred to the High Court by the Appellate Tribunal was answered against the assessee and in favor of the Income-tax Department. The assessee was ordered to pay the costs of the references.Separate Judgments:Choudhary, J. concurred with the judgment.