Profit-sharing payment to a member of an association of persons was disallowed as a deduction, not business expenditure.

A payment described as leadership fees by an association of persons to one member was treated as a non-deductible appropriation of profits rather than business expenditure. The absence of evidence that the member rendered real services, the predetermined receipt-sharing arrangement, and the fact that one constituent merely secured the contract while execution rested with another showed that the amount was in substance profit sharing. The statutory bar on such payments to a member of an association of persons therefore applied, and commercial expediency could not override it. Earlier years' treatment did not assist because each assessment year is separate and res judicata does not apply in income-tax proceedings.

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Issues: Whether the payment of leadership fees by the assessee association of persons to one of its members was an allowable deduction, or was merely an appropriation of profits and hit by the statutory bar on such payments to a member of an association of persons.

Analysis: The payment was not supported by evidence of any real services rendered by the member. The arrangement showed that the member's association was instrumental only in securing the contract, while the contractual obligations and execution rested on the other constituent. The receipt-sharing arrangement was predetermined, indicating that the impugned amount was only a profit-sharing allocation and not a deductible business expenditure. In view of the statutory prohibition against such payments by an association of persons to its member, the plea of commercial expediency could not prevail. The absence of similar additions in earlier years also did not assist the assessee, since each assessment year is a separate unit and res judicata does not apply to income-tax proceedings.

Conclusion: The payment was rightly disallowed as a deductible expense and treated as an appropriation of profits, with the result that the assessee's challenge failed.

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