Patna High Court
B.P. Jain vs Commissioner Of Income-Tax on 19 September, 1973
Equivalent citations: [1976]105ITR195(PATNA)
Author: N.L. Untwalia
Bench: N.L. Untwalia
JUDGMENT Uutwalia, C.J.
1. In these five tax cases are involved certain common questions of law and, therefore, they have been heard together and are being disposed of by a common judgment. The facts are also common and, except one or two points which arise only in Tax Case No. 15 of 1968, the other points are all identical.
2. The assessee in this case is Shri Bimal Prasad Jain. He had entered into a partnership agreement with his uncle, Harchandmull Jain. The deed of partnership is dated 1st July, 1945, and is annexure "A" to the statement of the case. The partnership business consisted of promoting new companies under the Indian Companies Act, to be the managing agents of such companies or of any other company and, in particular, to be the managing agents of Bharat Mining Corporation Ltd. The duration of the partnership fixed by the deed was 20 years and, oil expiration of the said term, the partnership could be determined by either party giving to the other not less than six months' notice in writing. On the expiration of such notice, the partnership was to stand determined. Unfortunately, before the expiry of the period of 20 years, Harchandmull died on June 14, 1959. The partnership business, which was carried on under the name and style of H. M. Jain & Co., after the death of Harchandmull, could not be so carried on, as the partnership stood dissolved under Section 42(c) of the Partnership Act, because in the partnership deed there was no term to the contrary. In such a situation, the assessee started a business under the name and style of Jain Industries as its sole proprietor. It may be mentioned here that Harchandmull died leaving behind Srimati Pushpa Devi Jain as his widow and six minor children. Bimal Prasad entered into an agreement with Pushpa Devi on November 19, 1959. A copy of the memorandum of agreement is annexure "B" to the statement of the case. In pursuance of the terms of this agreement, the assessee had to part with four annas share in the income which he got from his business of managing agency carried on under the name and style of Jain Industries. In the accounting year, corresponding to the assessment year 1961-62, on account of the four annas share the assessee paid a sum of Rs. 14,228 to Pushpa Devi out of his total income of Rs. 56,912 from the managing agency commission. In the following accounting year, corresponding to the assessment year 1962-63, the assessee paid a sum of Rs. 16,937, one-fourth share out of his managing agency commission. A question arose whether the sums aforesaid could be deducted from the income of the assessee under any of the relevant provisions of the Indian Income-tax Act, 1922, namely, Section 12A, or Section 10(2)(xv) in respect of the year 1961-62, which was covered by the 1922 Act, or whether the payment made in relation to the assessment year 1962-63 could be allowed under Section 39 or Section 37(1) of the Income-tax Act, 1961, as the law applicable in respect of the said assessment year was the 1961 Act.
3. The Income-tax Officer disallowed the claim of deduction in his assessment orders, copies of which are annexure "C". The assessee went up in appeal. The Appellate Assistant Commissioner dismissed the appeals and maintained the disallowance of the two sums of money in the two years. Copy of the order of the Appellate Assistant Commissioner is annexure "D". The assessee took up the matter in further appeal before the Income-tax Appellate Tribunal in I.T.As. Nos. 506 and 507 of 1964-65. The Tribunal dismissed the appeals by its order contained in annexure "E". On being asked to state a case and refer the question of law to this court, the Tribunal, in respect of both the years, has made the reference which in one case will be under Section 66(1) of the 1922 Act and in the other under Section 256(1) of the 1961 Act. The question of law referred to this court is in the following terms:
"Whether, on the facts and in the circumstances of the case, the payment to Smt. Puspha Devi in pursuance of an Indenture dated November 29, 1959, was a permissible deduction in the assessment of the assessee?"
4. Similar payment of a different amount was made in the accounting year, corresponding to the assessment year 1963-64. A sum of Rs. 21,294 was paid to Pushpa Devi by the assessee in this year. The deduction of this amount from the assessee's income was not allowed either under Section 39 or under Section 37(1) of the Income-tax Act, 1961, The Tribunal in the appellate order merely followed its own decision given in the previous appeals. Tax Case No. 92 of 1971 arises out of the assessment proceeding for the assessment year 1963-64, and the question of law referred to this court is in the following terms:
"Whether, on the facts and circumstances of the case, the payment of Rs. 21,294 to Pushpa Devi is an admissible deduction under Section 39 or Section 37(1) of the Income-tax Act, 1961?"
5. Similarly, in the following two accounting years, corresponding to the assessment years 1964-65 and 1965-66, payments Were made by the assessee to Pushpa Devi. Eventually, the Tribunal did not allow any deduction, following its earlier decision. In the assessment year 1964-65, the amount paid to Pushpa Devi is Rs. 24,648, and in the assessment year 1965-66, the amount is Rs. 18,865. The question of law referred in Tax Cases Nos. 117 and 118 of 1971, arising out of the assessment proceedings for the assessment years 1964-65 and 1965-66, is in the following terms:
"Whether, on the facts and circumstances of the case, the payments of Rs. 24,648 in the year 1964-65 and Rs. 18,865 in the year 1965-66 are admissible deductions under Section 39 or Section 37(1) of the Income-tax Act, 1961?"
6. It would be convenient at the outset to reframe the question in Tax Cases Nos. 15 and 16 of 1968 and separate them for the two years, as the facts are slightly different. In one case the Act of 1922 would apply and the other will be governed by the Act of 1961. The reframed questions, therefore, would be the following;
"(i) Whether, on the facts and in the circumstances of the Case payment of Rs. 14,228. by the assessee to Srimati Pushpa pevi in respect of the assessment year 1961-62 could be deducted from the assessee's income under Section 12A or Section 10(2)(xv) of the Indian Income-tax Act, 1922, or whether it could be rightly treated as the income of the assessee?
(ii) Whether, on the facts and in the circumstances of the case, the payment of Rs. 16,937 to Srimati Pushpa Devi could be deducted from the income of the assessee in the assessment year 1962-63 under Section 39 or Section 37(1) of the Income-tax Act, 1961?"
7. Mr. A.K. Sen, learned counsel for the assessee, submitted the following points for our determination :
(1) that the finding of the Tribunal that there was no adequate consideration for the agreement to share the managing agency commission with Pushpa Devi within the meaning of Section 12A or Section 39 of the Income-tax Act, 1922 or 1961, is vitiated in law; the finding has been arrived at by committing several errors of law, is based upon no material and on irrelevant consideration ;
(2) that even if the amounts paid to Pushpa Devi could not be deducted under the provisions of law aforesaid, they could very well be deducted under the provisions of Section 10(2)(xv) or Section 37(1) of the Income-tax Acts; and (3) that the liability to part with the four annas managing agency commission of the assessee in favour of Pushpa Devi was at the source of the income and hence, in any view of the matter, it could not be treated as the income of the assessee under Section 10(1) or Section 28(i) of the two Acts.
8. It will not be necessary to consider the other two submissions of Mr. Sen apropos the case for the assessment years 1962-63 to 1965-66 as, for the reasons stated hereinafter, the first point urged on behalf of the assessee has got to succeed and it has got to be held that the payment in those four years made by the assessee to Pushpa Devi of the one-fourth share out of the managing agency commission is allowable as a deduction from the assessee's income under Section 39 of the 1961 Act. But since in respect of assessment year 1961-62, a declaration, as required by Section 12A of the 1922 Act, was not filed, the argument to allow it as a deduction either under Section 10(2)(xv) or not to treat it as an income of the assessee under Section 10(1) of the 1922 Act was strenuously pressed. It may be stated here that at one time learned counsel for the assessee endeavoured to argue that the statement made in the return along with which the agreement dated November 19, 1959, was filed, was sufficient compliance, with the requirement of filing the declaration under Section 12A, but feeling the difficulty in pursuing this matter any further, as no such question arises out of the Tribunal's order, he gave up this point and conceded that in the assessment year 1961-62, the sum of Rs. 14,228 could not be deducted from the assessee's income under Section 12A of the 1922 Act. And that led him to strenuously press for deduction either under Section 10(2)(xv) or under Section 10(1).
9. Section 12A was introduced in the 1922 Act after the decision of the Privy Council in Tata Hydro-Electric Agencies Ltd. v. Commissioner of Income-tax. The corresponding provision to be found in the 1961 Act is contained in Section 39. The two provisions are almost identical, except that under Section 12A an agreement in writing was not necessary, while to claim the benefit under Section 39 an agreement in writing is necessary. In this particular case, there is no doubt that there is an agreement in writing. I shall now read Section 39 of the 1961 Act:
"Where a managing agent of a company is liable under an agreement in writing made for adequate consideration to share managing agency com mission with a third party or third parties, the said agent and the said party or parties shall file a declaration showing the proportion in which such commission is shared between them under the agreement, and on proof to the satisfaction of the Income-tax Officer of the facts contained in such declaration, such agent and each such party shall be chargeable only on the share to which such agent or party is entitled under the agreement."
10. I would like to point out here that even before the introduction of Section 12A of the Income-tax Act, 1922, if there was a parting of a share in the managing agency commission which could, on the facts and in the circumstances of a particular case, be treated as a revenue expenditure laid out or expended wholly and exclusively for the purpose of the business, it could be deducted as a payment allowable as a business expense (vide Commissioner of Income-tax v. Tata Sons Ltd, [1939] 7 ITR 195 (Bom). It may also be pointed out here that the parting of a portion of the income by an assessee in pursuance of his liability coming into existence at the time of the accrual of the income, then, within the meaning of Section 10(1) of the 1922 Act, the portion of the income so parted could not be treated as income earned by the assessee. If, however, the assessee parted with a portion of his income and the parting was not covered by either of the two situations referred to above, then in that case parting of the income after it was received by the assessee was not allowable under any head, even though the income may be from a managing agency commission. And such was the case decided by the Privy Council in the case of Tata Hydro-Electric Agencies Ltd., [1937] 5 ITR 202 (PC) In respect of the managing agency commission, however, legislature inter vened and allowed the sharing of the managing agency commission with a third party and provided that the managing agent shall be chargeable to income-tax only on the share to which he would be entitled under the agreement, and the third party with whom he shared the commission shall be chargeable on his share to which he would be entitled under the agreement. In my opinion, Section 39 makes no difference between the two types of cases, whether the liability is at the source or the liability is there to part with the income after it has become the income of the assessee.
Both types of cases are covered by Section 12A or Section 39 of the Acts, provided the other requirements of the sections are fulfilled. Thus it becomes a special provision for bifurcating the charging of the tax on the total managing agency commission in two hands, according to the respective shares of the recipients. This being a special provision in respect of the sharing of the managing agency commission, an assessee must fulfil the requirements of the special provision. If he fails to do so, he cannot fall back upon the general provision contained in Section 10(1) or Section 28(i) of the Income-tax Acts. As I read the language of the section, it is plain that both kinds of liabilities to share the managing agency commission under an agreement are covered by the provision. Nothing remains for taking the case out of Section 12A or Section 39 and to bring it under Section 10(1) or Section 28(i) on failure of the assessee to fulfil the requirements of the former provisions. But same is not the position with regard to the matter covered by Section 10(2)(xv) or Section 37(1) of the Acts. Sharing of the managing agency commission, if it is for adequate consideration, may not necessarily be by way of business expense. It may be so also if the elements for allowing the deduction under Section 12A or Section 10(2)(xv) are common. There, therefore, may be a case where the assessee can claim a deduction of the share of the managing agency commission which he has parted in favour of a third party under Section 12A on fulfilment of the requirements of that section and yet that case may be a case of business expense. But there is no reason to think that if the requirements of Section 12A are not fulfilled, the assessee cannot claim it as a business expense. There may be overlapping, but everything which will be material for allowing it as a business expense will not be material for allowing it as a deduction under Section 12A nor vice versa would be true. In that view of the matter, I think, in a given case, if deduction cannot be allowed under Section 12A or Section 39 of the Income-tax Acts, it can very well be allowed under Section 10(2)(xv) or Section 37(1), provided the amount satisfies the tests of claiming deduction under these provisions.
11. In this connection, I may make a reference to a decision of the Calcutta High Court in Jhajharia Brothers Ltd. v. Commissioner of Income-tax, [1950] 18 ITR 126 (Cal). At page 131 it has been said by the learned judge :
"In my opinion, the two sections can be reconciled. Section 10 is a general enactment with regard to all businesses. Section 12A makes certain specific enactment with regard to a special kind of business, the managing agency of a company. Hence, the special or particular enactment should be operative and should be considered as an exception to the general rule." The same view has been further elaborated at page 133 of the report. I respectfully agree with the observations of the learned judge in so far as the provision of Section 10(1) of the Income-tax Act, 1922, is concerned, but not with reference to Section 10(2)(xv)."
12. For the subsequent four assessment years, declarations, as required by Section 39 of the 1961 Act, were filed. Payments had been made by the assessee to Pushpa Devi, there is no doubt about it, out of the managing agency commission earned by the assessee. The only question for consideration is whether the managing agent has made himself liable under the agreement to share the managing agency commission for adequate consideration.
13. Before I come to deal with the specific relevant provisions of the agreement, it should be pointed out that the partnership had come to an end on June 14, 1959, on the death of Harchandmull. The assessee alone could not carry on the business of managing agency with the property of the firm. If he would have done, so, he would have been liable to pay the share of the profits made by him to Pushpa Devi and her minor children who were the heirs of Harchandmull under Section 37 of the Partnership Act. I will presently show that Bimal Prasad Jain needed the help of the voting power which was under the control of Pushpa Devi as also the sum of Rs. 50,000 which she agreed to invest for the purpose of obtaining or carrying on the managing agency business in the name of Jain Industries. It would be seen from paragraph 5 of the partnership deed dated July 1, 1945, that the capital of the partnership was to be Rs. 50,000 and it was to be provided in accordance with the shares of the parties, namely, three-fourths by Bimal Prasad Jain and one-fourth by Harchandmull. The capital was to bear interest at 6 per cent. per annum. If any further capital was needed, the same was also to be contributed by the partners in proportion to their shares. The assessee was the managing agent of the four companies. It would appear from the assessment order of the Income-tax Officer that in Ganeshpur Colliery Co. (Private) Ltd. there were only 5,000 shares, out of which 3,755 shares, or to be more accurate, /according to the agreement, 3,815 shares were held by Pushpa Devi in her name or in the names of her three minor sons. The assessee had only 130 shares. It is, therefore, plain that if the assessee did not capture the voting power of Pushpa Devi by parting with a portion of the managing agency commission, she would not have allowed the assessee to be appointed or to continue as the managing agent of the Ganeshpur Colliery Co. In the United Karanpura Collieries (Private) Ltd., out of 66,400 shares the assessee had 36,800 and 15,750 were held by Pushpa Devi, either in her name or in the names of her minor sons. It may well be that for being appointed as a managing agent only a majority of votes was necessary in accordance with Section 326 of the Companies Act, 1956, and the assessee himself has got majority of shares. But then it is well-known that many matters in relation to the affairs and business of the company have got to be decided in a special meeting by a special resolution commanding three-fourths of the votes, and in such a situation it is pertinent to point out that the assessee by obtaining the controlling power on the votes of Pushpa Devi could command three-fourths majority in the United Karanpura Collieries. In Bharat Mining Corporation Ltd., 12,400 shares were held by Pushpa Devi either in her name or in the names of her minor daughters out of 1,86,334 shares. Here, the number of shares held by Pushpa Devi was not quite appreciable, but the matter has to be judged as a whole with reference to the four companies; and for the purpose of finding out adequate consideration in the agreement in question, it is possibly not permissible to treat the managing agency business separately for each company, but the entire business has to be judged as a whole. The advancement of Rs. 50,000 on interest at 6 per cent. per annum only was also a good contribution of capital for carrying on the business. The return of 6 per cent. interest on the advancement of Rs. 50,000 could not be treated as adequate return. Moreover, it is well-known in the commercial world that the capital pushes up the business and the payment of interest, and that also at a low figure of 6 per cent. per annum is not an adequate consideration for the financier. In this background, I now refer to some of the terms of the agreement. In the preamble it has been provided:
"And whereas on the death of the said Harchandmull Jaini the said firm, H. M. Jaini & Co. was dissolved.
And whereas the first party has started business under the name and style of Jain Industries (hereinafter referred to as "the said firm") as its sole proprietor inter alia with the object of the said firm being appointed to act as managing agents of the said 4 companies.
And whereas the said Pushpa Devi Jain is a shareholder in the said 4 companies and holds and controls in the capacity of guardian of her minor children shares in the said 4 companies.
And whereas the said Pushpa Devi Jain has agreed to exercise the voting rights in respect of the said shares in favour of the resolutions sponsored and supported by the first party and not to exercise the said voting rights in any other manner.
And whereas the said Pushpa Devi has further agreed to advance and keep in deposit with the said firm a sum of Rs. 50,000 during the subsistence of this agreement yielding interest at the rate of 6% per annum for the purpose of facilitating business of the said firm as such managing agents.
And whereas the first party has in consideration of the premises agreed to give to the second party 25% of the net income of the said firm only from its business of acting as managing agents of the said 4 companies or any other companies of which the said firm is appointed managing agent during the subsistence of this agreement and not from any other businesses that the said firm may carry on."
14. In Clause (1) of the agreement it has been provided that Pushpa Devi shall hold and control the shares held and controlled by her on behalf of her minor children during the subsistence of the agreement and shall irrevocably authorise Bimal Prasad or his nominee to exercise the voting rights in respect of such shares in the meetings of the company in such manner as he thinks prudent and reasonable and Pushpa Devi shall not exercise the voting rights in any other manner. In my opinion, the control of the voting rights of the shares held by Pushpa Devi in her name or in the names of her minor children was a substantial consideration for the agreement. As a managing agent it was necessary for the assessee to control the affairs of the company and to carry on the business to its best advantage. Without the control on the voting rights of the shares of Pushpa Devi and her children the assessee would have been in difficulty in carrying on the managing agency business. Under Clause (9) of the agreement, the agreement was to terminate if the assessee ceased to act as managing agent of the four companies. It is, therefore, clear that the control of the voting rights was acquired in connection with the managing agency business.
15. Clause (2) of the agreement made provision for advancement of the sum of Rs. 50,000 at the rate of 6 per cent. per annum. In my opinion, therefore, there was adequate consideration for the agreement, whereby the assessee bound himself to part with four annas share in the managing agency commission.
16. From the language of the preamble as also from the terms of Clauses (3), (6) and (8), it is clear that Birnal Prasad made himself liable to part with a portion of the managing agency commission after it has become his income and the liability was not incurred at the accrual stage. In Clause (3) it is recited that:
"The first party shall pay to the 2nd party 25% of its net annual profits derived only from the business of the Jain Industries by acting as managing agents of the said 4 companies or any other company of which the said firm may be appointed as managing agent..." Clause (8) is not correctly printed in the paper book of Tax Cases Nos. 15 and 16 of 1968, the correct version is to be found at page 14 of the paper book of Tax Case No. 92 of 1971. Srimati Pushpa Devi had no right to dispute the audited balance-sheet which was to be treated as conclusive on the quantum of profits; she had no right to interfere with the business. Reading the document as a whole, it is clear that the liability incurred by Bimal Prasad was to part with a portion of the income of the managing agency after the receipt of the commission amounts from the different companies. The liability was not incurred at source. Nor was it an overriding obligation to pay a portion of the income at the time of its accrual.
17. I now turn to consider the reasons given by the Tribunal for holding that there was no adequate consideration for the agreement. The learned Members of the Tribunal say in paragraph 5 at page 15 : "On a reading of the said agreement dated November 19, 1959, we are unable to locate, either in the preamble or in the text of it, any stipulation by virtue of which the assessee agreed to part with the 0-4-0 share in consideration of the premature dissolution of the partnership entered into by the assessee with Sri H.M. Jain," I confess, this reason is not intelligible to me at all. The agreement was not entered into in consideration of the premature dissolution of the partnership, but this aspect of the matter had to be viewed with reference to Section 37 of the Partnership Act, as I have referred to above. When the Tribunal says that Section 92 of the Evidence Act was a bar to take into consideration any other extraneous matter, the reason is wholly irrelevant. The terms had to be culled out from the written agreement it self. The only reason given by the Tribunal in paragraphs 6 and 7 is that the shares in the four coal companies were the properties of the minor children of Harchandmull and Pushpa Devi. The Tribunal read Clause (1) of the agreement to mean that the shares held and controlled by Pushpa Devi were to be held and controlled by the assessee and hence the assessee became "the de jure owner of the said shares". Properties of the minor could not be alienated or otherwise dealt with unless compelling necessity arose, Hence, the Tribunal came to hold that the transfer of the shares was untenable in law. To say the least, such reasons merely betray a jumbling up in a confused manner of the various principles applicable to the facts of the case. There was no transfer of shares at all; only the voting right was to be controlled by the assessee. Pushpa Devi, as the guardian of the minor children, had control over the voting rights. She parted with this right for the benefit of the minors. The various considerable amounts paid in various years by the assessee to Pushpa Devi were not only meant for her but also for the maintenance of the minor children and they had been adequately benefited by them.
18. The other reason given by the Tribunal is that 6 per cent. interest on the sum of Rs. 50,000 invested by Pushpa Devi was an adequate consideration and for that parting with, a portion of the managing agency commission was not necessary. I have already referred to this aspect of the matter and, in my opinion, the Tribunal has misdirected itself in law in saying so. It is, thus, clear that the Tribunal recorded the finding on the question of adequacy or inadequacy of the consideration in the agreement on wrong, illegal and irrelevant matters and left out of consideration the valid and relevant materials. Hence, the finding is vitiated in law and not binding on this court in the reference.
19. For the four assessment years, viz., 1962-63 to 1965-66, therefore, there is no difficulty in holding that all the requirements of Section 39 were fulfilled and the various amounts paid by the assessee in those years to Pushpa Devi must be deducted from his income from the managing agency In respect of the year 1961-62, the requirement of filing the declaration was not fulfilled. Hence, the amount cannot be deducted under Section 12A of the 1922 Act. I have already rejected the argument of the learned counsel for the assessee not to treat the amount paid by the assessee to Pushpa Devi as the income of the former under Section 10(1). Apart from the fact that the matter cannot be examined under Section 10(1), when there was a failure to comply with the requirement under Section 12A, I may also point out that, on the interpretation which I have put to the various terms in the agreement in question, it is plain that the case is not covered by the principles of law laid down in some of the cases which will be alluded to hereinafter, as by the agreement no overriding obligation was created to share the income at the source or at the time of its accrual. The terms of the agreement clearly indicate, as I have said above, that the assessee agreed to part with a portion of the income after its receipt. That being so, even on facts the assessee must fail under Section 10(1).
20. Then remains to consider as to whether the assessee could take the benefit of Section 10(2)(xv) of the Income-tax Act, 1922, in respect of the amount paid by him to Pushpa Devi in the year 1961-62. Although, as I have said above, I differ respectfully from the decision of the Calcutta High Court in the case of Jhajharia Brothers Ltd., and no other case was brought to our notice that on the failure of the assessee to claim the benefit under Section 12A in a given case, he could not fall back upon Section 10(2)(xv), on the facts of the instant case the assessee cannot succeed to claim the deduction under the said provision of law. Necessary facts to sustain the claim under Section 10(2)(xv) have not been brought on the record by the assessee. Learned counsel for the assessee submitted that, in order to carry on the business of the managing agency and to earn commission therefrom, it had become necessary for the assessee to part with the portion of the income to earn the income. It was not an investment of a capital nature in the structure earning the income. But parting with a portion was necessitated for earning the income itself. I am not prepared to accept this argument as correct. On the interpretation which I have put on the various terms of the agreement, the assessee did not incur any overriding obligation at source to part with the income. If he parts with the income after its receipt, then cases, some of which will be referred to hereinafter, have taken the view that such a claim cannot be allowed under Section 10(2)(xv) of the Act as this is merely an application of income after its receipt and not obliging the assessee to part with it at the source. It is, therefore, difficult to uphold the contention put forward on behalf of the assessee that year after year the parting of the income by the assessee in favour of Pushpa Devi is an expenditure laid out or expended wholly and exclusively for the purpose of the business of the managing agency. By capturing the voting rights of the shares held by Pushpa Devi, the assessee did not only facilitate the obtaining of the managing agency business but also added to his power of carrying on the business of the company in the manner he liked to carry it on.
21. In that view of the matter also, it is difficult to accept that the parting of the portion of the commission was wholly and exclusively for the purpose of the managing agency business.
22. It is no doubt true that expediency for incurring an expenditure has to be viewed from the business point of view, as held by the Supreme Court in Eastern Investments Ltd. v. Commissioner of Income-tax, [1951] 20 ITR 1 ; [1951] SCR 594 (SC) and Commissioner of Income-tax v. Walchand Co. Private Ltd., [1967] 65 1TR 381 ; [1967] 3 SCR 214 (SC) But at the same time it has to be seen whether within the ambit of the law the expenditure claimed to have been made by the businessman is wholly and exclusively for the purpose of the business. I am aware of the change in the phraseology of the Act when the Privy Council decided the case of Pondicherry Railway Co. Ltd. and later on when in Section 10(2)(xv) it was provided for the purpose of the business instead of for the purpose of earning income from the business. But, on the facts of this case, the observation of Lord Macmillan in the case of Pondicherry Railway Co. Ltd., at page 170, can be pressed into service, where he has said :
"A payment out of profits and conditional on profits being earned cannot accurately be described as a payment made to earn profits."
22. In this particular case, a payment made out of profits after they had become the income of the assessee and conditional on profits being earned could not accurately be described as a payment for the purpose of the business. Beaumont C.J., under similar circumstances, followed the Privy Council decision in the case of Pondicherry Railway Co. Ltd., AIR 1931 PC 165 in Commissioner of Income-tax v. C. Macdonald & Co., [1935] 3 ITR 459 (Bom) In Govindram Ramnath & Co. v. Commissioner of Income-tax, [1953] 23 ITR 1 (Bom) Chagla C.J. has pointed out at page 9 that:
"The assessee would have to prove that it was for the purpose of his business or in order to help or assist his business that he had to part with a portion of his commission, and it is only then that he could possibly make a claim under Section 10(2)(xv)."
23. I now, briefly, refer to some of the cases which are relevant on the point and which were relied upon by the learned counsel for the asscssee. In Seth Motilal Manekchand v. Commissioner of Income-tax, [1957] 31 ITR 735 (Bom), it was held that the share of the income which was parted by A and B in favour of A's wife, 2 annas 8 pies each out of their managing agency commission, could not be treated and counted as income of A and B, Since at the time of partition this obligation was incurred by A and B, it was treated, as it appears, to be their overriding obligation to share the income at the source, and, therefore, it could not be treated as the real income of the assessee. In my opinion, this case cannot help the assessee in the present case because of two reasons, (1) that the assessee must fail if he fails under Section 12A, and (2) that on the facts of this case the overrriding obligation to part with the income was not there.
24. In Commissioner of Income-tax v. Sitaldas Tirathdas, [1961] 41 ITR 367 ; [1961] 2 SCR 634 (SC) Hidayatullah J. (as he then was), pointed out very succinctly, if I may say that with utmost respect, the difference between the two types of obligation. At page 374 runs a passage thus;
"In our opinion, the true test is whether the amount sought to be deducted, in truth, never reached the assessee as his income. Obligations, no doubt, there are in every case, but it is the nature of the obligation which is the decisive fact. There is a difference between an amount which a person is obliged to apply out of his income and an amount which by the nature of the obligation cannot be said to be a part of the income of the assessee. Where by the obligation income is diverted before it reaches the assessee, it is deductible; but where the income is required, to be applied to discharge an obligation after such income reaches the assessee, the same consequence, in law, does not follow. It is the first kind of payment which can truly be excused and not the second. The second payment is merely an obligation to pay another a portion of one's own income, which has been received and is since applied. The first is a case in which the income never reaches the assessee, who even if he were to collect it, does so, not as part of his income, hut for and on behalf of the person to whom it is payable."
25. The case of Murlidhar Himatsingka v. Commissioner of Income-tax, [1966] 62 ITR 323; [1960] Supp SCR 453 (SC) decided by the Supreme Court, was a case of sub-partnership entered into by the partner of a firm dividing the income between sub-partners. On interpretation of the agreement entered into by the partner and the sub-partners it was held that the effect was to divert the income from the partner's share to the sub-partners before it reached the partner. In this connection, the passage from the case of Commissioner of Income-tax v. Sitaldas Tirathdas, which I have already extracted, was quoted with approval at page 328 by Sikri J. (as he then was).
26. Mr. Sen placed great reliance on the decision of the Supreme Court in Commissioner of Income-tax v. Travancore Sugars and Chemicals Ltd., [1973] 88 ITR 1 (SC) in support of his proposition that the sum paid by the assessee to Pushpa Devi even in the assessment year 1961-62 should be allowed as business expense under Section 10(2)(xv), as in his submission the facts of the two cases were almost identical. From the decision of the Supreme Court, I would quote a paragraph which occurs at page 13 :
"It appears to us that the amount to be paid by reference to profits can either be that it is paid after the profits become divisible or distributable or that the amount is payable prior to such distribution or division to be computed by a reference to notional or as in some decisions what is termed as apparent net profits. In the former instance it will certainly be a distribution of profits and not deductible as an expenditure incurred in running the business hut in the latter it may, on the facts and circumstances of the case, and the agreement or the nature of the obligation under the particular instrument, which governs the obligation, be an expenditure incurred as a contribution to the profit-earning apparatus or, as it is said, incurred at the inception and deductible as an overriding charge of the profit-making apparatus or is one laid out and expended wholly and exclusively for purposes of such business. It is true that Sub-section (1) of Section 10 of the Indian Income-tax Act, 1922, imposes a charge on the profits and gains of a business which accrue to the assessee while Sub-section (2) of the said section enumerates various items which are admissible as deduction. Where income which accrues to the assessee is not his income, the question of admissible deductions would not arise. Therefore, where income is diverted at source so that when it accrues it is really not his income but is somebody else's income the question as to whether that income falls under Sub-section (2) of Section 10 does not arise. Again, income can be said to be diverted only when it is diverted at source so that when it accrues it is really not the income of the assessee but is somebody else's income. It is thus clear that where by the obligation income is diverted before it reaches the assessee, it is deductible. But where the income is required to be applied to discharge an obligation after such income reaches the assessee, it is merely a case of application of income to satisfy an obligation of payment and is, therefore, not deductible."
On the facts and in the circumstances of that case, it was held that the sum in question was either a revenue expenditure or an overriding charge of the profit-making apparatus or laid out and expended wholly and exclusively for the purpose of the trade. In any view of the matter, the answer, according to the decision, had to be given in favour of the assessee and against the department. On the facts, therefore, this case is clearly distinguishable and does not help the assessee.
27. For the reasons stated above, I would answer the reframed question in Tax Case No. 15 of 1968 against the assessee and in favour of the income-tax department. I would hold that the sum of Rs. 14,228 paid by the assessee to Srimati Pushpa Devi cannot be deducted either under Section 12A or Section 10(2)(xv) of the Indian Income-tax Act, 1922, nor can it be treated as not forming part of the income of the assessee under Section 10(1). The reframed question in Tax Case No. 16 of 1968 and the questions in the other three tax cases must be answered in favour of the assessee and against the department, and it must be held that the various sums paid by the assessee to Srimati Pushpa Devi in relation to the assessment years 1962-63, 1963-64, 1964-65 and 1965-66 must be deducted from the assessee's income under Section 39 of the Income-tax Act, 1961. In the circumstances, there will be no order as to costs in any of the tax cases.
S.K. Jha, J.
28. I agree.