# DHARAMVIR DHIR v. THE COMMISSIONER OF INCOME-TAX, BIHAR & ORISSA

- **Citation:** [1961] 3 S.C.R. 359
- **Court:** Supreme Court of India
- **Decided:** 1958-02-12
- **Case number:** Civil Appeals Nos. 448 and 449 of 1959
- **Bench:** J. L. Kapur, M. Hidayatullah, J.C. Shah
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/dharamvir-dhir-v-the-commissioner-of-income-tax-bihar-orissa-2005
- **Pages:** 13

## Headnote

Income-tax-Deductions-Expenditure iticurred for purpose of
trade-Assessee paying share of profits in return of advance madeWhether allowable deduction-Indian Income-tax Act, I922 (II of
z922), ss. IO (2)(iii) and zo(2)(xv).
The assessee entered into a contract for working certain
collieries. As he did not have the requisite funds, he entered
into an agreement with M whereunder M was to advance a sum
upto Rs. rt lacs, but could withdraw the money at any time and
stop further advances and was not liable for any losses; the
assessee was to pay interest on the advances at 6% per annum
in addition to a sum equivalent to II/16th of the net profits of
the business. In pursuance of the agreement M made advances
to the assessee and the assessee paid interest and n/16th of his
net profits to M. The assessee claimed these amounts paid to
M as allowable de<luctions under s. I0[2)(iii) or under s. 10(2)(xv)
of the Income-tax Act. The amount paid as interest was allowed but the other sums paid were not allowed on the ground
that these sums were not wholly and exclusively laid out for
the purpose of the business.
Held, that the assessee was entitled to the deductions
claimed. The case had to be decided according to the tenor of
th.e agreement and the circumstances of the case. In order to
justify the deduction of the ·sum given up had to be.for .reasons.·
of commercial expediency; it may be voluntary but so !orig as it
was incurred for the assessee's benefit, e.g., the carrying on of
his business, the deduction was claimable. In the present case
there was nothing to show that the assessee could have made
any better arrangements or would not have lost the contract
had he not entered into the agreement with M. Therefore in a
commercial sense the payments were an expenditure wholly and
exclusively laid out for the purpose of the business.
Commissioner of Income-tax v. Chandulal Keshavlal, [1960]
38 I.T.R. 6or, followed.
Commissioner of Income-tax, Bombay v. M/s. Jaggannath
Kissonlal, [1961] 2 S.C.R. 644, M/s. Haji Aziz & Abdul Shakoor
Bros. v. The Commissioner of Income-tax, [r961] 2 S.C.R. 651, and
Strong v. Woodijield, (1906) 5 T.C. 215, relied on.
Pondicherry Railway Company v. Commissioner of 1ncometax, Madras, (193I) L.R. 58 I.A. 239, distinguished.
Union Cold Storage Co. Ltd. v. Adamson, (1931) 16 T.C. 293,
f anuary 5.
360
SUPREME COURT REPORTS
(1961]
I960
Tata Hydro-Electric Agencies Ltd., Bombay v. The Commissioner of
Income-tax, Bombay Presidency, (1937) L.R. 64 I.A. 215, Robert
Dharam,.•fr Dhir Ad1tie & Sons' Collieries, Ltd, v. Commissioners of Inland Revenue,
v.
(1924) S.C. 231, Commissioner of Income-tax, Bombay !'residency v.
The Commissioner Tata Sons Ltd. [1939] 7 I.T.R. 195· The Indian Radio and Cable
of Incon"·tax, Communications Company Ltd. v. The Commissioner of focome-tax,
Lihnr & Orissa Bombay, [1937] 5 I.T.R. 270, British Sugar Man11Jaeturers Ltd. v.
Harris, [1937] 21 T.C. 528, referred to.

## Text

3 S.C.R. SUPREME COURT REPORTS
359
DHARAMVIR DHIR.
v.
THE COMMISSIONER OF INCOME-TAX,
BIHAR & ORISSA
(J. L. KAPUR, M. HIDAYATULLAH and J.C. SHAH, JJ.)
Income-tax-Deductions-Expenditure iticurred for purpose of
trade-Assessee paying share of profits in return of advance madeWhether allowable deduction-Indian Income-tax Act, I922 (II of
z922), ss. IO (2)(iii) and zo(2)(xv).
The assessee entered into a contract for working certain
collieries. As he did not have the requisite funds, he entered
into an agreement with M whereunder M was to advance a sum
upto Rs. rt lacs, but could withdraw the money at any time and
stop further advances and was not liable for any losses; the
assessee was to pay interest on the advances at 6% per annum
in addition to a sum equivalent to II/16th of the net profits of
the business. In pursuance of the agreement M made advances
to the assessee and the assessee paid interest and n/16th of his
net profits to M. The assessee claimed these amounts paid to
M as allowable de<luctions under s. I0[2)(iii) or under s. 10(2)(xv)
of the Income-tax Act. The amount paid as interest was allowed but the other sums paid were not allowed on the ground
that these sums were not wholly and exclusively laid out for
the purpose of the business.
Held, that the assessee was entitled to the deductions
claimed. The case had to be decided according to the tenor of
th.e agreement and the circumstances of the case. In order to
justify the deduction of the ·sum given up had to be.for .reasons.·
of commercial expediency; it may be voluntary but so !orig as it
was incurred for the assessee's benefit, e.g., the carrying on of
his business, the deduction was claimable. In the present case
there was nothing to show that the assessee could have made
any better arrangements or would not have lost the contract
had he not entered into the agreement with M. Therefore in a
commercial sense the payments were an expenditure wholly and
exclusively laid out for the purpose of the business.
Commissioner of Income-tax v. Chandulal Keshavlal, [1960]
38 I.T.R. 6or, followed.
Commissioner of Income-tax, Bombay v. M/s. Jaggannath
Kissonlal, [1961] 2 S.C.R. 644, M/s. Haji Aziz & Abdul Shakoor
Bros. v. The Commissioner of Income-tax, [r961] 2 S.C.R. 651, and
Strong v. Woodijield, (1906) 5 T.C. 215, relied on.
Pondicherry Railway Company v. Commissioner of 1ncometax, Madras, (193I) L.R. 58 I.A. 239, distinguished.
Union Cold Storage Co. Ltd. v. Adamson, (1931) 16 T.C. 293,
f anuary 5.
360
SUPREME COURT REPORTS
(1961]
I960
Tata Hydro-Electric Agencies Ltd., Bombay v. The Commissioner of
Income-tax, Bombay Presidency, (1937) L.R. 64 I.A. 215, Robert
Dharam,.•fr Dhir Ad1tie & Sons' Collieries, Ltd, v. Commissioners of Inland Revenue,
v.
(1924) S.C. 231, Commissioner of Income-tax, Bombay !'residency v.
The Commissioner Tata Sons Ltd. [1939] 7 I.T.R. 195· The Indian Radio and Cable
of Incon"·tax, Communications Company Ltd. v. The Commissioner of focome-tax,
Lihnr & Orissa Bombay, [1937] 5 I.T.R. 270, British Sugar Man11Jaeturers Ltd. v.
Harris, [1937] 21 T.C. 528, referred to.
CIVIL APPELLATE JURISDICTION:
Civil Appeals
Nos. 448 and 449 of 1959.
Appeals by special leave from the judgment and
order . dated February 12, 1958, of the Patna High
Court in Misc. Judicial Cases Nos. 679 and 680 of
1955.
A. V. Viswanatha Sastri and Naunit Lal, for the
appellant (In both the appeals).
A. N. Kripal and D. Gupta, for the Respondent (ln
both the appeals).
1961. January 5. The Judgment of the Court was
delivered by
Kapur J.
KAPUR, J.-'These appeals by the a.ssessee are
brought against two judgments and orders of the High
Court of Judicature at Patna in Income-tax references
under s. 66(2) of the Income Tax Act answering the
questions in the negative and against the assessees.
The questfons were:
(I) "Whether on the facts and circumstances of
this case R·s. 72,963- 12-0 was a revenue expenditure
deductible under section l0(2)(iii) or under section
10(2)(xv) of the Indian Income Tax Act?''
(2) "Whether on the facts and circumstances of
this case Rs. 76,526-1-3 was a revenue expenditure
deductible under section 10(2)(iii) or under section 10(2)(xv) of the Indian Income-tax Act?"
The facts of the appeals are these: The appellant
was an employee of M/s. Karam Chand Thapar &
Bros. and for each of the accounting years relating to
the assessment years 1947-48 and 1948-49 his salary
was Rs. 10,572. He also had an income of Rs. 500
from shares in certain joint stock companies. On
December 20, 1945, he entered into a. contra.ct with
-
3 S.C.R. SUPREME COURT REPORTS
361
Bengal Nagpur Coal Company Ltd., for raising coal
x96x
from Bhaggatdih Colliery, Jharia and actually start. D
. D .
ed his business from January 1, 1946. Evidently he
haram;"
hir
did not have the requisite funds for his business and The Commissioner
therefore in order to finance it, he entered into an of Income-ta•.
agreement with the Mohini Thapar Charitable Trust Bihar & Orissa
on February 25, 1946. The trust is a public charitable
trust, which was created by Lala Karam Chand
Kapur f.
Thapar, who constituted himself as the Managing
Trustee. The relevant terms of this agreement bet.
ween the appellant and the trust were that the trust
was to advance a sum upto Rs. I! lacs, the contract
was to be "carried in accordance of the policy" settled
between the appellant and the' trust; the trust could
withdraw its money at any time and to stop further.
advances; the trust was not to be liable for any losses;
the· appellant was to send monthly returns' to the
trust and the seventh clause was "that in consideration· of the trust having agreed to finance my said .
contract business up to Rs. l! lacs I ha'l.'e agreed to
pay to the trust interest on the amount from time to
time ·owing to the trust in respect of the monies to be
advanced as above at the rate of 6 p.c. per annum in
addition to a. sum equivalent to ll/16th of the net
profits of this business of mine."
In pursuance of this agreement the appellant,
besides interest, pa.id to the trust the sum of Rs. 72,963
for the first accounting year and Rs. 76,526-1-3 for the
second accounting year corresponding to years of
assessment 1947-48, 1948-49 and claimed these amounts
as allowable deductions under s. 10(2)(iii) or under
s. 10(2)(xv) of the Income-tax Act. The amount of
interest has been allowed but the claim in regard to the
other sums paid was disallowed ·by the Income-tax
Officer on the ground that the agreement was not
genuine and bona fide and that it was not prompted
by ordinary business considerations.
The matter
was taken in appeal to the Appellate Assistant Commissioner who upheld the order of the Income-tax
Officer. An appeal to the Income-tax Appellate Tribunal was also dismissed and so was an application
46
362
SUPREME COURT REPORTS
[1961]
x961
for reference under s. 66( 1 ), but the High Court
.
. directed the Tribunal to state the case on the quesDharamvir Dh" tions set out above. For the two assessment years
The co;;,.issioner the_ question was the same e:ccepting for the amounts
of Income-tax, claimed as allowable deduct10ns.
Bihar & Orissa
In its order dated April 4, 1955, the Appellate Tribunal had foand that t.he payments were not for the
Kapur f,
purpose of the business and that taking into account
the nature of the accounts, the nature of the payments and the relationship i)etween the parties, it
could not be said that the amounts were wholly and
exclusively laid out for the purpose of· the business
and therefore rejected the claim. In the statement of
the case the Tribunal has said that the average
amount which had been advanced by the trust to the
appellant in the first year was Rs. 18,100 and the
payments made to the trust in the two years were
therefore a share of profits and not expenditure laid
out wholly and exclusively for the purposes of the
business.
The High Court approached the question from the
same angle. It was of the opinion that the question
should be determined on principles of ordinary commercial trading and because the Managing Trustee was
in a dominating position and only a small sum of money
i.e., Rs.18,100 on an average had been advanced, the
payment of Rs. 72,963 in addition to interest was an
absurdly large sum which with the interest paid worked out at about 400% interest. The High Court also
took into consideration the fact that the appellant was
an employee of Lala Karam Chand or his company.
Put in their own words the High Court observed
"having regard to the relationship between the parties
and having examined the clauses of the agreement of
the 25th February, 1946, between the assessee and the
board of trustees I am of the opinion that the real
legal position in this case is that there is a joint
adventure between the parties, a quasi partnership
which falls something short of partnership and that
the arrangement between the parties was that the
amount of profits should be ascertained and then they
shall divide it up in certain specified proportions".
f
1
3 S.C.R. SUPREME COURT REPORTS
363
The payments, therefore, did not fall within s. 10(2)
r96r
(xv). The question was therefore answered in the Dh
--:- Dh'
.
.
aramvir
ir
negative and agamst the assessee. The appellant has
v.
come in appeal to this Court by special leave.
The Commissioner
As far as the record goes at the relevant time the of Income-ta<,
appellant was a person of comparatively small means. Biha' "' Odssa
No doubt he was getting a salary of Rs. 10,572 a year
-
b
b
I<apu' ].
and had a out Rs. 500 from his share holdings ut
beyond that he does not seem to have had any other
means. There is nothing to show on the record that
he had any security to offer or did offer for the money
that he was borrowing. Thus the trust was lending
monies to the extent of Rs. li lakhs without security
and upon a venture which might or might not have
been successful. The '.l'ribunal and the High Court
seem to have fallen into an error by taking o. mean of
the advances made by the Trust to the appellant during the first accounting year. The record shows that
the advances were very considerable in the first year
ranging fr6m Rs. 12,000 in January 1946 to Rs.
1,86,000 in July of that year and in the following
months of that year they ranged from Rs. 59,000 to
Rs. 7,000. In the following years beginning from the
end of 1946 to 1953 considerable sums of money had
been advanced which ranged on au average from
Rs. 1,97,000 in 1947 to Rs. 3,17,000 in 1953. In regard
to 1947, the Tribunal has found that the average
amount of ioan was Rs. 1,20,317 but according to the
figures supplied by the appellant in his petition for
special leave to appeal to this Court, the average
comes to Rs. 1,97,919. In any case very considerable
sums of money had been advanced by the Trust and
as we have said above to a person who was not a
businessman, who neither gave nor is shown to have
been able to give any security. The agreement between the appellant and the trust has to be considered
in the context of those circumstances and if taking all
the surrounding circumstances into consideration the
trust found it necessary to have control over the
working and over the finances and had offered stringent conditions it is not a matter which can be considered to be abnormal.
364
SUPREME COURT REPORTS
[1961)
i961
Another matter which was taken into consideration
--:-
. by the Tribunal was that the amounts claimed as
Dh.,amv" Dh" deductible items were shown as a share of profits of
The co;~issioner the trust which had. he.en debited in the appellant's
of Income-tax. profit and loss appropr1at10n account or in other words
Bihar & Orissa the appellant as per his accounts admitted that it was
an appropriation of the profits to the trust. The TriKapur J ·
bunal thus was of the opinion that the interest to be
received by the Trust was 11/16 part of the profits of
the appellant's business and that the method of
accounting clearly sh'owed that the appellant was only
parting with the share otiirofits. This, in our opinion,
is an erroneous approaCh to the question. The case
has to be decided according to the tenor of the docu-
. ment as it stands and the circumstances of the case.
The genuineness of the document has not been challenged though an effort was made by the Revenue to
so construe the document and so read the facts as to
make both the amounts liable to tax in the hands of
the appellant.
·
As to what is a deductible expense has to be viewed
in the circumstances of each case. In Commissioner
of Income.tax v. Chandulal Keshavlal (') this Court
observed that in deciding whether a payment of money
is a deductible expenditure, one has to take into consideration the question of commercial expediency and
the principles of ordinary commercial trading. If the
payment or expenditure is incurred for the purpose
of the trade of the assessee it does not matter that
the payment may enure for the benefit of a third
party. Another test laid down in that case was whether the transaction is properly entered into as a part
of the assessee's legitimate commercial undertaking in
order to facilitate the carrying out of its business and
it is immaterial that a third party also benefits thereby. Thus in cases like the present one, in order to
justify the deduction th~ sum given up must be for
reasons of commercial expediency. It may be voluntary but so long as it is incurred for the assessee's benefit e.g. the carrying on of his business, the deduction
would be claimable. In Commissioner of Income-tax,
(1) [1960] 38 I.T.R. 601.
3 S.C.R. SUPREME COURT REPORTS
365
Bombay v. Jaggannath Kissonlal (1) the assessee execut-
'96'
ed a promissory note jointly with another person in Dharamvfr flhir
order to raise the money for himself and for the other.
v.
The other person became.insolvent and the assessee The. Commissioner
had to pay the whole amount and claimed that of Income-tax,
amount as an allowable deduction under s. 10(2)(xv) Bihar <l> Odssa
and it was found that it was a practice in the Bombay
k
b.
h
.
Kapur j.
mar et to
orrow money on sue
promissory notes
and there was an element of mutualitv in the transaction. The loss sustained by the assessee was allowed
as a deductible item on the basis that a commercial
practice of financing the business by borrowing money
on joint and several liability was established. In another case decided by this Court M/s. Haji Aziz &
Abdul Shakoor Bros. v. The Commissioner of Incometax (2) it was held that the expenses which are permitted as deductible are such as are made for the purpose of carrying on the business i.e. to enable a person
to carry on business and earn profits in that business
and the disbursements must be such which are for the
purpose of earning the profits of the business. See also
Strong and Company of Romsey Ltd. v. Woodifield (').
These cases therefore show that if any amount is expended which is commercially expedient and is expended for the purpose of eae1ing profits it is a
deductible expenditure.
In support of their opinion the High Court relied
upon the cases hereinafter mentioned but in our
opinion they do not apply to the facts and circumstances of this case. The first case referred to is
Pondicherry Railway Company v. Commissioner of
Income-Tax, Madras('). In that case the assessee company, incorporated in the United Kingdom, obtained
a. concession of constructing a railway in the territories of Pondicherry. The assessee company was to
pay to the French . Government l of its net profits.
The French Government on its part gave land Ol]
which the railway was to be built free of charge and
also agreed to pay a subsidy. The question for decision in that case was wh0ther the monies paid by the
(1) [1g61] 2 S.C.R. 644,
(3) (19o6) 5 T.C. 215.
(2) [1g61] 2 S.C.R. 651.
(41 [1931] L.R. 58 I.A. 239.
-.
366
SUPREME COURT REPORTS
[1961]
'96'
assessee company to the French Government i.e., ! of
Dharamvir Dhfr its net profits were allowable as a deduction under the
v.
provisions corresponding to s. 10(2)(xv). Lord MacThe Commissioner millan observed at p. 251:-
of Income-tax,
"A payment out of profits and conditions on proBihar & Orissa
fits being earned cannot accurately be described as
Kapur }.
a payment made to earn profits. It assumes that
profits have first come into existence. But profits
on their coming into existence attract tax at that
point, and the revenue is not concerned with the
subsequent application of the profits."
But these observations have been later on explained
in other cases to which reference will be made presently. In Union Cold Storage Co. Ltd. v. Adamson (1)
the assessee leased landR and premises abroad reserving a rent of£ 9,60,000. It was also provided in the
deed that if at the end of the financial year it was
found that after providing for this rent the result of
the company's operations ~~·as insufficient to pay interest on charges and debentures etc., the rent for the
year was to be abated to the extent of the deficiency.
In computing its profits the assessee company claimed
the sums of rent paid in two respective years. They
were held not payable out of the profits or gains and
were allowable deductions.
At page 318 Rowlatt J.
said that the sum which was to be paid by the company
was a recompense in respect of possession and use of
the premises abroad and the company had entered
into some liabilities by way of payment for their premises and that payment was an outgoing of the business which was to be provided for and allowed before
profits of the business could be ascertained. In the
House of Lords Lord Macmillan distinguished the
Pondicherry case(') by saying that in that case the
ascertainment of profits preceded the coming into
operation of the obligation to pay and when profits
had been ascertained the obligation was to make over
! thereof to the :French Government. Dealing with
the passage above referred to Lord Macmillan said at
p. 331:-
.
"I was dealing with a case in which the obligation was, first of all, to ascertain the profits in a
(1) [1931] 16 T.C. 293.
(2) (1931) L.R. 58 I.A. 239.
3 S.C.R. SUPREME COURT REPORTS
367
prescribed manner, after providing for all outlays
I96I
incurred in earning them, and then to divide them.
H
h
.
.
h h
d d
.
.c
Dha•amvir Dhir
ere t e quest10n 1s w et er or not a e uct10n ior
rent has to be made in ascertaining the profits, and 1 he c0 ;;,,issioner
the question is not one of the distribution of profits of Income-ta"
at all."
Bihar &.. Orissa
In Tata Hydro-Electric Agencies Limited, Bombay
Th C
.
.
l<apur J.
v.
e
ommissioner of Income-tax, Bombay Presidency (1) the Tata Power Co. entered into an agency
agreement with Tatasons Ltd. agreeing to pay to
Tatasons Ltd. a commission of 10% on the annual net
profits of Tata Power Co., subject to a minimum whether any profits were made or not. Later on two persons D and S advanced funds to Tata Power Company
on the condition that in addition to the interest payable to them by Tata Power Company they should
each receive from Tatasons Ltd., 12t% of the commission earned by Tatasons Ltd.
Tatasons Ltd.
assigned their entire right to the assessee company
and the Tata Power Company entered into a new
agency agreement with the assessee company and the
assessee company received a commission and out of
that paid ! to D and S. Relying on Pondicherry Railway
case (') the Bombay High Court held that that was
not an allowable deduction as expenditure incurred
solely for earning profits. On appeal the Privy Council
held that Pondicherry case did not govern the case.
The nature of the transaction was held to be this that
the obligation to make the payments was undertaken
by the assessee company in consideration .of its acquisiticn of the right to p,roperty to earn profits i.e. of
the right to conduct the business and not for the purpose of producing profits in the conduct of the business. Dealing with Pondicherry Railway case (') Lord
Macmillan said:-
"In the Pondicherry case the assessees were
under obligation to make over a share of their profits to the :French Government. Profits had first to be
earned and ascertained before any sharing took
place. Here the obligation of the appellants to pay
(1) [1937] L.R. 64 I.A. 215.
(2) (1931) L,R. 58 I.A. 239.
368
SUPRE:ME COURT REPORTS
[1961]
a quarter of the commission which they receive
from the Tata Power Co. Ltd. to F. K Dinshaw
Dharamvir Dhir
Ltd., and Richard Tilden Smith's administrators is
v.
The Commissioner
quite independent of whether the appellants make
of Income-ta.,
any profits or not."
Bihar & Orissa and at page 225 Lord Macmillan said:-
Kapur ].
"In short, the obligation to make these payments
was undertaken by the appellants in consideration
of their acquisition of the right and opportunity to
earn profits, that is, of the right to conduct the
business, and not for the purpose of producing
profits in the conduct of the business."
At page 226 the Privy Council accepted the following
test laid down by Lord President in Robert Addie &:
Sons' Collieries, Ltd. v. Commissioners of Inland
Revenue(') where it is observed:-
"What is 'money wholly and exclusively laid out
for the purposes of the trade' is a question which
must be determined upon the principles of ordinary
commercial trading. It is necessary, accordingly,
to attend to the true nature of the expenditure, and
·to ask oneself the question, Is it a part of the Company's working expenses; is it expenditure laid out
as part of the process of profit earning".
In Commissioner of Income-tax, Bombay Presidency v.
Tata Sons Ltd. (') the company received a commission
on the basis of profits. The managed company was
in urgent need of money and the assessee company
found a financier a Mr. Dinshaw and an agreement
was entered into with the managed company and Mr.
Dinshaw by which the latter agreed to lend a crore
of rupees on the condition that the assessee company
assigned to him a share in the commission which the
assessee company might receive from the managed
company. That was held to be an agreement on the
part of the assessee company to share their commission with Mr. Dinshaw and it was a part of the
arrangement on which the assessee company obtained
· finance and therefore the payment to Mr. Dinshaw
was an expenditure solely for the purpose of earning
profits or gains and it was not of a capital nature. At
(1) (i9"4) S.C. 231,
(•) (1939) 1 I.T.R. 19;.
I
3 s.c.R. SUPREME COURT REPORTS
369
page 203 Beaumont 'c,J. said that the question wher96r
ther the 'payment of a part of the commission to a Dh
. nh·
th. d
b
d d
d"t
.
d
aramvir
"
1r person can e regar e as expen 1 ure mcurre
v.
solely for the purpose of earning that commission. is a Th• Commission"
question which must be answered on the facts of each
of Income-tax,
case on a commercial basis.
Bihar & Orissa
In The Indian Radio and Gable Communications
Company Ltd. v. The Commissioner of Income-tax,
Bombay (1) it was observed that it was not universally
true to say that a payment the making of which is
conditional on profits being earned cannot properly be
described as an expenditure incurred for the purpose
of earning such profits. Lord Maugham in explaining the judgment in the Pondicherry Railway case (')
said at page 278 :-
"To avoid misconception it is proper to say that
in coming to this conclusion they have not taken
the view that the case is governed by the decision
in Pondicherry Railway Co. Ltd. v. Commissioner
of Income-tax, Madras, though that case no doubt
shows light on the nature of the problem which has
to be solved in the present case. It should perhaps
be added that a sentence in the judgment in that
case has been explained, if explanation was necessary, by Lord Macmillan in the subsequent case of
W. H. E. Adamson v. Union Gold Storage Company."
As to when a deduction is claimable and when it
is not, it was said at page 277 that if a company had
made an apparent net profit and then had to pay to a
director as a contractual recompense, the net profit
would be the difference between the two but if there
was a contract to pay a commissio~n the net profits
of the year it must necessarily be'held to mean as net
profits before the deduction of the commission.
In British Sugar Manufacturers Ltd. v. Harris(')
the assessee company agreed to pay two other companies a certain percentage of its annual profits after
deduction of expenses and debenture interest in consideration of their giving to the assessee company the
full benefit of their technical and financial knowledge
(1) (1937] 5 I.T.R. 270.
.
(2) (1931] L.R. 58 I.A. 239.
\3) ~ig37] 21 T.C. ~28.
J(apur f.
370
SUPREME COURT REPORTS
[1961]
1961
and experience.
Certain payments were made in
Dharam•i• Dhir pursuance of that agreement and it was held that
v.
payments under the agreement were permissible
The Commissicmer deductions in computing the assessee company's proof Imome-t~x, fits.
Dealing with the Pondicherry Railway case (1) at
Bihar & Oms• page 548, the learned Master of the Rolls said :-
Kapur].
"It is to be observed that Lord Macmillan in that
paragraph was quite clearly using the word ' profit ' in one sense and one sense only ; he was using
it in the sense of the 'real net profit' to which
Lord Maugham referred. That he was doing that
is, I think, abundantly clear when the nature of the
contract there in question is considered, which was
merely a contract under which a percent,age of profits was payable by the railway company to the
French Government. There was no question of
services or anything of that kind in the case; it was
merely a sum payable out of profits. I do not find
myself constrained by that expression of opinion,
because it must be read; as Lord Macmillan has
said in a subsequent case Union Cold Storage Co.
Ltd. v. Adamson(') at pp. 331-2, in relation to the
particular subject matter with which he was
dealing."
As has been said above the question to be considered
in this case is governed by the observati'.lns of this Court
in Commissioner of Income-tax v. Chandnlal Keshavlal
& Co. (')and the circumstances under which the trust
agreed to lend the appellant such a large sum of
money shows the true nature of the transaction.
On
the facts proved in the present case the Trust agreed
to finance the business of the appellant on the terms
set out in the agreement and there is nothing to show
that he could have made any better arrangements or
would not have lost the contract if he had failed to
enter into the agreement i.e. the agreement to pay
the amounts in dispute. Therefore in a commercial
sense the payments were an expenditure wholly and
exclusively laid out for the purpose of the business.
In our opinion, therefore, the High Court was in
error and the question referred should have been
(1) [1931] T •. R. 58 I.A. 239.
(2) (1931) 16 T.C. i93. 331·3•.
(5) [1¢<>] 38 I. T.R. 6o1.
1
I
3 S.C.R.
SUPREME COURT REPORTS
371
answered in the affirmative in favour of the appellant.
1961
The appeals are, therefore, allowed and the judgments Dharamvir DAir
and . orders of the High Court are set aside. The Th c v. . .
I
'JI h
h'
.
h' C
t
d .
th
' omm1ssioner
appe !ant w1
ave
IS costs m t IS our an m
e
of Income-•••,
High Court. One hearing fee.
BihaY & Orissa
Appeals allowed.
THE FIRST NATIONAL CITY BANK
v.
THE COMMISSIONER OF INCOME-TAX,
BOMBAY CITY.
(J. L. KAPUR, M. HrnAYATULLAH and J.C. SHAH, JJ.)
Business Profits Tax-" Undivided profits ", if fell within the
word" reserves "-Business Profits Tax Act, I947 (XX! of r947),
Sch.[[, Rule 2(I).
The appellant, a non-resident Banker incorporated under
the National Bank Act of the United States of America with its
Head Office in America, was assessed under Business Profits
Tax Act, 1947· Under the Treasury Rnles of the United States
of America and Instructions for preparation of reports of conditions by the National Banking Association certain sums had to
be specifically allocated under s. 52n of the Revised Statute
of the United States, and the appellant bank was required to
keep a certain sum of money under the head " undivided profits" and that was an integral part of the capital structu.c.e.
The reason for the existence of this fund was that when losses
occurred according to the practice they could be charged against
"undivided profits", i.e., profits set apart after provision for
expenses and taxes etc. for continuous use in the business of the
Bank. The appellant contended that in computing the amount
for the purpose of "abatement" it was entitled to include the
"undivided profits" which fell within the word " reserves".
The question was whether the large sum of money shown
as "undivided profits" was a part of the reserves.
Held, that the amount designated as "nndivided profits"
was a part of the reserves and had to be taken into account
when computing the capital and reserves within Rule 2(1) of
Sch. II of the Business Profits Tax Act, 1947.
CIVIL APPELLATE JURISDICTION:
Civil Appeal
No. 315/1958.
Appeal by special leave from the judgment and
order dated February 5, 1957, of the Bombay High
Court in I.T.R. No. 34/1956.
Kapur].
I96I
January 6.