Payments made for the purpose of earning profits are allowable deductions under S. 10 (2) (xv) of the Income-tax Act.

Judgment

KAPUR, J. : These appeals by the assessee 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 assessee. The questions were:

(1) "Whether on the facts and circumstances of this case Rs. 72,963-12-0 was a revenue expenditure deductible under section 10 (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 ?"

2. 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 contract with Bengal Nagpur Coal Company Ltd. for raising coal from Bhaggatdih Colliery, Jharia and actually started his business from January 1, 1946. Evidently he did not have the requisite funds for his business and therefore in order to finance it, he entered into an agreement with the Mohini Thopar Charitable Trust on February 25, 1946. The trust is a public charitable trust, which was created by Lala Karam Chand Thapar, who constituted himself as the Managing Trustee. The relevant terms of this agreement between the appellant and the trust were that the trust was to advance a sum upto Rs. 11/2 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. 11/2 lacs I have agreed to pay to 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 11/16th of the net profits to a sum equivalent to 11/16th of the net profits of this business of mine."

3. In pursuance of this agreement the appellant, besides interest, paid 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 for reference under S. 66(1), but the High Court directed the Tribunal to state the case on the questions set out above. For the two assessment years the question was the same excepting for the amounts claimed as allowable deductions.

4. In its order dated April 4, 1955, the Appellate Tribunal had found that the payments were not for the purpose of the business and that taking into account the nature of the accounts, the nature of the payments and the relationship between 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 m