A payment of a share of profits is not an item of expense incurred legitimately for commercial purpose in the course of the business if it is not a genuine transaction and is for the oblique purpose of distribution or bifurcation of profits so that the profits received by the assessee are reduced for the purpose of obtaining the advantage of avoidance of tax liability on the same.

RAY, J.

1. THE assessee entered into an agreement with H. Manory Ltd., hereinafter referred to as the company, on 5th May, 1948, whereby the assessee agreed to finance the company in its business and the latter agreed to pay the assessee 50 per cent of the profits to be earned in that business. The assessee was short of funds and entered into an agreement in writing with Ratiram Tansukhroy on 7th Oct., 1948. The agreement between the assessee and M/s Ratiram Tansukhroy, hereinafter referred to as the financier, provided that the financier would advance moneys to the assessee for the purpose of financing the business of H. Manory Ltd. and further that the financier would render services and help as might be required by the assessee in connection with the business. The agreement further provided that in consideration of help to be rendered by way of arranging finance and/or further services the assessee would pay to the financier interest at the rate of 4= per cent. per annum on all the amounts that might be advanced by the financier together with 50 per cent. of the share of the net profits which would be received by the assessee from H. Manory Ltd., that is to say, that such profits would be shared between the assessee and the financier in the following manner :

(a) The assessee would retain 50 per cent. of the actual net profits to be received by the assessee from H. Manory Ltd. ;

(b) The financier would be paid the remaining 50 per cent. of the net profits.

2. BEFORE the execution of the 7th Oct., 1948, agreement between the assessee and the financier, the assessee had obtained an advance of Rs. 50,000 and Rs. 17,500 on 24th May, 1948, and 7th June, 1948, respectively, in order to pay the said amounts to the company. The financier negotiated a loan of Rs. 1,00,000 advanced to the assessee by Premier Stores Supplying Co., in the month of June, 1948, and the said amount was advanced by the assessee to H. Manory Ltd.

The assessee closed its accounts on 31st Dec., 1948. During that year the assessee received Rs. 1,76,875 as 50 per cent. of the share of profits from H. Manory Ltd. Out of that amount the assessee paid Rs. 87,937-8-0 being the 50 per cent. of the said amount to Ratiram Tansukhroy. Similarly, in the calendar year 1949, relevant for the present case, the assessee received Rs. 1,62,155 as 50 per cent. share in the profits of H. Manroy Ltd. and paid Rs. 81,078 to Ratiram Tansukhroy.

3. THE contention of the assessee was that the transaction between Ratiram Tansukhroy, the financier, and the assessee was a joint venture and the alternative contention was that the amount paid to Ratiram Tansukhroy was admissible as a deduction under s. 10(2)(xv) of the IT Act. In other words, the assessee contended that the amount was paid as an expense in the matter of finance received by the assessee from Ratiram Tansukhroy and for negotiation of the loan from Premier Stores Supplying Co. and, therefore, it was a business expense.

4. THE Tribunal found that it was not a joint venture. The Tribunal held that only the interest payable by the assessee to Ratiram Tansukhroy was admissible under s. 10(2)(iii) of the Act but the payment of a moiety of the profits was only a diversion of the profits after they were earned by the assessee and as such was not allowable as a deduction under s. 10(2)(xv).

The question of law that has been referred on these facts and circumstances is as follows :

"Whether, on the facts and in the circumstances of this case, the payment of the sum of Rs. 81,078 to Ratiram Tansukhroy was an expense admissible as a deduction under s. 10(2)(xv) of that Act ?"

5. COUNSEL for the assessee relied on the decision of the Supreme Court in the case of Dharamvir Dhir vs. CIT (1961) 42 ITR 7 (SC) in support of the contention that the assessee agreed with H. Manory Ltd. to finance the business of the company in tea chests and inasmuch as the assessee was short of funds in financing the said business the assessee entered in