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TMI Blog1938 (1) TMI 22X X X X Extracts X X X X X X X X Extracts X X X X ..... ee and Jagan Nath Syal and Company is a legitimate deduction under Section 10(2), Clauses (i) and (ix) of the Income tax Act ; and (2) Whether the assessee is entitled to deduct ₹ 2,109 and ₹ 2,622 paid to Fatehchand Jairamdas and Shanti Sarup, respectively, as interest on capital alleged to have been borrowed from them by the assessee. In the opinion of the Commissioner both questions should be answered in the negative and we have no hesitation in agreeing with him. The sum involved in question No. 1 was paid by the assessee to Jagan Nath Syal and Company, hereinafter called the company, in the following circumstances:- The company took on lease a cotton ginning factory and the assessee entered into an agreement with the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... significant that throughout the proceedings before the Income tax authorities prior to the issue of mandamus by this Court the assessee never based his claim on that clause. Had the sum in dispute been rent, it could easily have been so expressed in the agreement entered into between the assessee and the company. This however was not done nor can a fluctuating item like this be treated as rent. The following observations of their Lordships of the Privy Council in Indian Radio and Communications Co. v. Commissioner of Income Tax, Bombay (5 I.T.R. 270) are pertinent in this respect:- "Circumstances of greater importance are that the sum payable may be small or great or nothing-a most unusual feature in the case of rent-and that it is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... solely for the purpose of making or earning 'income, profits or gains' and they agree that it may be impossible to formulate a test which will always suffice to discriminate between the expenditure which is and which is not allowable for the purpose of income tax, but in the present case they have little hesitation in coming to the conclusion that the proposed deduction is not allowable". In that case the Communications Company and the Radio Company entered into an agreement to the effect that their businesses in India should be combined and conducted by the Radio Company for a certain number of years. The Communications Company agreed to deliver all the plant, machinery, fittings, etc., of their business in India to the Radi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o what his real import was in using these words. In Union Cold Storage Co. v. Adamson (16 Tax Cases 293, at page 331), his Lordship remarked:- "When therefore, in the passage referred to by the Attorney- General in the Pondicherry case I said that 'a payment out of profits and conditional on profits being earned cannot accurately be described as a payment made to earn profits,' I was dealing with a case in which the obligation was, first of all, to ascertain the profits in a prescribed manner, after providing for all outlays incurred in earning them, and then to divide them". In Tata Hydro Electric Agencies, Ltd. v. Commissioner of Income Tax, Bombay (64 I.A. 215), his Lordship once more adverted to the Pondicherry case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he had gained. We are even prepared to go further and say in the present case the company and the assessee had started a quasi partnership business in which the company had to receive certain definite sums as ginning charges and had in addition to receive certain profits after making certain deductions and not to be responsible for any losses. The profits were to be paid to the company after they were earned and as such they cannot in any way be treated as an expenditure which the assessee had to incur for earning them. The second question can be disposed of on the short ground that it is a question of fact whether the advance made by a partner is a loan to the partnership or an increase in the capital of the firm, and when once the incom ..... X X X X Extracts X X X X X X X X Extracts X X X X
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