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TMI Blog1972 (1) TMI 30X X X X Extracts X X X X X X X X Extracts X X X X ..... 56(1) of the Income-tax Act, 1961, at the instance of the Commissioner of Income-tax, Kerala, Ernakulam. The questions referred to this court are : "(1) Whether, on the facts and in the circumstances of the case, the payment of Rs. 1,45,969 by the assessee to the Kerala Government under the agreements dated June 18, 1937, and January 28, 1947, was allowable under section 10 of the Indian Income-tax Act, 1922 ? (2) Whether, on the facts and in the circumstances of the case, the payment of Rs. 1,14,520 by the assessee to the Kerala Government under the agreements dated June 18, 1937, and January 28, 1947, was allowable under section 10 of the Indian Income-tax Act, 1922? (3) Whether, on the facts and in the circumstances of the case, the payment of Rs. 1,21,578 by the assessee to the Kerala Government under the agreements dated June 18, 1937, and January 28, 1947, was allowable under section 10 of the Indian Income-tax Act, 1922 ? (4) Whether, on the facts and in the circumstances of the case, the payment of Rs. 65,682 by the assessee to the Kerala Government under the agreements dated June 18, 1937, and January 28, 1947, was allowable under section 37 of the Income-tax Act, 1961 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... years 1959-60 to 1961-62 and under section 37 of the Income-tax Act, 1961, for the assessment year 1962-63. The Income-tax Officer as well as the Appellate Assistant Commissioner disallowed the claim of the assessee for deduction of the amounts. The Appellate Tribunal, following the decision of the Supreme Court in Travancore Sugars & Chemicals Ltd. v. Commissioner of Income-tax and that of this court in Commissioner of Income-tax v. Travancore Sugars and Chemicals Ltd., upheld the plea of the assessee. For the assessment year 1958-59, the assessee claimed deduction of Rs. 42,480 paid to the Government under clause (7) of annexures "A" and "B" under section 10(2)(xv) of the Indian Income-tax Act, 1922. The income-tax authorities disallowed the claim of the assessee while the Tribunal upheld the same. At the instance of the Commissioner of Income-tax, Kerala, the sustainability of the claim of the assessee for deduction was referred to this court under section 66(1) of the Indian Income-tax Act, 1922. This court by its decision reported in Commissioner of Income-tax v. Travancore Sugars & Chemicals Ltd., answered the question in favour of the revenue taking the view that payment u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e (7) of annexures "A" and "B". We, therefore, hold that the payments to the Government under clause (7) of annexures "A" and "B" during the assessment years 1959-60 to 1962-63 are in the nature of revenue expenditure. It was not contended before us that as a result of annexures "A" and "B", there was a joint venture between the assessee and the Government to share profits. We are, therefore, left with only two aspects, viz., (1) whether the payments in pursuance to clause (7) of the agreement amount to diversion of profits by title paramount, and (2) whether the assessee is entitled to deduction of the amounts in question under section 10(2)(xv) of the Indian Income-tax Act, 1922, and under section 37 of the Income-tax Act, 1961. Counsel for the revenue pleaded for the acceptance of the view of Isaac J. on both the aspects in preference to the majority view expressed by Raghavan J. and Mathew J. We shall take up the first question whether the payment of the amounts to the Government is a diversion of profits by title paramount. Counsel for the revenue relied on the principle of law stated by Lord Macmillan in Pondicherry Railway Co. v. Commissioner of Income-tax. There the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... result of the company's operations was insufficient to pay both interest on its charges and debentures and dividends the rent should abate to the extent of deficiency. The assessee-company claimed the rent paid in the two respective years to be deducted in computing its profits for assessment to income-tax. The plea of the assessee was upheld. Lord Macmillan explained his observations in the earlier case in the following manner at pages 331 and 332 : "In that case, therefore, the ascertainment of profits preceded the coming into operation of the obligation to pay, and when the profits had been ascertained the obligation was to make over one-half thereof to the French Colonial Government. The obligation was conceived in language entirely different from the language which your Lordships have been considering in the present appeal, where there is a common form obligation in a lease to pay rent. 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, f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce of an obligation imposed by their testator. It is not a case like the case of Raja Bejoy Singh Dhudburia v. Commissioner of Income-tax, in which a portion of income was by an overriding title diverted from the person who would otherwise have received it. It is simply a case in which the executors having received the whole income of the estate apply a portion in a particular way pursuant to the directions of their testator, in whose shoes they stand." The several High Courts in India have applied the above mentioned decisions of the Judicial Committee in diverse manner. It is not necessary, in our view, to examine all of them. Suffice it to say that the Supreme Court in Commissioner of Income-tax v. Sitaldas Tirathdas, after reviewing the decisions of the Judicial Committee and some of the decisions of the High Courts, has enunciated the principles that should guide us for the decision of the point mooted before us. In the Supreme Court decision the assessee in computing his total income for purposes of income-tax sought to deduct amounts paid by him as maintenance to his wife and children under decree of court passed by consent. There was no charge created in favour of the wife ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be a payment to earn profits has not been accepted as absolutely correct. In Indian Radio and Cable Communications Company Ltd. v. Commissioner of Income-tax, Lord Maugham pointed out : "It may be admitted that, as Mr. Latter contended, it is 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. The typical exception is that of a payment to a director or a manager of a commisson on the profits of a company. It may, however, be worth pointing out that an apparent difficulty here is really caused by using the word 'profits' in more than one sense. If a company having made an apparent net profit of pound 10,000 has then to pay pound 1,000 to directors or managers as the contractual recompense for their service during the year, it is plain that the real net profit is only pound 9,000. A contract to pay a commission at 10 per cent. on the net profits of the year must necessarily be held to mean on the net profits before the deduction of the commission, that is, in the case supposed, a commission on the pound 10,000." There is a decision of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e principles it is clear that the expression "net profits" referred to therein is not the "profits and gains of business" for assessment within the meaning of the Indian Income-tax Act, 1922, or the Income-tax Act, 1961, but only for the purpose of determining the amount payable to the government to enable the assessee to earn the net profits. The obligation under the contract evidenced by annexures "A" and "B" is such that the amount involved cannot be considered to belong to the assessee. There is a diversion of the amount even before they reached the assessee. Subba Rao J. (as he then was) in Poona Electric Supply Co. Ltd. v. Commissioner of Income-tax, after quoting with approval the decisions of the Judicial Committee in Indian Radio and Cable Communications Co. Ltd. v. Commissioner of Income-tax and British Sugar Manufacturers Ltd. v. Harris, explained the concept of "real income" for assessment in the following manner : "Income-tax is a tax on the real income, i.e., the profits arrived at on commercial principles subject to the provisions of the Income-tax Act. The real profit can be ascertained only by making the permissible deductions. There is a clear-cut distinction bet ..... X X X X Extracts X X X X X X X X Extracts X X X X
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