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TMI Blog1958 (2) TMI 47X X X X Extracts X X X X X X X X Extracts X X X X ..... ; 11 lakhs on payment of interest at the rate of 6 per cent, per annum and also an additional amount equal to 1 l/16ths of the profit. The terms of the agreement are contained in a letter dated the 25th of February, 1946, written by the assessee to the board of trustees. The letter of the assessee reads as follows: (1)That the trust would finance me up to ₹ 11 lakhs to enable me to carry on the said coal raising contract business taken by me from Bengal Nagpur Coal Company Limited. (2)That the coal raising contract would be carried in accordance with the policy from time to time mutually agreed upon between me and the managing trustee of the trust and that no change or deviation therein would be permitted to be made by me without a previous consent of the said managing trustee and all monies lent and advanced or to be advanced under this arrangement shall be spent solely for this business. (3)That the trust shall be at liberty to call back the money at any time due and outstanding from me and to stop further finance on giving me a week's notice and in case of breach of terms and conditions of the loan forthwith. (4)That notwithstanding the limit of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... claim was also put forward that the amount represented partly interest and partly expenditure incurred wholly for the purpose of the business under section 10(2)(xv) of the Income-tax Act. The claim was dissallowed 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 consideration. The assessee took the matter in appeal to the Appellate Assistant Commissioner, but the appeal was dismissed and the Appellate Assistant Commissioner confirmed the order of the Income-tax Officer, holding that the interest claimed by the assessee worked out to 409.1 per cent., and not 50 per cent, as stated by the Income-tax Officer and there was no justification for stipulating such an absurdly high rate of interest. The assessee took the matter again in appeal to the Appellate Tribunal but the Appellate Tribunal dismissed the appeal holding that the amount of ₹ 72,963 was only a share of profits and that the amount could not be taken as expenditure laid out wholly and exclusively for the purpose of the business. Under section 66(2) of the Income-tax Act the Appellate Tribunal has submitted the following que ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at liberty to call back the money at any time and to stop further finance on giving a week's notice. Under clause (4) it is in the absolute discretion of the trust to withdraw the facility for credit and to stop future advances after giving a week's notice. Clause (8) provides that all stores-stock-in trade, outstandings and book debts and other assets in the business shall stand charged and be a security for due repayment of the monies due to the trust. Clause (5) states that the trust would not be responsible for any losses or damages sustained by the assessee in respect of the coal raising contract. Under clause (9) the assessee is required by the trust to execute an irrevocable power of attorney in favour of the trustees, authorising them to collect all the bills due from the Bengal Nagpur Coal Company Limited under the coal raising contract. It is also mentioned by the Appellate Tribunal in the statement of the case that the average amount of the loan advanced by the trust was ₹ 18,100 and against a loan of such an amount it is absurd to make payment of sum of ₹ 72,963 in addition to ₹ 1,086. The payment of this amount would work out at more than 400 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Railway Company Limited v. Commissioner of Income-tax [1931] 5 ITC 363 . In that case the French Colonial Government had agreed to contribute land free of charge to the Pondicherry Railway Company to construct a railway and to pay it a subsidy, and the Pondicherry Railway Company in turn covenanted to pay to the French Colonial Government a share in the profits. It was argued before the Judicial Committee on behalf of the Pondicherry Railway Company in that case that inasmuch as the Pondicherry Railway Company as a condition of making any profits must pay over one half of them to the French authorities and could never itself reserve the whole profits, the payment so made was of the nature of a rent payable by the company or a charge on the undertaking. The argument was rejected by Lord Macmillan who took the view that the contract between the parties showed that the French Colonial Government shall participate in the success of the undertaking and that any deduction by the company what it pays to the French Colonial Government was not permissible. The material facts in the present case are of similar character. The same principle has been reiterated by the Judicial Committee i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing made an apparent net profit of 10,000 has then to pay 1,000 to directors or managers as the contractual recompense for their service during the year, it is plain that the real net profits is only 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 10,000. Their Lordships do not think that there is in the present case any sufficient ground for holding that the sum in question is of the nature of rent. It is neither described as a rent nor does the agreement contain several of the clauses which a lease of plant of such a character would naturally contain. 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 impossible to presume or infer that the half share of profits is being paid only as rent, or as a similar payment, in consideration merely of the use of the plant the subject of the licence in clause 3 of the agreement. The sum is in truth made payable as part of the consideration in respect of a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2,94,308 and at page 203 of the report Beaumont, C.J., has observed that the agreement made as to finance by the assessee was the wisest which could be made in the circumstances and that the agreement to share their commission with Mr. Dinshaw was justified in a commercial sense. In the present case the material facts are different and I have already stated that the agreement of the assessee in the present case with the trust cannot be supported on the principle of ordinary commercial expediency. Reference was also made on behalf of the assessee to Vithaldas Thakordas and Company v. Commissioner of Income-tax [1946] 14 ITR 822 in which the assessees, a firm of partners, entered into an arrangement with the widow of V for the use of V's name for their bullion business. Under the arrangement, in consideration of the widow having agreed to allow the partners to use the name of V for the purpose of the partnership business, the partners agreed to pay to the widow out of the net profits of the business in the first instance an amount equal to two annas in the rupee of the net profits. The partnership deed further provided that after payment of the aforesaid amount to the widow ..... X X X X Extracts X X X X X X X X Extracts X X X X
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