Lallubhai Shah, Kt., Acting C.J.
1. As the question upon which we are required to express our opinion is not categorically formulated, we may state the essential facts and the question before proceeding to express our opinion thereon.
2. The assessees in this case are three brothers who are doing business in the name of Messrs. Haji Jamal Nurmahomed & Co. They attract capital for the purpose of their business by means of borrowings from persons who are described as 'Mudibhagidars' under an agreement with them. The arrangement is that instead of the Mudibhagidars being given any interest on the advances made by them to this firm, they receive certain specified shares in the profits of the business, and they are not responsible for the losses, if any. It is common ground that they are not partners in the business. In the year under consideration this firm made a profit of Us. 1,27,810-9-6. Out of that according to the agreement with the Mudibhagidars, they have to pay KB. 63,065-1-3 for the advances made by the various Mudibhagidars. The question that arises on this reference relates to thin sum of Rs. 68,065-1-3 payable to the Mudibhagidars for advances made by them to this firm. With reference to that, the question is whether they are entitled to an allowance under Section 10 (2) (ix) of the Indian Income Tax Act (XI of 1922). Under this clause they would be entitled to an allowance in respect of any expenditure (not being in the nature of capital expenditure) incurred solely for the purpose of earning such profits or gains.
3. After a consideration of the arguments urged on both sides we are of opinion that this sum cannot be treated as expenditure incurred solely for the purpose of earning such profits or gains within the meaning of this clause. Our reasons for this opinion may be briefly stated. In the first place, the advances made by the Mudibhagidars are clearly in the nature of capital borrowed for the purposes of the business, With reference to the allowance to be made in respect of the capital borrowed for the purposes of the business, there is an express clause, viz., Clause (iii), of that sub-section. Under that clause the allowance can be made for the amount of the interest paid whore the amount, of Merest in respect of capital borrowed is not in any way dependent on the earning of profits. In the present case, admittedly, the amount payable to the Mudibhagidars Is dependent upon the earning of profits. So even if the payments of certain portion of the profits to the Mudibhagidars are to be treated a being in lieu of interest within the meaning of Clause (iii). as they are dependent on the, earning of profits, the profits would not be liable to any deduction or allowance in respect thereof. It would be rather an anomalous result if under Clause (iii), which is directly applicable to capital borrowed for the purposes of the business, an allowance cannot be made, still it should be capable of being made under Clause (ix). There is considerable force in the argument urged on behalf of the Crown that in this case, if an allowance cannot be made under Clause (iii), it cannot be made at all. Still we have to consider the argument urged on behalf of the assessees whether this can be treated as expenditure incurred solely for the purpose of earning Mich profits or gains. Without attempting to define the exact scope of this clause, it seems to us to be sufficient to say that payments to be made in certain proportion nut of the profits on the capital advanced for the purposes of the business cannot be treated as expenditure incurred solely for the purpose of earning such profits or gains within the meaning of Clause (ix) of Sub-section (2), of Section 10. We are, therefore, of the opinion that the' assessees are liable to be charged in respect of this sum payable- to the Mudibhagidars and are not entitled to any deduction claimed by them.
4. Costs of this reference to be paid by the assessees on the original side scale.