Horace Owen Compton Beasley, C.J.
1. On this petition we are asked to direct the Commissioner of Income-tax to refer the following question:
Whether interest payments made to partners of the petitioners' firm under the circumstances mentioned in the petition, and in the order of the Assistant Commissioner of Income-tax are admissible items of expenditure under Section 10(2)(iii), Income Tax Act.
2. The assessees are a partnership firm carrying on business in the purchase and sale of cotton seeds and it appears now to be a very flourishing business. In the year of assessment, 1928-229, it was assessed to income-tax in the amount of Rs. 25,095: In arriving at this assessment, the Income-tax Officer disallowed a sum of Rs. 7,633-40 which the assessees claimed to be entitled to a deduction from the gross profits of the partnership. They based their claim, as is apparent from the question we are asked to direct the Commissioner of Income-tax to refer, on Section 10(2)(iii) Income-tax Act, That section allows a deduction 'in respect of capital borrowed for the purposes of the business where the payment of interest thereon is not in anyway dependent upon the earning of profits, the amount of interest paid.'
3. It was contended by the assessees that this sum of money was interest on capital borrowed from or at least a loan to the partnership by the individual patners and as such not assessable to income-tax. In this connexion much reliance was placed by Mr. K.V. Sesha Ayyangar on the Full Bench decision in Commissioner of Income-tax v. Subramania Chettiar 110 Ind. Cas. 889 : A.I.R. 1928 Mad. 923 : 51 M. 787 : (1928) M.W.N. 474 : 28 L.W. 190 : 55 M.L.J. 416. There a Full Bench of which I was a member held that where a partner genuinely lends money, beyond the initial capital, to the partnership at an agreed reasonable rate of interest, and the money is used for capital expenditure, the interest paid by the partnership to him in the year of assessment must be deducted in computing the profits or gains of the partnership as provided by Section 10(2)(iii), Income Tax Act. That is all that that case decides; and when the facts of the case are looked into, it will be seen that before the partnership started, there was an agreement in which the amount of capital contributed by each of the partners was set out and the rate of interest agreed to be paid upon the capital so contributed was also agreed upon. In this case there is no such agreement. Furthermore, in the agreement in that case there was a provision that after the partnership started working, the partners might contribute further capital to the partnership and that if they did so, they should receive interest at a certain rate on the capital so contributed. That case in no way, in our view, supports the contention of Mr. Sesha Ayyangar. There is no agreement whatever in the present case to contribute any capital or lend any moneys nor is there an agreement to pay any interest. It is contended by the assessees that when the partnership started the business, the business was a very small one and that there was no initial capital. But it is quite obvious, as the Assistant Commissioner of Income-tax says in his order, that a business with so large a turnover as this one could not possibly be conducted without some capital and that what happened in this case was that a certain amount of the profits earned by the partnership, was allowed to remain in the partnership as capital by means of which to carry on the partnership.
4. This is a very different case to the Full Bench case where there was a specific agreement to contribute further capital beyond the initial capital already contributed. There is a further difficulty in the way of Mr. Sesha Ayyangar, namely, that whereas in the full Bench case there was an agreement to pay a fixed rate of interest, here, as I have already stated, there is he agreement to pay any interest at all. But as a fact it does appear that for a period of 17 years 12 per cent, interest was paid on the amounts allowed to remain in the partnership by the partners and it is, therefore, quite obvious that in those years the partnership earned sufficient profits to enable the partnership to pay that high rate of interest. It must also be equllay clear that had there been no such profits no such rate of interest could have been paid. Therefore, the payment of interest was dependent on the earning of profits. There is not, as in the Full Bench case, a definite and an enforceable agreement to pay interest. What was strenuously argued before us in that case, so far as my recollection serves me, was that, quite irrespective of any profits being earned, the rate of interest agreed upon was payable. Mr. Sesha Ayyangar is, therefore, unable to bring himself within the provisions of Section 10(2)(iii), Income Tax Act.
5. Another matter which I think I ought to mention is that Thiruvenkatachariar, J., who was a member of that Full Bench, in his answer to the question referred, stated that this question is purely a question of fact, and with that statement I am inclined to agree. Under these circumstances, we decline to direct the Commissioner of Income-tax to refer this case. The assessees will pay Rs. 150 costs to the Commissioner.
Anantakrishna Ayyar, J.
6. I agree.
7. I agree.