Phillips, Offg. C. J.
1. The first question referred is 'whether there was a genuine and valid partnership.' This depends upon the construction of the agreements dated the 11th April 1922 executed by 33 persons in favour of the petitioner. The petitioner has been treated as the sole proprietor of his firm and been assessed accordingly, and he contends that these 33 persons who have executed the agreement of April 1922 (Ex. A) are his partners in the business. The Commissioner has found that this agreement does not constitute a partnership agreement and we entirely agree. Apparently there is a provision that each of the executants is to have a certain share in the profits of the business when ascertained at the end of the two years which it is to be in force, No provision is made for their liability in case of loss and the complete control of the business is retained by Muhammad Kassim, who contributed the whole capital. Not only is he to have the control of the business but even persons holding power-of- attorney from him are to have the same power. The executants agree to be bound by Muhammad Kassim's orders and the orders of those holding his power-of-attorney and also agree that, if they contravene the provisions of the agreement, they can be dismissed. The proprietor has also the power of altering the shares. On these facts, it is clear that this is not a partnership agreement and that these 33 persons were merely the employees of Muhammad Kassim and were entitled to certain shares in the profits when ascertained at the end of the two years.
2. The second question runs as follows:
If the answer to the first question is that there is no partnership, was the Income-tax Officer right in refusing to deduct from the assessable income the portion of the profits which was paid to the employers as wages?
3. The petitioner claims to deduct the shares payable to the employees under Section 10 (ix), Indian Income-tax Act, which runs
any expenditure (not being in the nature of capital expenditure) incurred solely for the purpose of earning such profits or gains.
4. The Income-tax Commissioner has held that it has not been shown that the shares were paid out of the capital in the Madras branches of the petitioner's firm and that there are merely some entries in the accounts of the head-office at Klang in the Federated Malay States. Apart from this, we think it is clear that this expenditure is to be set off against the profits earned in the year and it must be incurred 'solely for the purpose of earning such profits or gains.' Is it possible to say that payments out of profits really constitute expenditure incurred solely for the purpose of earning such profits? The amount of the expenditure depends on the amount of the profits and, consequently, it is impossible to hold that it was expenditure incurred solely for the purpose of earning those profits.
5. It is contended by the learned Advocate- General that expenditure must be deemed also to include liability and that, inasmuch as these payments were in the nature of wages of which payment was deferred, they, equally with wages, should be deducted and, to hold otherwise, would produce the anomaly that part of the wages of the firm might be deducted and another part not. This may be anomalous, but it must be remembered that income-tax is calculated on profits and when the tax has been calculated the expenditure on the deferred wages has not been incurred. In fact, it might not ever be incurred if the proprietor chose to break the agreement, and certainly it cannot be deemed to be expenditure incurred for the purpose of earning such profits. It is not the expenditure that has led to the profits being earned, but it is a promise that such expenditure would be made in the future that has possibly produced these profits. Rule 3 (1) Schedule D, English Income-tax Act, 1918, prescribes that
in computing the amount of the profits or gains to be charged, no sum shall be deducted in respect of any annual interest, or any annuity or other annual payment payable out of the profits or gains.
6. This is very specific and would include the payment out of profits in the present instance. Similarly, if some of the working partners are to get a share in respect of capital put in by them any payment to them as interest on that capital cannot be deducted under Section 10 (3), Indian Income-tax Act. In view of the language of the section which is very clear, we think it is unnecessary to refer to the cases cited before us and hold that, although it may possibly work hardship in a few cases, the payments to these working partners out of the profits cannot be deducted under Section 10 (ix). Petitioner will pay costs, including counsel's fee of Rs. 250.
7. I agree.