THE CHIEF JUSTICE :- The question propounded is :-'Whether the sum of Rs. 12,348 and Rs. 2,074 should not in the circumstances of the case be deemed to form an item of expenditure allowable under the Indian Income tax Act, XI Of 1922.'
The amounts claimed it is contended are allowable under Sec. 10(2)(ix) of the Act as being an expenditure incurred solely for the purpose of earning such profits or gains.
The facts are that in December 1917, the assessee firm and three other yarn merchants, among these the firm of K. M. Subbier and Sons, entered into four separate and independent contracts with Messrs. Walker and Co., to purchase two lots of 290 bales each or 720 bales in all of Peacock Turkey Red yearn. The price of the first lot of 360 bales was fixed at Rs. 23-8-0 per bundle, that of the second lot being left over to be settled later. In July, 1911, the assessee firm and the three other merchants before mentioned entered into a partnership contract to deal with these 720 bales : the assessee firm was to manage the business, they having two out of five shares and each of the three other one out of five. In October 1918 the price of the second lot of 360 bales was fixed at Rs. 26-13-0 a bundle. By the end of May 1919 the first lot of 360 bales had been sold at a profit of Rs. 1,56,000. After the declaration of the Armistice in November, 1918, the price of yarn fell and the assessee firm and another partner of this venture other than K. M. Subbier and Sons proposed to the other partners that they should get the contracts for the second lot cancelled by giving up to Messrs. Walker and Co., as damages the profit they had made on the first lot of 360 bales. K. M. Subbier and Sons did not agree to this proposal for according to them even though the partnership was not likely to make much profit in the second lot, it was certain not to suffer loss. But the proposal was carried by the other partners. Messrs. Walkar and Co., accepted this proposal. The profit of Rs. 1,56,000 was accordingly paid to them by the June 20, 1919 and the contracts for the second lot of 360 bales were cancelled by them on that date. On the same day, the assessee firm and the other two partners, other than K. M. Subbier and Sons, entered into a fresh contract with Messrs. Walkar and Co., to repurchase the second lot of 360 bales of Rs. 21-8-0 a bundle when the market rate was Rs. 24- 12-0 per bundle. As before stated K. M. Subbier and Sons were excluded from this contract. The profit made on this contract as found by the High Court was Rs. 72,000 K. M. Subbier and Sons filed a suit against the assessee firm and the two partners in the High Court and claimed that they were entitled to a share of the profit made on the sale of the second lot under the repurchase contract. WALLER, J., upheld the plaintiffs contentions and passed a decree in their favour and this decree was confirmed on appeal by myself and Cornish J. In accordance with the decree the assessee firm had to pay K. M. Subbier and Sons Rs. 12,348 in the year of account being their share of the profits which had been withheld from them the expenses incurred by the assessee firm in connection with the litigation amounted to Rs. 2,074. In the assessment made upon the assessee firm for 1921-22 a sum of Rs. 48,999 was included as their profit in the joint venture in yarn entered into by them with Messrs. Walker and Co., and two other firms.
The position is this, therefore that the assessees now claim that the sum paid to K. M. Subbier and Sons, namely Rs. 12,348 and the litigation expenses incurred in the suit namely Rs. 2,074 should be deducted from the amount returned as the profits of the firm for the year 1921-22 because that payment, it is contended was made to Subbier and Sons solely for the purpose of earning the profits and gains of the partnership. The short answer to the assessees contention is that for 1921-22 the profits of the transaction were returned as Rs. 48,999 and the Rs. 12,348 paid to Subbier and Sons was the latters share of those profits. This payment was a distribution of profits already earned and nothing else, and it cannot in my opinion with any show of reason be contended that it was an expenditure incurred solely or even in part for the purpose of earning such profits. The amount itself was apart of the profits. How could the payment to Subbier and Sons help to earn the profits already earned or increase them This was nothing more, as I have already stated, than a distribution of the profits of the partnership to one of its co-shares. If the contention now advanced by the assessee firm were correct it would mean that all of the profits earned when distributed could escape liability to assessment from income tax, because a payment to any one of the partners could for the reasons advanced be excluded as an expenditure incurred solely for the purpose of earning the profits of the partnership. In my view the contention cannot succeed and the answer to the question propounded must be in the negative. Costs of the Commissioner of Income-tax Rs. 250.
KING, J. - I agree.
GENTLE, J. - agree.