Case: Dharamvir Dhir Vs. Commissioner of Income Tax, Bihar &amp; Orissa

Whether on the facts and circumstances of this case Rs. 72,963-12-0 was a revenue expenditure deductible under section 10 (2) (iii) or under section 10 (2) (xv) of the Indian Income-tax Act ?2. The facts of the appeals are these : The appellant was an employee of M/s. Karam Chand Thapar and Bros. and for each of the accounting years relating to the assessment years 1947-48 and 1948-49 his salary was Rs. 10,572/-. He also had an income of Rs. 500 from shares in certain joint stock companies. On December 20, 1945, he entered into a contract with Bengal Nagpur Coal Company Ltd. for raising coal from Bhaggatdih Colliery, Jharia and actually started his business from January 1, 1946. Evidently he did not have the requisite funds for his business and therefore in order to finance it, he entered into an agreement with the Mohini Thopar Charitable Trust on February 25, 1946. The trust is a public charitable trust, which was created by Lala Karam Chand Thapar, who constituted himself as the Managing Trustee. The relevant terms of this agreement between the appellant and the trust were that the trust was to advance a sum upto Rs. 11/2 lacs, the contract was to be "carried in accordance of the policy" settled between the appellant and the trust, the trust could withdraw its money at any time and to stop further advances; the trust was not to be liable for any losses; the appellant was to send monthly returns to the trust and the seventh clause was"that in consideration of the trust having agreed to finance my said contract business up to Rs. 11/2 lacs I have agreed to pay to trust interest on the amount from time to time owing to the trust in respect of the monies to be advanced as above at the rate of 6 p. c. per annum in addition to a sum equivalent to 11/16th of the net profits to a sum equivalent to 11/16th of the net profits of this business of mine."3. In pursuance of this agreement the appellant, besides interest, paid to the trust the sum of Rs. 72,963 for the first accounting year and Rs. 76,526-1-3 for the second accounting year corresponding to years of assessment 1947-48, 1948-49 and claimed these amounts as allowable deductions under S. 10 (2) (iii) or under S. 10 (2) (xv) of the Income tax Act. The amount of interest has been allowed but the claim in regard to the other sums paid was disallowed 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 considerations. The matter was taken in appeal to the Appellate Assistant Commissioner who upheld the order of the Income-tax Officer. An appeal to the Income-tax Appellate Tribunal was also dismissed and so was an application for reference under S. 66(1), but the High Court directed the Tribunal to state the case on the questions set out above. For the two assessment years the question was the same excepting for the amounts claimed as allowable deductions.        4. In its order dated April 4, 1955, the Appellate Tribunal had found that the payments were not for the purpose of the business and that taking into account the nature of the accounts, the nature of the payments and the relationship between the parties, it could not be said that the amounts were wholly and exclusively laid out for the purpose of the business and therefore rejected the claim. In the statement of the case the Tribunal has said that the average amount which had been advanced by the trust to the appellant in the first year was Rs. 18,100 and the payments made to the trust in the two years were therefore a share of profits and not expenditure laid out wholly and exclusively for the purposes of the business.        5. The High Court approached the question from the same angle. It was of the opinion that the question should be determined on principles of ordinary commercial trading and because the Managing Trustee was in a dominating position and only a small sum of money, i. e., Rs. 18,100 on an average had been advanced, the payment of Rs. 72,963 in addition to interest was an absurdly large sum which with the interest paid worked out at about 400 % interest. The High Court also took into consideration the fact that the appellant was an employee of Lala Karam Chand or his company. Put in their own words the High Court observed "having regard to the relationship between the parties and having examined the clauses of the agreement of the 25th February, 1946, between the assessee and the board of trustees I am of the opinion that the real legal position in this case is that there is a joint adventure between the parties, a quasi partnership which falls something short of partnership and that the arrangement between the parties was that the amount of profits should be ascertained and then they shall divide it up in certain specified proportions". The payments, therefore, did not fall within S. 10(2) (xv). The question was therefore answered in the negative and against the assessee. The appellant has come in appeal to this Court by special leave.

Reasoning: 6. As far as the record goes at the relevant time the appellant was a person of comparatively small means. No doubt he was getting a salary of Rs. 10,572 a year and had about Rs. 500 from his share holdings but beyond that he does not seem to have had any other means. There is nothing to show on the record that he had any security to offer or did offer for the money that he was borrowing. Thus the trust was lending monies to the extent of Rs.11/2 lakhs without security and upon a venture which might or might not have been successful. The Tribunal and the High Court seem to have fallen into an error by taking a mean of the advances made by the Trust to the appellant during the first accounting year. The record shows that the advances were very considerable in the first year ranging from Rs. 12,000 in January 1946 to Rs. 1,86,000 in July of that year and in the following months of that year they ranged from Rs. 59,000 to Rs. 7,000. In the following years beginning from the end of 1946 to 1953 considerable sums of money had been advanced which ranged on an average from Rs. 1,97,000 in 1947 to Rs. 3,17,000 in 1953. In regard to 1947, the Tribunal has found that the average amount of loan was Rs. 1,20,317 but according to the figures supplies by the appellant in his petition for special leave to appeal to this Court, the average comes to Rs. 1,97,919. In any case very considerable sums of money had been advanced by the Trust and as we have said above to a person who was not a businessman, who neither gave not is shown to have been able to give any security. The agreement between the appellant and the trust has to be considered in the context of those circumstances and if taking all the surrounding circumstances into consideration the trust found it necessary to have control over the working and over the finances and had offered stringent conditions it is not a matter which can be considered to be abnormal7. Another matter which was taken into consideration by the Tribunal was that the amounts claimed as deductible items were shown as a share of profits of the trust which had been debited in the appellants profit and loss appropriation account or in other words the appellant as per his account admitted that it was an appropriation of the profits to the trust. The Tribunal thus was of the opinion that the interest to be received by the Trust was 11/16 part of the profits of the appellants business and that the method of accounting clearly showed that the appellant was only parting with the share of profits. This, in our opinion, is an erroneous approach to the question. The case has to be decided according to the tenor of the document as it stands and the circumstances of the case. The genuineness of the document has not been challenged though an effort was made by the Revenue to so construe the document and so read the facts as to make both the amounts liable to tax in the hands of the appellantAs has been said above the question to be considered in this case is governed by the observations of this Court in 1960-38 I T R 601 : (AIR 1960 S C 738) (supra) and the circumstance under which the trust agreed to lend the appellant such a large sum of money shows the true nature of the transaction. On the facts proved in the present case the Trust agreed to finance the business of the appellant on the terms set out in the agreement and there is nothing to show that he could have made any better arrangements or would not have lost the contract if he had failed to enter into the agreement, i.e., the agreement to pay the amounts in dispute. Therefore in a commercial sense the payments were an expenditure wholly and exclusively laid out for the purpose of the business13. In our opinion, therefore, the High Court was in error and the question referred should have been answered in the affirmative in favour of the appellant.