Law:

Section:

Section 37(1) of the Income-tax Act, 1961 - Business expenditure - Allowability of - Assessment years 1959-60 to 1962-63 - Assessee-company, carrying on business of manufacturing sugar, running a distillery and a tincture factory, entered into agreement with State Government whereby Government agreed to sell certain business assets of certain concerns to assessee, and, according to clause (7) thereof, was entitled to certain percentage of net profits of assessee-company every year - 'Net profits', for purpose of clause (7) would mean amount for which company's audited profits in any year were assessed to tax - Assessee claimed deduction of amounts so paid - Whether payments to State Government under clause(7) of agreement were in nature of revenue expenditure - Held, yes - Whether even a payment which is made conditional on profits being ascertained can be a payment to earn profits - Held, yes - Whether expression 'net profits' referred to in clause (7) was not 'profits and gains of business' but only for purpose of determining amount payable to Government to enable assessee to earn net profits - Held, yes - Whether obligation under contract was such that amount involved could not be considered to belong to assessee and there was a diversion of amount even before they reached assessee - Held, yes - Whether, therefore, amounts payable in pursuance of clause (7) of agreement were on basis of paramount right created by contract between parties, and were liable to be deducted under section 10(2)(xv) of Indian Income-tax Act, 1922 and section 37 of 1961 Act - Held, yes FACTS The assessee, a public limited company carried on the business of manufacturing sugar, running a distillery and a tincture factory. By an agreement dated 18-6-1937, the State Government agreed to sell certain business assets of three organizations to the assessee. According to clause (7) of the agreement, as substituted in 1947, the Government was entitled to ten per cent of the net profit of the company every year. For purpose of this clause, net profits would mean the amount for which the company's audited profits in any year were assessed to income-tax. The assessee claimed deduction of the…

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