Law: Income Tax Act, 1922

Section: 10(2)(xv)

Section 37(1) of the Income-tax Act, 1961 [Corresponding to section 10(2)(xv) of the Indian Income-tax Act, 1922] - Business expenditure - Allowability of - Assessment year 1949-50 - Assessee-company agreed to finance business of company 'M' in consideration of 50 per cent of profits of M - Being short of funds assessee entered into agreement with 'R' for advancing money to assessee agreeing to pay interest at specified rate on amounts so advance as well as 50 per cent of assessee's share in profits of company M - Assessee claimed payment of interest and 50 per cent of profit as deduction from its total income - Tribunal allowed assessee's claim for interest under section 10(2)(iii) and disallowed share of profits on grounds that there was no 'joint venture', that R was not a genuine financier because he himself could not advance money but had done so by borrowing from others; and that arrangement of loan by R to assessee was less than 25 per cent of advance made by assessee to company M - Whether, on facts, stipulation by assessee to pay 50 per cent of its profits to R was not for purpose of fostering business but was for oblique purpose of reducing profits by distribution or bifurcation of profits so that profits received by assessee from M were reduced for purpose of obtaining advantage of avoidance of tax liability on same - Held, yes - Whether, therefore, payment of a share of profits was not an item of expense incurred legitimately for commercial purpose in course of business and was not admissible as deduction under section 10(2)(xv) - Held, yes FACTS The assessee entered into an agreement with H Ltd., dated 5-5-1948 whereby it agreed to finance the company in its business and the latter agreed to pay the assessee 50 per cent of the profits to be earned in that business. The assessee was short of funds and entered into an agreement with R on 7-10-1948 which provided that R would advance moneys to the assessee for the purpose of financing the business of H Ltd.; that R would render services and help as might be required by the assessee in connection with the business; that in consideration thereof the assessee would pay to R interest at the rate of 4½ per…

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