D.D. Italia and Others vs Commissioner Excess Profits Tax

P. Jaganmohan Reddy, J.—The Petitioners carry on the business of excise contractors in the sale of liquor and toddy. In compliance with a notice under sub-s. (1) of Section 13 the Assessees declared profits of Rs. 52,728/- and Rs. 39,970/-for the second and third chargeable accounting periods respectively. It was contended before the Excess Profits'' Tax Officer that the business in liquor was carried on by the firm consisting of two partners, namely, D. D. Italia and Bankatlal and the business in toddy was carried on by another firm consisting of three partners, namely, the said two persons along with one Ramagoud. It was stated that though Ramagoud did not invest any capital he was taken as a partner and given three annas share as a consideration for his not bidding at the auction of the toddy shops. The Assessees, therefore, claim that the toddy business was separate from that of liquor & the two firms are different for the purpose of assessment.

During the course of the assessment proceedings the Excess Profits Tax Officer found that there was no documentary evidence in support of the claim that the toddy business was carried on by the alleged partnership consisting of the three partners referred to above. He accordingly held that the liquor and toddy businesses belong to one and the same firm consisting of the Petitioner and assessed the entire profits derived from both liquor and toddy contracts. The said officer further treated the payment of three annas share of profit to Ramagoud as capital expenditure and after disallowing some inadmissible amounts computed profits at Rs. 77,9207- and Rs. 59,115/- for the 2nd and 3rd chargeable accounting periods respectively. On appeal the Deputy Commissioner upheld the finding of the Excess Profits Tax Officer, but however reduced the assessments by Rs. 9,276/- and Rs. 8,460/-respectively for the 2nd and 3rd Chargeable Accounting periods due to certain inadmissible items added by the Excess Profits Tax Officer. Against the order of the Deputy Commissioner the Petitioners filed a petition before the Commissioner u/s 20 and sub-s. (.2) of Section 48, Excess Profits Tax Act contending inter alia, (i) that the business in toddy should be treated as a separate business belonging to the firm of D. D. Italia, Bankatlal and Ramagoud and should be separately assessed; (ii) in the alternative payment of 3/16th share of profit to Ramagoud should be allowed as business expenditure; and (iii) that the estimated sum of Rs. 5000/- & Rs. 6000/- claimed as expenses of Motor Lorry disallowed by the E. P. T. authorities in respect of the 2nd and 3rd chargeable accounting periods respectively should be allowed.

One of the partners, D. D. Italia, made a statement on 11-9-1946 to the effect that Ramagoud was taken as a partner only in order to keep him from competing with them and that the said Ramagoud neither contributed any capital nor labour. The Commissioner of Excess Profits Tax refused to state a case on the ground that the answer to each of the three questions cannot but be a finding of fact pure and simple and that no question of law arose. The Assessees, thereafter filed these two petitions under sub-s. (3) of Section 48, Excess Profits Tax Act relating to the 2nd and 3rd chargeable accounting periods respectively for directing the Commissioner to state a case on the said three questions of law. A bench of this High Court had, however, directed the Commissioner on 4-11-1952 to state a case only on the second of the aforesaid three questions, viz.,

Whether the Assessee is legally entitled to the deduction which he has claimed under the Excess Profits Tax Act.

In compliance with the aforesaid order the Commissioner after setting out the facts as aforesaid contends that the payment made by the Assessees to a rival contractor with a view to prevent him from bidding at the auction is a capital expenditure; the money so paid not being for the purpose of working the contract but for obtaining it, cannot be deemed to be an expenditure laid out for the purposes of the business.

The soundness of this contention depends upon the determination of the exact nature of the expenditure that has been incurred by the Assessee when he agreed to pay to Ramagoud three annas share of the profits derived from the toddy contracts. If the expenditure so incurred is a, revenue expenditure, it will be permissible to deduct it as an expense, but if it is an expenditure of a capital nature, then it is inadmissible. It may here be observed that an item of expenditure though wholly and exclusively laid out for purposes of business would nevertheless be inadmissible as an allowance if it is of a capital nature. The E. P. T. Act has nowhere defined capital expenditure. The use of the words"in the nature of capital expenditure" which occur in R. 1(1) (x) of Sch. I, E. P. T. Act does not assist us in the ascertainment of the nature of the expenditure.

Generally speaking from a commercial or accountancy point of view the term "capital" connotes an asset which is utilised for earning profits. Accordingly all expenditure which results in the acquisition of a permanent asset or assets-with a view to its being used in the business for earning revenue is capital expenditure and any amount expended for increasing that asset or for adding to it in order in increase the capacity of the asset to earn more profits or reducing the cost of production is treated as capital expenditure. Similarly all establishment and other expenses such as those incurred by way of repairs, replacements, renewals of existing assets which do not in any way add to their earning capacity but simply serve to maintain the orignal equipment in an efficient working order and generally all such expenses which are incurred in the conduct and administration of the business are properly chargeable to revenue expenditure.

It is, however, necessary to examine some of the leading cases on the subject both Indian and English based on the analogus provisions of the respective Income Tax Act, to ascertain the tests to be applied for determining the nature of the expenditure. The tests which can be formulated from these cases, in our view, can neither be infallible nor is their application to the facts of any particular case easy, for discriminating between expenditure which is and expenditure which is not incurred solely for the purpose of earning income, profits or gains.

In � John Smith & Sons v. Moore II(1921) AC 13 (A) the Appellant''s father who carried on business as a shipping and coal agent for many years prior to his death, gave an option to his son under his will to take over on his death the assets of his business at a valuation but without paying anything for goodwill. The assets included certain forward coal contracts made by the father with several colliery owners for the delivery of coal by the latter in periodic instalments at prices which ultimately turned out to be very advantageous to the purchaser. These coal contracts were valued at �30,000. The Appellant claimed, in arriving at the amount of the profits of the business chargeable'' to Excess Profits Duty under the Finance (No. 2) Act, 1915, in an accounting period from 7-3-1915 to 31-12-1915, to deduct this �30,000 as representing part of the purchase price of the stock in trade. A majority of the House of Lords consisting of Viscounts Haldane, Cave and Sumner, Viscount Finlay dissenting, held that the deduction was not permissible. Viscount Cave at pages 24 and 35 has dealt with this question in the following words:

If the profits which are to be considered as the profits derived from the trading operations of the continuing firm of John Smith & Son, however constituted then the expenses to be deducted are those, and those only, which were incurred in the course of those trading operations and it is plain that the �30,000 deduction of which is claimed, does not fall within that description. The � 30,000 was not paid by the firm for coal, nor was it paid by the trading firm as such for coal contracts; it was paid by John Ross Smith out of his private pocket as part of an overhead transaction under which the business with its assets and future profits passed into his hands, and it left the trading profits of the firm unaltered.

He further aptly illustrated the test in this manner:

If I buy the crop of an orchard in a particular year for & 20 and sell it for � 40 my profit is only �20, But the profit of the orchard is � 40; and In comparing the produce of the orchard in that year with its produce in another year, it is the & 40 and not the � 20 that must be taken into account.

In the case of British Insulated and Helsby Cables Ltd. v. Atherton 1926 AC 205 (B) the Assessee company claimed to deduct a sum of � 31,784, which was settled upon a trust to form the nucleus of the Pensions fund for its employees. The fund was constituted by a trust deed which provided that members should contribute a percentage of their salaries to the fund and that the company should contribute an amount equal to half the contributions of the members; and further that the company should contribute a sum of � 31,784 to form the nucleus of the fund and to provide the amount necessary in order that past years of service of the then existing staff should rank for pension. This sum was arrived at by an actuarial calculation on the basis that the sum would ultimately be exhausted when the object for which it was paid was attained. On the winding up of the fund the whole amount was to be distributed among the members. The company, having paid the sum of � 31,784 out of current profits, claimed that it was an admissible deduction in computing its profits for the purpose of assessment to Income Tax for the financial year 1917-18. The House of Lords rejected the claim on the ground that the amount so given was in the nature of a capital expenditure.

Viscount Cave, L. C., propounded a test which though not exhaustive is of considerable assistance in determining the nature of the expenditure in most cases. He said at pages 213 and 214 of his speech as follows:

But when an expenditure is made, not only once and for all, but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade, I think that there is very good reason (in the absence of special circumstances leading to an opposite conclusion) for treating such an expenditure as properly attributable not to revenue, but to capital.

It may be observed with reference to this passage that the expenditure is to be attributed to capital if it is made for bringing into existence an "asset or an advantage", though it is not necessary that it should have this result. It has also to be observed that an asset or advantage is for the enduring benefit of the trade. As Romer, L. J., citing Rowlat J., pointed out in � Anglo Persian Oil Co v. Dale (1932) 1 KB 124 (C), that by "enduring" is meant enduring in the way that fixed capital endures and not in the sense that for a good number of years, it relieves the business of a revenue payment. What is permanent and enduring would depend upon the facts of each case. The test that was formulated by Lord Clyde in � Robert Addie Sons Collieries Ltd v. inland Revenue (1924) 78 Tax Cas 671 (D) and which was approved by the Privy Council in Tata Hydro-electric Agencies Ltd. v. Commr. of Income Tax, Bombay Presidency and Aden, AIR 1937 PC 139 at page 142 (E), is in these words:

�What is ''money wholly and exclusively laid out for the purpose of the trade'' is a question which must be determined upon the principles of ordinary commercial trading. It is necessary, accordingly, to attend to the true nature of the expenditure and to ask oneself the question ''Is it a part of the company''s working expenses is it expenditure laid out as part of the process of profit earning? ........... Or, on the other hand is it capital outlay? Is it expenditure necessary for the acquisition of the property or of rights of a permanent character, the possession of which is a condition of carrying on its trade at all? ''

(10) In the case of � City of London Contract Corporation Ltd. v. Styles (1887) 2 Tax Cas 239 (F) where the Assessee took over a business of another company which had a number of unexecuted contracts on hand and the taking over company paid a lump sum of money to the outgoing company to obtain the benefit of those contracts claimed it as a deduction, Lord Justice Bowen in the course of the argument said this:

You do not use it (that is, the money which had bought the contractual rights ''for the purpose of ''your concern, (which means'' for the purpose of carrying on your concern'') but you use it to acquire the concern".

This case was approved by the House of Lords in � John Smith & Sons v. Moore (A).

11.The learned Advocate for the Petitioner has laid great stress upon three cases in support of the proposition that the amount spent by the Assessee in paying off a competitor should not be regarded as capital expenditure, but revenue expenditure. The cases upon which he relies are: � R. S. Munshi Gulab Singh & Sons v. Commissioner of Income Tax, Lahore AIR 1947 Lah 82 (G) � Commissioner of Income Tax Vs. Piggot Chapman and Co., (H); and � Commissioner of Income Tax Vs. Lahoty Brothers Ltd., (I). An examination of these and other cases would show that they deal with payments made for the purposes of increasing profits or minimising expenses or for buying off a competitor or for effecting a price control.

In cases like � Guest Keen & Nettlefolds v. Fowler (1910) 1 K. B. 713 : AIR 1947 Lah 82 (G), expenditure incurred for avoiding price competition & for increasing profits was held to be revenue. Similarly in cases like � G. Seammell & Nephew Ltd v. Rowles 1940-8 I. T. R. Suppl. 41 (K), � ''Noble v. Mitchell (1926) 11 Tax Cas 372 (L), �(1932) 16 Tax Cas 253 (C) ''Anglo Persian Oil Co. (India) Ltd. v. Commr. of Income Tax 1933 1 I. T. R. 129 (Cal) (M), payments made to avoid losses have been held to be revenue expenditure. In both these categories of cases the basis for the decision appears to be to facilitate the carrying on of the business in a more profitable manner than would have been the case if the expenditure had not been incurred. Such payments have been allowed as revenue expenditure as they were not incurred to secure an asset, but to enable the business to continue and make greater profits. There is yet another category of cases where expenditure is incurred to buy off a competitor altogether, in which the expenditure has been treated. as of a capital nature. There may be other cases which fall into other categories, but we do not propose to examine all such cases which are not immediately germane to the point at issue before us.

We will now consider the cases cited by the learned Advocate for the Appellant which are urged in support of the expenditure being treated as revenue expenditure. In� Commissioner of Income Tax Vs. Piggot Chapman and Co., (H). where a firm of exchange brokers purchased the goodwill of another similar firm together with the four seats in the Calcutta Exchange Brokers Association on payment of annuity in accordance with the terms specified with the selling firm which agreed not to work as an exchange broker or compete with the transferee firm, it was held by Das and Mukherjee, JJ., that the payment of the annuity was a revenue expenditure. Charavartti, J. in � Assam Bengal Cement Co. Ltd., Calcutta Vs. Commissioner of Income Tax, West Bengal, Calcutta, (N) observed with reference to this case in the following words:

With great respect I confess the reasoning of the decision is not at all clear to me, because after referring to a large number of Indian and English cases and particularly to � ''Collins v. Joseph Adamson & Co (1938) 21 Tax Cas 400 (O) and � ''Associated Portland Cement Manufacturers Ltd. v. Kerr (1946) 27 Tax Cas 103 (P) the learned Judges distinguish them and place their own decision on the sole ground that the payment of the annuity was contingent upon. the receipt of brokerage from Ralli Brothers. What the last circumstance had to do with the payment, as made by the transferee firm, being of a capital or revenue nature is not easy to see. But, in any event even if the decision be right I feel in no way embarrassed by it in deciding the present case, where the payment is not to a person previously engaged in the same line of business, in consideration of his withdrawing therefrom".

We are in respectful agreement with these observations and at any rate in our view that decision is an authority on the facts of that case. In Commissioner of Income Tax Vs. Lahoty Brothers Ltd., (I) one is not able to glean the full facts upon which the decision rests. Banerjee, observed at page 150 that the payment was made to keep the competitor out of the area where the Assessee was carrying on its business. None of the leading cases upon the subject was considered by the learned Judges and the tests laid for distinguishing capital expenditure and revenue expenditure do not appear to have been considered. The learned Judge observed at page 429:

It is not possible to lay down any hard and fast rule for distinguishing a capital expenditure from revenue expenditure. There is no standard for making the distinction, except the standard set up by the prudence and experience of merchants. But so far as this case is concerned we are not troubled with the distinction. In our view, the case is plain".

Prom these observations, with great respect, one is unable to gather the basis underlying the decision although later on, it appears from the observations that the amounts paid not being incurred towards acquiring an asset and for keeping a competitor out of the area, they were treated as revenue. It is, in our view, not safe to determine the nature of an expenditure for the purposes of fiscal laws on the prudence and experience of merchants. In this regard, it will not be out of place to cite the apt observations of Lord Greene, M. R. in the case of � ''Associated Portland Cement Manufacturers Ltd. v. Commissioner of Inland Revenue (1947) 27 Tax Cas 111 at page 116 (Q) while dealing with the manner in which a trader might treat his asset in his account books or balance sheet and the manner in which for the purposes of the fiscal law it has to be treated. He said:

Whether or not an item of expenditure is to be regarded as of a revenue or capital nature must in many, and indeed in the majority of cases, I should have thought, depend upon the nature of the asset or the right acquired by means of that expenditure. If it is an asset which properly appears as a capital asset in the balance sheet then that is an end of the matter. But it must never be forgotten that, an asset Which may properly and quite correctly appear and only appear in the balance sheet as an asset, may be acquired but of revenue. There is nothing in the world to force a company or a trader who buys a capital asset to debit the cost of it to capital. Conservatively managed companies every day pay for, capital assets out of revenue, if they are fortunate enough to have the revenue available. It is, therefore, no sufficient test to say that an asset has been paid for out of revenue, because the consequence does not by any means necessarily follow that it is an asset of a revenue nature as distinct from a capital nature. Similarly, there is nothing to prevent a company or a trader who has acquired a capital asset from refraining from placing any value on that asset in his balance sheet".

The facts in the case of ---- '' R. Section Munshi Goolab Singh & Sons v. Commr. of Income tax, Lahore (G) are distinguishable from the facts of this case. There the business was not started or acquired by the Kartha of the Assessee joint family and he had incurred no expenditure in acquiring the concern. The arrangement which the printing press owned by the Assessee firm made with the rival company of Messrs. Peroze Din and Sons and Messrs. Attar Chand Kapoor & Sons respectively was to secure full time work for the Assessee''s press and in the interests of its business the Assessee arrived at an arrangement with his competitors and persuaded them to quote uniform prices in the tenders given to Government for printing and publishing work, in order to keep the press going by securing work so that it may show substantial turnover and thus earn profits after meeting the expenses of establishment and other costs incidental to the trade which were appreciably more than those of its competitors. On these facts, it was held by Mahajan, J., that the expenditure was in the nature of revenue expenditure. Alter examining the various cases and citing the observations of Viscount Cave, L. C. in the � ''British Insulated Cables and Halesby v. Atherton (B) the learned Judge observed ''at page 90,'' that the expenditure was not made once and for all and with a view to bringing into existence an asset or advantage for the enduring benefit of the trade. The expenditure was of a recurring nature arising in the course of the trade, only incurred with a view to enhance the annual profits and with no other purpose or object in view.

It may be convenient at this juncture to examine the case of �- ''A. Section Alaganan Chetti v. Commissioner of Income tax, Madras 3 T. I. C. 44 (Mad) (R) where the Assessee who was a carrying contractor paid Rs. 12,000/- to a rival contractor to induce the latter not to compete with him which resulted in his obtaining the carrying contract at a rate higher than the previous year, enabling him to make larger profits. It was held by Coutts Trotter, C.J., Beasley & Madhavan Nair, J J., that the payment of this sum of Rs. 12,000/- was not a permissible allowance u/s 10 (2) (ix) (now corresponding to Section 10 (2) (xv), Indian Income Tax Act.

This case is certainly an authority for the proposition that even though a sum of money has been expended to shut off a competitor which resulted in increased profits to the Assessee, the amount so spent has been treated as a capital expenditure. This being the conclusion in the case, there would appear to be apparent conflict with the conclusions arrived at by Mahajan, J., in ''R. Section Munshi Goolab Singh''s case (G) although the tests applied in both the cases, have been drawn from some of the same leadings authorities. It appears to us that these two cases are distinguishable and that in fact no conflict does arise. In ''Munshi Goolab Singh''s case (G),'' as has air ready been seen the arrangement was for price control and for ensuring that profits are made. Mahajan, J., ''at page 87'' observed that the expenditure incurred is in the nature of an annual business expenses incurred to run the press to its full capacity. The manner in which this object was sought to be achieved was for the Assessee to enter into an arrangement with the competitors for procuring the printing contracts which were necessary to keep the printing machines working and meet the working expenses and if need be to make profits. This, in our view, is quite different from the case where an amount has to be spent in order to buy off a competitor as a ''sine qua non'' for obtaining a contract, which yields profit. The amount so expended is apart from the amount to be spent for working the contract once it is acquired. Supposing the management spends monies in procuring a device or a machine which reduces cost of production and thereby increases the profits, is the money so spent capital expenditure or revenue expenditure even though the amount may be paid from the revenue account itself? The answer to this question both on authority and principle appears to be that it is a capital expenditure. If expenditure incurred in acquiring such an asset or advantage which has the object of increasing profits can be treated as capital expenditure, then the buying off of a competitor with a view to eliminating him from the field of business for acquiring a right the exercise of which earns profits is an advantage enduring to the trade, in the sense that it endures as long as the contract endures, and as such should be deemed to be a capital expenditure. In the instant case there is no question of any established business between these Assessees as in the case of ''Munshi Goolab Singh & Sons (G)''. The Assessees stated in their petition before the Commissioner, Excess Profits Tax that it is always common in abkari contracts that the prospective bidders meet at the last moment and form and constitute themselves into an amalgam for carrying on the business provided they are. successful in obtaining the contracts. In other words, individuals either tender for the contracts singly or along with other potential bidders as partners: or buy off the most dangerous competitor with a view to securing such contracts whichever is advantageous. The very fact that the Assessees tendered together for liquor and tried to set up a partnership between themselves and another person for toddy business would show that their modus operandi is to tender for toddy or liquor business in any particular district and in order to acquire it, buy off any potential competitor in the district where such tenders are given by agreeing to give a share in the profits to him. As we have already said there is no proof that the Assessees carried on an established business together so as to raise an inference that the buying off of a competitor could be deemed only for the purpose of increasing their profits and bring it within the group of cases which treated such payments as a revenue expenditure. They buying off of a potential competitor in the circumstances set out above, did confer an advantage on the Assessees and was an expenditure which acquired an asset for the purposes of earning profits.

To apply the illustration analogous to that given by Lord Cave in � John Smith & Sons v. Moore (A)'' to the facts of this case, it would appear that if each year I have to spend Rs. 500/-in order to obtain a contract which bring me a profit of Rs. 1000/- the profits are not Rs. 500/-but Rs. 1000/- and Rs. 500/- spent in getting the contract is to be treated as the capital expenditure. It would make no difference if that Rs. 500/- is spent in the initial outlay or in buying off a competitor or for any other like purpose which has as its object the procuring of the contract. In the case of (1938) 21 Tax Cas 400(O) a trade association of which the company was a member had bought the business assets of a member of the association with a view to prevent it from being acquired by an outside firm which was not a member of the association. The association when it acquired the business in question closed it down and got rid of the assets. The share in cash which the company obtained was the subject matter of the question at issue, the question being whether it was a profit which ought to be brought in for tax purpose. Lawrence, J., dealing with the case of � ''Southwell v. Sevill Brothers Ltd. (1900) 4 Tax Cas 430 (S) referred to by the Solicitor-General in support of his contention that in order that the expenditure should be of a capital nature, it is not necessary that there should be any tangible asset created by the expenditure, observed at page 409:

From that case I think it may be deduced that you cannot test the question whether the payment is properly a capital or a revenue payment by seeing whether it can be shown to be productive. Nor do I think that the argument of Mr. King, that what was produced by the expenditure in the present cases was impalpable or intangible or incalculable, is a sound argument for holding that it must be treated as of a revenue nature. In fact, In both the present cases the payments which were made had, as a result the removal or the prevention of a trade competitor, who would not have been subject to the rules of the association. In my opinion, those payments created for the members of that association advantages of an enduring nature, and, I think, of such an enduring nature as properly to be treated as capital, and not to be treated as revenue".

Lord Greene, M. R. in the case of � ''Associated Portland Cement Manufacturers Co., Ltd. v. Commissioner of Inland Revenue (Q) citing with approval the above dictum observed that the buying off a potential competitor improves the value of the goodwill and thus brings into existence an advantage. It would appear from all these cases that the approach to the question whether an expenditure is of a capital nature depends on whether an advantage or right of an enduring nature has been secured which is necessary for carrying on of the business and not for earning profits.

Their Lordships of the Privy Council in � Tata Hydro-electric Agencies Ltd. v. Commr. of Income Tax, Bombay Presidency and Aden, AIR 1937 PC 139 (E), dealing with a case where the Appellant company had taken over the obligation to make certain payments to third parties as part of a transaction whereby they acquired the agency business from Tata Sons Ltd., observed at page 209:

They were certainly not made in the process of earning their profits; they were not payments to creditors for goods supplied or services rendered to the Appellants in their business; they did not arise out of any transaction in the conduct of their business. That they had to make those payments no doubt affected the ultimate yield in money to them from their business but that is not the statutory criterion. They must have taken this liability into account when they agreed to take over the business. In short, the obligation to make these payments was undertaken by the Appellants in consideration of their acquisition of the right and opportunity to earn profits, that is, of the right to conduct the business and not for the purpose of producing profits in the conduct of the business.

Their Lordships made distinction between this case where the assignees had to undertake a liability of the assignor as a part of the assignment to pay to third parties some amounts which were quite independent of any profits earned and the case of � AIR 1931 165 (Privy Council) (T) where profits had first to be earned and ascertained before any sharing took place. In the last mentioned case the Pondichery Company had to pay half of its net profits to the French Colonial office which it tried to deduct as an expenditure u/s 10, Indian Income Tax Act. Lord Macmillan put the whole matter tersely ''at page 170'' in the following words:

A payment out of profits and conditional on profits being earned cannot accurately be described as a payment made to earn profits. It assumes that profits have first come into existence. But profits on their coming into existence attract tax at that point and the revenue is not concerned with the subsequent application of the profits.

Mr. Rangachari for the Excess Profits Tax Commissioner argues that on this basis also, since the amount payable to Ramagoud is to be determined by a reference to profits which must first be earned, the expenditure cannot be allowed as deduction. We think this contention to be sound.

It appears to us that on an application of the aforesaid principles to the facts of this case, the agreement to give three annas share of the profits to Ramagoud in order to stop him from competing at the auction is not an expenditure laid out as part of the process of profit earning, but it was a necessary expenditure for the acquisition of the business from which profits were expected. In other words the amount agreed to be paid was not necessary for the carrying out of the contract but was necessary to obtain the contract itself, i. e., for the acquisition of the initial asset or advantage which endured as long as the contract or the earning asset or advantage lasted. This is also clear from the fact as found by the Income Tax authorities that the losses were not to be shared. Further even on the application of the principle laid down in the ''Pondichery case (T)'' once the profits come into existence which is a necessary condition for payment to Ramagoud, they attract tax. In this view of the matter our answer to the question is in the negative. The Respondent will have his costs of the reference. This judgment will govern both the references.