The Commissioner of Income Tax vs R.E. Muhammad Kassim Rowther of R.E. Muhammad Kassim Rowther and Co.

William Phillips, Kt., Officiating C.J.

The first question referred is ""whether there was a genuine and valid partnership"". This depends upon the construction of the agreement, dated

the 11th of April, 1922, executed by 33 persons in favour of the petitioner. The petitioner has been treated as the sole proprietor of his firm and

been assessed accordingly, and he contends that these 33 persons who have executed the agreement of April 1922 (Ex. A) are his partners in the

business. The Commissioner has found that this agreement does not constitute a partnership agreement and we entirely agree. Apparently there is a

provision that each of the executants is to have a certain share in the profits of the business when ascertained at the end of the two years during

which it is to be in force. No provision is made for their liability in case of loss and the complete control of the business is retained by Muhammad

Kassim, who contributed the whole capital. Not only is he to have the control of the business, but, even persons holding power-of-attorney from

him are to have the same power. The executants agree to be bound by Muhammad Kassim''s orders and the orders of those holding his power of-

attorney and also agree that, if they contravene the provisions of the agreement, they can be dismissed. The proprietor has also the power of

altering the shares. On these facts, it is clear that this is not a partnership agreement and that these 33 persons were merely the employees of

Muhammad Kassim and were entitled to certain shares in the profits when ascertained at the end of the two years.

The second question runs as follows:

If the answer to the first question is that there is no partnership, was the Income Tax Officer right in refusing to deduct from the assessable income

the portion of the profits which was paid to the employees as wages?

The petitioner claims to deduct the shares payable to the employees u/s 10 (ix) of the Indian Income Tax Act, which runs:

any expenditure (not being in the nature of capital expenditure) incurred solely for the purpose of earning such profits or gains.

The Income Tax Commissioner has held that it has not been shown that the shares were paid out of the capital in the Madras branches of the

petitioner''s firm and that there are merely some entries in the accounts of the head-office at Klang in the Federated Malay States. Apart from this,

we think it is clear that this expenditure does not come within the meaning of Section (10) (ix). Such expenditure is to be set off against the profits

earned in the year and it must be incurred ""solely for the purpose of earning such profits or gains"". Is it possible to say that payments out of profits

really constitute expenditure incurred solely for the purpose of earning such profits? The amount of the expenditure depends on the amount of the

profits and, consequently, it is impossible to hold that it was expenditure incurred solely for the purpose of earning those profits.

It is contended by the learned Advocate-General that expenditure must be deemed also to include liability and that, inasmuch as these payments

were in the nature of wages of which payment was deferred, they, equally with wages, should be deducted and, to hold otherwise, would produce

the anomaly that part of the wages of the firm might be deducted and another part not. This may be anomalous, but, it must be remembered that

Income Tax is calculated on profits and, when the tax has been, calculated, the expenditure on the deferred wages has not been incurred. In fact, it

might not ever be incurred if the proprietor chose to break the agreement, and certainly it cannot be deemed to be expenditure incurred for the

purpose of earning such profits. It is not the expenditure that has led to the profits being earned, but, it is a promise that such expenditure would be

made in the future that has possibly produced those profits. Rule 3 (l) of Schedule D of the English Income Tax Act, 1918, prescribes that ""in

computing the amount of the profits or gains to be charged, no sum shall be deducted in respect of any annual interest, or any annuity or other

annual payment payable out of the profits or gains"".... This is very specific and would include the payment out of profits in the present instance.

Similarly, if some of the working partners are to get a share in respect of capital put in by them any payment to them as interest on that capital

cannot be deducted u/s 10 (iii) of the Indian Income Tax Act. In view of the language of the section which is very clear, we think it is unnecessary

to refer to the cases cited before us and hold that, although it may possibly work hardship in a few cases, the payment to these working partners

out of the profits cannot be deducted u/s 10 (ix). Petitioner will pay costs including counsel''s fee of Rs. 250.

Ramesam, J.

I agree.

Beasley, J.

I agree.