JUDGEMENT Appeal (No. 46 of 1936) from a judgment of the High Court (March 27, 1935) upon a reference made under s. 66, sub-s. 2, of the Indian Income-tax Act, 1922. The appellant company, Tata Hydro-Electric Agencies, Ld., Bombay, were a private limited company who carried on business as the managing agents of the Tata Power Co., Ld., and of three other electric power companies in India. The questions referred to the High Court arose in the course of the assessment of the income of the appellants for the year of assessment ending on March 31, 1934, and were as follows — " (1.) Whether in the circumstances of the case and in view of the provisions of s. 4, sub-s. 1, and s. 10 of the Act, the assessee company has been correctly assessed on the total amount of Rs.5,17,288 received by it as profits and gains of the business carried on by it as the managing agents of the Tata Power Co., Ld. (2.) Whether under the provisions of s. 10 of the Act or under any other provisions thereof, the assessee company is entitled to have a deduction from the said profits and gains amounting to Rs.5,17,288 to the extent of Rs. 1,29,322 paid by it to certain parties under the agreements, exhibits F and G [being agreements between the appellants and F. E. Dinshaw Ld. and Richard Tilden Smiths administrator respectively, as below mentioned] on the ground that this latter amount was nothing but expenditure incurred solely for the purpose of earning the said profits or gains or on any other ground." The appellants had acquired their agency business by assignment from their predecessors, Tata Sons, Ld., subject to the above mentioned agreements by which their predecessors, who had borrowed money for the Tata Power Co., Ld., from F. E. Dinshaw Ld. and Richard Tilden Smith, had agreed to pay to the lenders, in addition to the interest payable on the loans by the Tata Power Co., Ld., 12 ½ per cent, of the commission which they, Tata Sons, Ld., received from the Tata Power Co., Ld. The question in this appeal was whether that 25 per cent, of the commission which the appellants paid was " expenditure incurred solely for the purpose of earning .... The question in this appeal was whether that 25 per cent, of the commission which the appellants paid was " expenditure incurred solely for the purpose of earning .... profits or gains" within the meaning of s. 10, sub-s. 2 (ix.), of the Indian Income-tax Act, 1922, so as to entitle them to deduct it in computing their profits or gains for tax purposes. The facts appear fully from the judgment of the Judicial Committee. The High Court (Sir John Beaumont C. J. and Rangnekar J.) answered the questions referred adversely to the appellant company. 1937. Jan. 26, 28, 29. Needham K.C., Reginald Hills and Ralph Parikh for the appellants. The payments made by the appellants to F. E. Dinshaw Ld. and the administrator of Richard Tilden Smith did not form part of the appellants income and ought not to have been taken into account in computing for the purpose of income-tax the profits of their business of managing agents. The payments were not and did not represent part of the profits of the appellants business, but were payments of or out of the gross revenue received by the appellants from one of the sources of revenue of the business— namely, a particular agency for a particular principal. What the appellants obtained under the assignment to them of the agency agreement by Tata Sons, Ld., was not the whole commission payable by the Tata Power Co., Ld., to their agents but only three-fourths of that commission. The Law. Rep. 64 Ind. App. 215 ( 1936- 1937) Tata Hydro-Electric Agencies v. Commnr of Income Tax 82 payments were in any event necessary expenditure of the appellants in carrying on their business as managing agents and earning the profits of the business. Tata Sons, Ld., could have deducted for tax purposes the amount they paid to the lenders from the remuneration they received from Tata Power Co., Ld. There must be a connecting link between the payments and the making of profits, and there is one here. The facts in Commissioner of Income-tax, Bombay v C. Macdonald & Co. (( 1934) 37 Bom. L. Rptr. 126.) are distinguishable from those in the present case, and the High Court ought not to have held itself bound by its previous decision in that case. The difference between s. 10 of the Indian Income-tax Act (XI. of 1922) and Sch. The facts in Commissioner of Income-tax, Bombay v C. Macdonald & Co. (( 1934) 37 Bom. L. Rptr. 126.) are distinguishable from those in the present case, and the High Court ought not to have held itself bound by its previous decision in that case. The difference between s. 10 of the Indian Income-tax Act (XI. of 1922) and Sch. D, r. 3, of the Income Tax Act, 1918, is merely one of words ; they are to the same effect. [Reference was also made to Pondicherry Ry. Co. v. Income-tax Com-missioner (( 1931) L. R. 58 I. A. 239.) ; Bharat Insurance Co. v. Income-tax Commissioner (( 1933) L. R 61 I. A. 41.) ; Last v. London Assurance Corporation (( 1885) 10 App. Cas. 438.) ; Bejoy Singh Dudhuria v. Income-tax Commissioner (( 1933) L. R. 60 I. A 196.) ; Ushers Wiltshire Brewery, Ld. v. Bruce ([ 1915] A. C. 433.) ; British Insulated and Helsby Cables v. Atherton ([ 1926] A. C. 205.) ; Mallett v. Staveley Coal and Iron Co. ([ 1928] 2 K. B. 405.) ; Moore v. Stewarts & Lloyds, Ld. (( 1906) 6 Tax Cas. 501.); and Van Den Berghs, Ld. v. Clark. ([ 1935] A. C 431, 441.)] There are ample facts in the documents and in the statement of facts by the Commissioner which would enable the Court to find that the expenditure in question was necessarily incurred in earning profits. Hubert Hull for the respondent. Reliance is not placed on Pondicherry Ry. Co., Ld. v. Commissioner of Income-tax, Madras (2) as covering the question here. The first step is to consider the nature of the obligation under which the disputed disbursement was made ; secondly, the purposes for which the paying company entered into the obligation. In answering the first question it is irrelevant to consider the position of the appellants predecessors, Tata Sons, Ld., at all. The answer to the question under what obligation they had to pay Dinshaw Ld. and R. T. Smith must be because they had covenanted to do so in 1932. But the appellants did not undertake the obligation with the object of providing funds for Tata Power Co., Ld. ; they undertook the obligation as necessary to enable them to acquire the agency. They would not have got the business unless they had undertaken the obligation. But the appellants did not undertake the obligation with the object of providing funds for Tata Power Co., Ld. ; they undertook the obligation as necessary to enable them to acquire the agency. They would not have got the business unless they had undertaken the obligation. They did not make the payments to get the commission but to get the business which earned the commission. The strongest case against the respondent is Moore v. Stewarts & Lloyds, Ld. (( 1906) 6 Tax Cas. 501.) ; but in that case there was a finding of fact that the payments were made for the purpose of earning the profits, and that distinguishes it from the present case. The Pondicherry case (( 1931) L. R. 58 I. A. 239.) decided that a payment which depended on the making of profits was not a payment to earn profits. In the present case the payment by the appellant company was not expenditure incurred, whether solely or at all, for the purpose of earning the profits or gains broughtunder charge, or for the purpose of earning any profits or gains. [Reference was also made to Commissioners of Inland Revenue v. Paterson (( 1924) 9 Tax Cas. 163.) ; Union Cold Storage Co., Ld. v. Adamson (H.M. Inspector of Taxes) (( 1931) 16 Tax Cas. 293.) ; Bejoy Singh Dudhuria v. Income-tax Commissioner (( 1933) L. R. 60 I. A. 196.) ; and Currimbhoy Ebrahim Baronetcy Trustees v. Income-tax Commissioner. (( 1934) L. R. 61 I. A. 209.)] Needham K.C. replied. March 12. The judgment of their Lordships was delivered by Lord Macmillan. The appellants are a private limited company who carry on the business of managing agents of the Tata Power Co., Ld., and of certain other hydro-electric companies in India. They acquired this agency business from their predecessors, Tata Sons, Ld., under an assignment dated November 21, 1929, whereby Tata Sons, Ld., transferred to the appellants their whole rights and interest as agents of the hydro-electric companies under their subsisting agreements with these companies, but subject, as to their rights and interest under their agreement with the Tata Power Co., Ld., to their obligations under two agreements with F. E. Dinshaw Ld. and Richard Tilden Smith respectively. The assignment was declared to be to the intent that the appellants should thenceforth be and act as the agents of the hydro-electric Law. Rep. 64 Ind. App. and Richard Tilden Smith respectively. The assignment was declared to be to the intent that the appellants should thenceforth be and act as the agents of the hydro-electric Law. Rep. 64 Ind. App. 215 ( 1936- 1937) Tata Hydro-Electric Agencies v. Commnr of Income Tax 83 companies and be entitled to all benefits and advantages contained in and conferred by the agreements between Tata Sons, Ld., and these companies, and should perform and be bound by all the obligations and duties thereby imposed, and further, that the appellants should receive all commissions and other remuneration to which Tata Sons, Ld., were entitled thereunder. The appellants for their part covenanted to carry out and perform the terms and conditions of the agreements with F. E. Dinshaw Ld. and Richard Tilden Smith, and to indemnify Tata Sons, Ld., against any consequences of the non-observance thereof. They further undertook, if so required, to enter into separate agreements in their own names with F. E. Dinshaw Ld. and Richard Tilden Smith in the same terms. Under the agency agreement between Tata Sons, Ld., and the Tata Power Co., Ld., which was dated September 24, 1919, and the benefit of which the appellants thus acquired, the remuneration of Tata Sons, Ld., for their services consisted of a commission of 10 per cent, on the annual net profits of the Tata Power Co., Ld., with a minimum of Rs.50,000 whether that company should make any profits or not, and they were also entitled to have their expenses reimbursed. In return for this remuneration Tata Sons, Ld., undertook to use their best endeavours to promote the interests of the Tata Power Co., Ld. The agreement was declared to be assignable, and the Tata Power Co., Ld., undertook to recognize any assignees as their agents and, if required, to enter into an identical agency agreement with such assignees. It was also declared to be lawful for Tata Sons, Ld., to assign the whole or any part of their earnings under the agreement. It appears that in 1926 the Tata Power Co., Ld., were urgently in need of financial assistance to the extent of over a crore of rupees. Tata Sons, Ld., their then managing agents, who, as the Commissioner of Income-tax puts it in his statement of facts, " had to find the money," approached F. E. Dinshaw Ld. It appears that in 1926 the Tata Power Co., Ld., were urgently in need of financial assistance to the extent of over a crore of rupees. Tata Sons, Ld., their then managing agents, who, as the Commissioner of Income-tax puts it in his statement of facts, " had to find the money," approached F. E. Dinshaw Ld. and Richard Tilden Smith, who agreed to provide the necessary funds. One of the conditions on which thej7 agreed to do so was that, in addition to the interest payable by the Tata Power Co., Ld., for the loan, they should each receive from Tata Sons, Ld., two annas in the rupee, or 121/2 per cent., of the commission earned by Tata Sons, Ld., under their agency agreement with the Tata Power Co., Ld. Two agreements embodying this obligation were entered into between Tata Sons, Ld., and F. E. Dinshaw Ld. and Richard Tilden Smith respectively, dated October 15 and 19, 1926, being the agreements referred to in the assignment by Tata Sons, Ld., of their agency business to the appellants. It will be observed that as the remuneration of Tata Sons, Ld., depended, subject to a minimum, on the prosperity of the Tata Power Co., Ld., they had an interest in assisting the Tata Power Co., Ld., to obtain the financial accommodation required for the conduct of their business. After the acquisition of the agency business by the appellants the Tata Power Co., Ld., in fulfilment of their obligation under their agreement with Tata Sons, Ld., entered into a new agency agreement with the appellants, dated December 17, 1929, in terms identical with those of their previous agreement with Tata Sons, Ld., and the appellants also entered into agreements with F. E. Dinshaw Ld. and the administrator of the estate of Richard Tilden Smith (who had meantime died), dated February 23 and May 19, 1932, respectively, in terms identical with those of the previous agreements between Tata Sons, Ld., and these parties. and the administrator of the estate of Richard Tilden Smith (who had meantime died), dated February 23 and May 19, 1932, respectively, in terms identical with those of the previous agreements between Tata Sons, Ld., and these parties. By this series of transactions complete novation was effected, with the result that the appellants came in room and place of Tata Sons, Ld., in all respects both as regards the right to receive from the Tata Power Co., Ld., the stipulated agency remuneration, and as regards the obligation to pay out of that remuneration 121 per cent, to F. E. Dinshaw Ld., and 121-per cent, to Richard Tilden Smiths administrator. in the year 1932 the appellants duly earned and received payment from the Tata Power Company of Law. Rep. 64 Ind. App. 215 ( 1936- 1937) Tata Hydro-Electric Agencies v. Commnr of Income Tax 84 their commission of 10 per cent, on the net profits of that company and duly paid over to F. E. Dinshaw Ld., and to Richard Tilden Smiths administrator 121 per cent, thereof each, or 25 per cent, in all. The assessment of the appellants income for tax purposes for the fiscal year to March 31, 1934, which is in question in the present appeal, is based on their income, profits and gains for the year 1932, and the question is whether in the computation for tax purposes of their income, profits and gains for that year they are entitled to deduct a sum representing the 25 per cent, of the commission earned and received from the Tata Power Co., Ld., which they paid over to F. E. Dinshaw Ld. and Richard Tilden Smiths administrator under the agree ments above mentioned. The gross commission received by the appellants was Rs.5,17,288, and the one-fourth thereof which they claimed to deduct was Rs. 1,29,322. Under s. 10, sub-s. 2, of the Indian Income-tax Act the profits or gains of any business carried on by the assessee are to be computed after making allowance for " (ix.) any expenditure (not being in the nature of capital expenditure) incurred solely for the purpose of earning such profits or gains/ The Income Tax Officer refused to allow the appellants to deduct the sum in question in the computation of the profits or gains of their business, and the Assistant Commissioner took the same view. The appellants then requested the respondent to refer to the High Court the legal question of the admissibility of the deduction. The respondent in doing so expressed, as required by the Act, his own opinion, which was also to the effect that the deduction was inadmissible. He founded his opinion on Pondicherry Ry. Co., Ld. v. Commissioner of Income-tax, Madras (( 1931) L; R. 58 I A. 239.), which he submitted was on all fours with the present case, and he also referred to Bharat Insurance Co. v. Commissioner of Income-tax, Lahore (( 1933) L. R. 61 I. A. 41.), in which the Pondicherry case (( 1931) L; R. 58 I A. 239.) was followed. The questions of law as formulated by the Commissioner of Income-tax were as follows — (1.) Whether in the circumstances of the case and in view of the provisions of s. 4, sub-s. 1, and s. 10 of the Act, the assessee company has been correctly assessed on the total amount of Rs.5,17,288 received by it as profits and gains of the business carried on by it as the managing agents of the Tata Power Co., Ld. (2.) Whether under the provisions of s. 10 of the Act or under any other provision thereof the assessee company is entitled to have a deduction from the said profits and gains amounting to Rs.5,17,288 to the extent of Rs.1,29,322 paid by it to certain parties under the agreements, exhibits F and G [being the agreements between the appellants and F. E. Dinshaw Ld. and Richard Tilden Smiths administrator respectively] on the ground that this latter amount was nothing but expenditure incurred solely for the purpose of earning the said profits or gains or on any other ground. In the High Court the appellants were also unsuccessful. The Chief Justice (Sir John Beaumont) in his judgment held that the whole 10 per cent, commission received by the appellants from the Tata Power Co., Ld., was properly included without deduction in the assessment of the profits or gains of the appellants business, in conformity with the decision in the case of C. Macdonald & Co. v. Commissioner of Income-tax, Bombay (i), within which the learned Chief Justice said that the present case exactly fell. v. Commissioner of Income-tax, Bombay (i), within which the learned Chief Justice said that the present case exactly fell. He further expressed the opinion that the question whether the expenditure in question was incurred solely for the purpose of earning the profits or gains of their business was a question of fact, and that as there was no finding of fact on which the Court could hold that the deduction claimed was one falling within the statute, the question must be answered in the negative. Law. Rep. 64 Ind. App. 215 ( 1936- 1937) Tata Hydro-Electric Agencies v. Commnr of Income Tax 85 By their order of March 27, 1935, the High Court accordingly answered the first of the questions stated by the Commissioner in the affirmative and the second in the negative. In the case of C. Macdonald & Co. (( 1934) 37 .Bom. L. Rptr. 126 ; 7 I. T. C. 466.), to which the learned Chief Justice refers, the assessees carried on the business of managing agents of another company from whom they received a commission for their services. This commission the assessees were bound under an agreement to share with certain third parties, and they claimed that the shares of their commission which they paid over to these third parties should be excluded or deducted in the computation of the profits or gains of their agency business. The Court held that the case was governed by the decision in the Pondicherry case (( 1931) L. R. 58 I. A. 239.), and that the whole commission received by the assessees must be included without deduction in the computation of their income for tax purposes. Before their Lordships counsel for the Crown did not seek to support the judgment of the High Court in the present case on the ground that it was ruled by the decision in the Pondicherry case (I), and in their Lordships view he was well advised in recognizing the clear distinction between that, case and the present case. In the Pondicherry case (I) the assessees were under obligation to make over a share of their profits to the French Government. Profits had first to be earned and ascertained before any sharing took place. Here the obligation of the appellants to pay a quarter of the commission which they receive from the Tata Power Co., Ld., to F. E. Dinshaw Ld. Profits had first to be earned and ascertained before any sharing took place. Here the obligation of the appellants to pay a quarter of the commission which they receive from the Tata Power Co., Ld., to F. E. Dinshaw Ld. and Richard Tilden Smiths administrator is quite independent of whether the appellants make any profit or not. Indeed, if on their years operations as a whole they were to make a loss and incur no liability to income-tax they would nevertheless have to pay away a quarter of the commission in question to the parties named. The commission in truth is not profit or gain ; it is only an item or factor in the computation of the appellants profits or gains. Their Lordships regard this as a fundamental distinction. In the case of C. Macdonald & Co. (( 1934) 37 Bom. L. Rptr. 126.) it would rather appear that the commission which was received by the assessees and which they were bound to share with certain other parties was the sole source of income of the assessees, but, be this as it may, the decision in that case cannot be supported by the authority of the Pondicherry case (( 1931) L. R. 58 I. A. 239.) on whatever other ground it may be justified. It was not questioned by counsel for the Crown that if the present question had arisen with Tata Sons, Ld., they would, under s. 10, sub-s. 2 (ix.), have been entitled on the facts stated to deduct their payments to F. E. Dinshaw Ld. and Richard Tilden Smith as being expenditure incurred solely for the purpose of earning their profits or gains. But he submitted that after the acquisition of the agency business by the present appellants the payments assumed a different character. The appellants, he said, did not take any part in obtaining the loans, nor did they incur the liabilities in question in the course of rendering any services to their principals. The obligation to make the payments in question was taken over by them as part of the transaction whereby they acquired the agency business from Tata Sons, Ld., and the payments were therefore made not for the purpose of earning profits in the conduct of the agency business but in fulfilment of the terms on which they purchased the business. The obligation to make the payments in question was taken over by them as part of the transaction whereby they acquired the agency business from Tata Sons, Ld., and the payments were therefore made not for the purpose of earning profits in the conduct of the agency business but in fulfilment of the terms on which they purchased the business. Their Lordships recognize, and the decided cases show, how difficult it is to discriminate between expenditure which is, and expenditure which is not, incurred solely for the purpose of earning profits or gains. In the present case their Lordships have reached the conclusion that the payments in question were not expenditure so incurred by the appellants. 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 transactions in the conduct of their Law. Rep. 64 Ind. App. 215 ( 1936- 1937) Tata Hydro-Electric Agencies v. Commnr of Income Tax 86 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. If the purchaser of a business undertakes to the vendor as one of the terms of the purchase that he will pay a sum annually to a third party, irrespective of whether the business yields any profits or not, it would be difficult to say that the annual payments were made solely for the purpose of earning the profits of the business. It would seem to make no difference that the annual sum should be made payable out of a particular receipt of the business, irrespective of the earning of any profit from the business as a whole. It would seem to make no difference that the annual sum should be made payable out of a particular receipt of the business, irrespective of the earning of any profit from the business as a whole. The case of a transferee of a business undertaking liability, for example, for the rents under current leases of the premises in which the business was carried on by the transferor and is to be carried on by the transferee is quite a different case, for the rents paid are clearly an outlay necessary for the earning of profit. In the case of Robert Addie & Sons Collieries, Ld. v. Commissioners of Inland Revenue ( 1924 S. C. 231.), the Lord President (Clyde), dealing with corresponding words in the British Income-tax Act, says (Ibid. 235.) " What is money wholly and exclusively laid out for the purposes 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 Companys working expenses ; is it expenditure laid out as part of the process of profit earning ? " Adopting this test, their Lordships are of opinion that the deduction claimed by the appellants is inadmissible as not being expenditure incurred solely for the purpose of earning the profits or gains of the business carried on by the appellants. They thus reach the same result as the learned, judges of the High Court, but on different grounds, and they would only add in conclusion that with all respect they do not share the view expressed by the learned Chief Justice that the question whether the payments in question were admissible deductions under s. 10, sub-s. 2 (ix.), was not open to argument in the High Court on the facts as found. Their Lordships will accordingly humbly advise His Majesty that the appeal be dismissed, and the order of the High Court of March 27, 1935, be affirmed. The respondent will have his costs of the appeal.