Ramaswami and Ahmad, JJ.:— In this case the assessee, Messrs Badridas Bansidhar of Muzaffarpur, is a Hindu undivided family which derives income from house property, shares in various firms, trade in cloth and salt business. The accounting year for the salt business was from the 28th October, 1943, to the 15th of October, 1944. It appears that the assessee had acquired the sole right of distributing salt in Muzaffarpur district. He organised seven distributing centres in the district, and one Kedarnath Jhunjhunwala was employed as the Chief Manager on behalf of the assessee to look after the various centres. There was an agreement between the assessee, on the one hand, and Kedarnath Jhunjhunwala on the other, to the effect that Kedarnath Jhunjhunwala would get remuneration at Rs. 75 per month and a commission calculated at the rate of Rs. 0-2-6 on the total amount of profits earned in the salt business. For the period in question, the assessee showed in his return a net profit of Rs. 46,533 in the salt business, after making deduction of Rs. 8,649, which was the share of profits payable to Kedarnath Jhunjhunwala, and also a sum of Rs. 900, which was paid to Kedarnath Jhunjhunwala as salary for the whole year. It should be noticed that the commission was actually paid to Kedarnath Jhunjhunwala on the 19th of November, 1944, after the close of the accounting year. Before the Income-tax Officer, the assessee produced a receipt given by Kedarnath Jhunjhunwala for the share of profits paid to him. Kedarnath Jhunjhunwala was also examined by the Income-tax Officer under section 37 of the Income-tax Act, but the Income-tax Officer formed the opinion that the claim for deduction of the sums of Rs. 8,649 and Rs. 900 paid to Kedarnath Jhunjhunwala was fictitious and could not be allowed. The assessee preferred an appeal to the Appellate Assistant Commissioner of Income-Tax, who reversed the order of the Income-tax Officer and directed that both the sums of Rs. 8,649 and Rs. 900 paid to Kedarnath Jhunjhunwala should be allowed as deductions. The Income-tax Department preferred appeals to the Income-tax Appellate Tribunal from the order of the Appellate Assistant Commissioner. After hearing these appeals, the Income-tax Appellate Tribunal decided that there was no proof of the payment of Rs. 8,649, which was the share of profits alleged to have been paid to Kedarnath Jhunjhunwala. The claim of deduction with respect to this amount was, therefore, disallowed by the Income-tax Appellate Tribunal, but the payment of the salary of Rs. 900 was held to be a genuine payment and the Income-tax Appellate Tribunal held that this amount should be deducted as business expenses.

The following question of law has been stated by the Income-tax Appellate Tribunal for the opinion of the High Court:

“Whether on the facts and circumstances of the case the Tribunal was justified in law in disallowing a sum of Rs. 8,649 as an admissible expenditure to Kedarnath Jhunjhunwala?”

The argument on behalf of the assessee is that there was no material before the Income-tax Appellate Tribunal to warrant the finding that the amount of Rs. 8,649 was not paid to Kedarnath Jhunjhunwala as his share of the profits of the salt business. Mr. Datta pointed out that the Tribunal has based its finding upon two circumstances: (1) that Kedarnath Jhunjhunwala did not produce his account books to show that the amount had been actually received by him; and (2) that there was no interim payment of the commission to Kedarnath Jhunjhunwala in the course of the accounting year. The contention put forward on behalf of the assessee is that these circumstances are irrelevant and that the finding of the Appellate Tribunal is a finding which is bad in law because there is complete absence of relevant material to support the finding. Counsel referred to certain important circumstances in the case which have not been taken into account by the Appellate Tribunal. Counsel pointed out that the assessee produced Kedarnath Jhunjhunwala before the Income-tax Officer and the statement of Kedarnath Jhunjhunwala was taken under section 37 of the Income-tax Act. Kedarnath Jhunjhunwala said in the course of his statement that he joined the firm of Badridas Bansidhar on the condition that he would be paid Rs. 0-2-6 share of the profits and also Rs. 75 a month for pocket expenses. The assessee also produced a receipt granted by Kedarnath Jhunjhunwala for the amount of Rs. 8,649. The receipt is dated the 9th of November, 1944, and the Appellate Tribunal does not say that this receipt is not a genuine document. It is also the admitted case that the account of the assessee showed that payment of Rs. 8,649 was made to Kedarnath Jhunjhunwala. Mr. R.J Bahadur, appearing on behalf of the Income-tax Department, pointed out that the assessee was related as maternal cousin to Kedarnath Jhunjhunwala, and this was a circumstance which must be taken to show that the alleged payment was a fictitious payment. But the existence of relationship has no real bearing on the question whether the payment was actually made. The other two circumstances which the Appellate Tribunal has taken into account have also no bearing in determining the question whether the payment of Rs. 8,649 was made to Kedarnath Jhunjhunwala as alleged on behalf of the assessee. In other words, the reasons given by the Income-tax Appellate Tribunal in support of its finding are no reasons in the eye of law because the reasons have no proximate connection or relevance in determining the question of the alleged payment. It is true that the question of payment or non-payment is essentially a question of fact for the Income-tax authorities to finally decide, but, if there is no material to support the finding of fact or if the Tribunal applies a wrong principle of law in determining a question of fact, the matter passes from the realm of fact into the realm of law and the High Court has jurisdiction to interfere with the finding. For the reasons we have stated, we hold that there was no material before the Income-tax Appellate Tribunal to support the finding that the payment of Rs. 8,649 to, Kedarnath Jhunjhunwala was not made as alleged on behalf of the assessee.

On behalf of the Income-tax Department, Mr. R.J Bahadur stressed the argument that, even if the payment was made to Kedarnath Jhunjhunwala, the allowance could not be lawfully granted to the assessee under any of the provisions of the Income-tax Act. The submission of Counsel was that, even if the fact of payment to Kedarnath Jhunjhunwala was accepted as true, the assessee would not be entitled to the deduction of that amount unless that deduction is admissible under any of the heads mentioned in section 10 of the Income-tax Act. Mr. Datta said that the question of law does not arise out of the order of the Tribunal, but we do not think that this submission is right. We think, the question referred to the High Court cannot be satisfactorily answered unless we hold that as a matter of law, the assessee is entitled to the deduction he has claimed. It is not sufficient for us merely to say that the payment of the alleged amount was actually made to Kedarnath Jhunjhunwala. We proceed, therefore, to examine the question whether the assessee is entitled to deduct the amount as a matter of law.

The argument presented on behalf of the assessee is that the deduction is permissible both under section 10(2)(x) and section 10(2)(xv) of the Income-tax Act. Section 10(1) states that the tax shall be payable by an assessee under the head “Profits and gains of business, profession or vocation” in respect of the profit or gains of any business, profession or vocation carried on by him, and section 10(2) states that such profits or gains shall be computed after making the following allowances, namely:—

(x) any sum paid to an employee as bonus, or commission for services rendered where such sum would not have been payable to him as profits or dividend if it had not been paid as bonus or commission: Provided that the amount of the bonus or commission is of a reasonable amount with reference to (a) the pay of the employee and the conditions of his service; (b) the profits of the business, profession or vocation for the year in question; and (c) the general practice in similar business, profession or vocations;”.

The other section under which the deduction is claimed is 10(2)(xv) which relates to any expenditure or (not being in the nature of capital expenditure or personal expenses of the assessee) laid out or expended wholly and exclusively for the purpose of such business, profession or vocation. The finding of the Appellate Tribunal in this case is that Kedarnath Jhunjhunwala was not a partner of the firm of the assessee and, therefore, the question whether section 10(4)(b) has any application does not arise in this case. The real contention put forward by Mr. Datta is that the case falls both under section 10(2)(x) and section 10(2)(xv). Section 10(2)(x) entitles an assessee to deduct any sum paid to an employee as bonus or commission for services rendered, but there is a condition that such sum should not have been payable to him as profits or dividend if it had not been paid as bonus or commission. Mr. Bahadur, on behalf of the Income-tax Department, contended that this condition has not been satisfied in this case. We are unable to agree. The amount of commission was paid to Kedarnath Jhunjhunwala because he was employed by the assessee as Chief Manager of the salt business. Had Kedarnath Jhunjhunwala not been employed as Chief Manager of the salt business, he would not have been paid this amount as bonus or commission. It is not the case of the department that Kedarnath Jhunjhunwala was a partner in the business or had any proprietary right in the business sufficient to entitle him to a share of the profits or dividend even though he was not employed as Chief Manager of the salt business. In our opinion, the contention of Mr. Datta is right, and so far as the sum of Rs. 8,649, which is the share of profits paid to Kedarnath Jhunjhunwala, is concerned, the case would fall within the ambit of section 10(2)(x). In our opinion, the more appropriate provision for the allowance is section 10(2)(xv) which refers to any expenditure (not being in the nature of capital expenditure or personal expenses of the assessee) laid out or expended wholly and exclusively for the purpose of such business. The reason is that Kedarnath Jhunjhunwala was paid not only Rs. 0-2-6 share of the total profits of the business but also a salary of Rs. 75 per month for his pocket expenses. The amount of salary is not covered by section 10(2)(x), but the amount of salary and also the amount of the profits paid to Kedarnath Jhunjhunwala would fall under section 10(2)(xv). It follows that the Tribunal was not justified in this case in disallowing the sum of Rs. 8,649 which is a permissible deduction to be granted to the assessee.

Mr. R.J Bahadur strongly relied upon a decision In re. Nrisinga Chandra Nandy in support of his submission that the deduction of the amount paid to Kedarnath Jhunjhunwala is not permissible. In that case, there was an agreement between the assessee of the one part and three persons of the other providing that the assessee shall employ the latter as managers of a business owned by the assessee for a period of five years, that the managers shall carry on and conduct the business of the assessee and that the managers shall pay to the assessee a certain percentage of the gross realisations and also a further sum of Rs. 1,000 per year and, after paying all the expenses of the business, retain the balance to themselves as remuneration. In respect of the year of assessment, the assessee received in accordance with the terms of the agreement Rs. 14,510 but income-tax was levied on the assessee in respect of the whole of the profits of the business, namely, Rs. 45,082. It was held by the High Court that the assessee was not entitled to deduct from the profits of the business the sum retained by the managers, under section 10(2)(viii-a) of the Income-Tax Act, and further that the sum retained by the managers was not “expenditure incurred solely for the purpose of earning profits or gains” under section 10(2)(ix) and was not a permissible deduction under that clause. With great respect, we think that the decision reached in this case is not correct in holding that the assessee was not entitled to the deduction claimed. The learned Judges relied upon a dictum of Lord Macmillan in Pondicherry Railway Company, Limited v. Commissioner of Income-Tax, Madras to the following effect:—

“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.”

But the principle laid down in this passage has been much qualified by Lord Macmillan himself in a later case in the Union Cold Storage Company, Limited v. A damson thus:

“When, therefore, in the passage referred to by the Attorney-General in the Pondicherry case I said that a payment out of profits and conditional on profits being earned cannot accurately be described as ‘a payment made to earn profits’, I was dealing with a case in which the obligation was, first of all, to ascertain the profits in a prescribed manner, after providing for all outlays incurred in earning them, and then to divide them.”

In the Indian Radio and Cable Communications Company, Limited v. The Commissioner of Income-Tax, Bombay Presidency and Aden, Lord Maugham expressed the view that it was not universally true to say that “a payment the making of which is conditional on profits being earned cannot properly be described as an expenditure incurred for the purpose of earning such profits”. At page 277, Lord Maugham states:)

“It may be admitted that, as Mr. Latter contended, it is not universally true to say that a payment, the making of which is conditional on profits being earned, cannot properly be described as an expenditure incurred for the purpose of earning such profits. The typical exception is that of a payment to a director or a manager of a commission on the profits of a company. It may, however, be worth pointing out that an apparent difficulty here is really caused by using the word ‘profits’ in more than one sense. If a company, having made an apparent net profit of £10,000, has then to pay £1,000 to directors or managers as the contractual recompense for their services during the year, it is plain that the real net profit is only £9,000. A contract to pay a commission at 10 per cent, on the net profits of the year must necessarily be held to mean on the net profits before the deduction of the commission, that is, in the case supposed, a commission on the £10,000.”

We think that the learned Judges of the ‘Calcutta High Court misapprehended the effect of Lord Macmillan's judgment in the Pondicherry case, and, therefore, the decision in Nrisinga Chandra Nandy's case cannot, in our view, be taken to be the correct exposition of the law on the point.

In the matter of this description, the true principle is to find out on examination of the facts of each case, whether the payment represents a payment of a share of profits simpliciter or whether the payment represents an item of expenditure the calculation of which is made with reference to the profits. If the payment falls in the first class the payment cannot be deducted in the assessment of profits of the assessee, but, if the payment falls in the second class, the assessee is entitled to a deduction of the payment under section 10(2)(xv) as a payment laid out or expended wholly or exclusively for the purpose of the trade. The question whether the payment falls on either side of the line must be answered with reference to the specific facts of each particular case. In the Indian Radio and Cable Communications Company's case the assessee company agreed to pay one-half of its profits for a certain number of years to another company as part of the consideration in respect of a number of advantages which the assessee company derived from the agreement. It was held by the Judicial ‘Committee that the agreement represented a joint adventure for a term of years, and that the payment of a share of profits was inadmissible as a deduction under section 10(2)(xv). The English case reported in British Sugar Manufacturers, Limited v. Harris (Inspector of Taxes) is an example where the payment was treated as an item of expenditure though the calculation was made with reference to the profits made by the assessee. In that case a company carrying on a manufacturing business agreed with two other companies to pay them a stated percentage of its net profits in consideration of their giving the benefit of their technical and financial knowledge and experience and giving to the company and its directors advice to the best of their ability on all questions relating to the manufacture and disposal of the company's products. Net profits were to be ascertained after payment of all expenses of the company and after providing for interest on debentures, but before making any provisions for depreciation. It was held by the English Court of Appeal that it was not a case of joint adventure or payment of a share of profits, simpliciter, but that the payment represented remuneration for services rendered and ought to be deducted before the real net profits could be ascertained. At page 103, Lord Greene states:

“I have come to the conclusion that the view which Finlay, J., but for the authorities, would clearly himself have taken is the right view. It appears to me that, when the true nature of this provision is appreciated it is not possible to avoid the conclusion that it is an agreement for remuneration by way of a commission representing a percentage of ‘profits’ for services to be rendered to the company; in other words, it is nothing more or less than a very common type of agreement under which officers of companies are remunerated by a commission on ‘profits’ which after all is simply a share of ‘profits’, provided that the word ‘profits’ is construed in the right sense. Some suggestion was made by the Attorney-General that the absence of a fixed salary in addition to commission affected the matter. I am unable to see that. I can see no reason at all in principle why a contract providing for remuneration by commission and nothing else should not produce the result that the sum payable under it to the employee is a proper deduction.”

In our opinion, the present case falls within the ambit of the principle laid down by Lord Greene in British Sugar Manufacturers, Limited v. Harris. We have already given reasons to hold that the payment to Kedarnath Jhunjhunwala of Rs. 0-2-6 share of the total profits of the business was not a mere division of profits simpliciter, but that the payment represents a remuneration or services rendered by him and that remuneration was to be calculated with reference to the total profits. If this is the legal character of the payment, it follows that the assessee is entitled under section 10(2)(xv) to claim deduction of Rs. 8,649 which was paid to Kedarnath Jhunjhunwala. We hold that the Income-tax Appellate Tribunal was not justified in law in disallowing this claim, and the question referred to the High Court must be answered in favour of the assessee in both Miscellaneous Judicial Case nos. 138 and 139 of 1951. We assess consolidated hearing fee in both the cases at Rs. 200 (two hundred only).

K.D

Reference answered.