1. MAHMUD, J.-'This is a reference under section 66(1) of the Income-tax Act, 1922 by the Income-tax Appellate Tribunal (Karachi Bench), Karachi on the application of the Commissioner of Income-tax, Central, Karachi, of the following common question of law arising out of the consolidated order of the Appellate Tribunal dated 3.5-1968 relating to the assessment years 1961-62 and 1962-63:- "Whether on the facts and in the circumstances of the case, the payments of Rs. 1,25,403, in the assessm ent year 1961-62 and of Rs. 1,07,585, in the assessment year 1962-63 were admissible deduction within the meaning of section 10(2)(xvi) of the Income-tax Act?"
2. The respondent Moosa Umer & Company Ltd., a private limited company at the relevant time carried on business in Karachi inter alia as agents and dealers in kerosene oil supplied by the Burmah Shell Oil-Company. In each cf the two years relevant to the charge years 1962-63, the respondent company made payments of the sums of Rs. 1,25,403, and Rs. 1,07,585, respectively, to other kerosene oil dealers and agents in the city as its share of excess profits earned under an Agreement dated 11-6-1959 entered into with them. For the assessment years under consideration the respondent-Company claimed deduction of the respective sum paid as expenditure incurred wholly and exclusively for the purpose of its business under section 10 (2)(xvi) of the Income-tax Act. But the claim was rejected by the Income-tax Officer for each of the assessment years by his orders dated 30-6-1966 and 15-2-1967 respectively holding that it was a case of sharing of profits with other parties to the Agreement and not a case of expenditure incurred for the purpose of earning profits. Being dissatisfied, the respondent filed a direct appeal to the Appellate Tribunal against the order of the Income-tax Officer passed in respect of assessment year 1961-62, and later an appeal to the Appellate Assistant Commissioner against the order of the Income-tax Officer passed in respect of the assessm ent year 1962-63. The Appellate Assistant Commissioner allowed the appeal holding that the payment in question was made to avoid unhealthy competition between kerosene oil dealers, and as the expenditure was incurred exclusively and wholly for the purpose of earning profits, it was an admissible deduction. The Department appealed to the Tribunal from the Appellate Assistant Commissioner's order. Both the appeals came up for hearing before the Appellate Tribunal which passed a consolidated order dated 3-5-1968. The Appellate Tribunal held that the arrangement under the Agreement indicated that the parties had agreed to form a syndicate avoid cut-throat and unhealthy competition between themselves in the kerosene oil business in Karachi by agreeing to a minimum sale price, by virtue of which, the assesses was able to earn larger profits and increase its profit-earning capacity. The sums paid as excess share of the ,profits earned by the assessee to the other parties to the Agreement, were expenditure incurred for the purpose of earning larger profits and as a matter of commercial expediency and as the fact of payment was not disputed, both the amounts were admissible as deductions under section 10(2) (xvi) of the Act. In the result, the Appellate Tribunal allowed the direct appeal filed by the assessee for the year 1961-62 and dismissed the appeal of the Department against the order of the Appellate Assistant Commissioner for the year 1962-63. On the application of the Commissioner of Income-tax, Central, Karachi, the Appellate Tribunal has referred to the High Court the common question of law above reproduced.
3. The salient features of the Agreement were as follows: The parties to the Agreement were the respondent Company and eight other firms, who described themselves as agents of Burmah Shell, S. V. O. C. (Standard Vacuum Oil Co.) and Caltax respectively. The Agreement recited that all of them were "interested in the sale of kerosene oil" and had agreed to be bound by the terms and conditions thereof. Clause (1) provided that the parties were to sell kerosene oil of their quotas to their respective customers at the rate mutually agreed between them and the profit thus arising out of the said kerosene oil sales was to be distributed amongst the parties in the proportions as stated therein. The share of the respondent was Rs. 33-5-4 per cent. The "profit" referred to in clause (1) has been defined in clause (5) of the Agreement as "the minimum sale price less cost".
Clause (3) provided that a monthly state--ment of the profit should be prepared and after its scrutiny by the respondent and two other parties named in clause (9), their shares of the profits were to be adjusted amongst themselves by means of payment through cheques against receipt.
Clause (4) provided that a weekly statement of kerosene oil sales to be prepared and any party selling in excess was to lift from party selling less, Expenses and allowances payable to customers and credit allowances received from their oil companies were to be own parties' account. The sales were restricted to Karachi area and no party was permitted to purchase from up-country-source for sale in Karachi. Under clause 10 each party agreed to deposit a sum of Rs. 500, into a joint account with Habib Bank Ltd. In token of parties agreeing not to infringe any term of the agreement. Any party could, retire from the agreement after giving six months' notice.
4. The main question is whether the two sums of money paid by the respondent company as excess share of profit to the other parties to the agreement, represented division of profits earned by it, or whether the payments amounted to expenditure inc6rred wholly and exclusively for the purpose of its business. The contention of Mr. Mansoor Ahmed Khan, learned counsel for the Commissioner, is that the agreement amounted to a joint venture between the parties who, as recited in the agreement, were "interested in the sale of kerosene oil" of their quota and who had agreed to pool their sales and distribute the profits amongst themselves in agreed proportions and that as such, it was a case of division of profits after the receipts were recorded by the respondent Company in its own books of account. He submitted that a payment out of profits after they have been earned or had reached the assessee's hands, could not be treated as expenditure incurred solely for the purpose of earning profits. Counsel referred to the case of Pondicherry Railway Co.
Ltd. v. Commissioner of Income-tax, Madras (AIR 1931 P C 165). In that case, the railway company in consideration of a 99-year concession from the French Colonial Government agreed to make over, to the Colonial Government one-half of the net profits of the undertaking arrived at in the prescribed manner during the whole period of the concession. The Company claimed deduction of the payments made as expenditure for the purpose of earning profits, but the contention was repelled by the Privy Council, Counsel relied particularly on an observation of Lord Macmillan that "a payment out of profits and conditional on profit being earned cannot accurately be described as payment made to earn profits." Counsel also referred to Commissioner of Income-tax, Bombay v. C.. Macdonald & Co. ((1935) 3 I 3' R 459) in which the Pondicherry case was applied. In that case, the assessee as managing agents of a company had agreed to pay a proportion of their gross income to certain other parties. Counsel also referred to the Indian Radio and ,Cable Communications Company Ltd. v. The Commissioner Income-tax, Bombay ((1973) 51 T R 270). In that case, the assessee company which carried on the business of Communication by wireless in India, entered into an agreement with another company which controlled two other companies carrying on a cable communication busines under which the assessee company was to combine its wireless business with the cable business and to conduct and control the same in consideration of which the assessee company agreed to pay a share of its net profits. The Privy Council held that the payments were not allowable as expenditure incurred solely for purposes of earning profits as the agreement was in the nature of a joint venture.
5. We have considered the cases referred to by the learned counsel but we think that they are clearly distinguishable on their facts. In each of these cases, the arrangement was in the nature of a joint venture for a term of years and an agreement to share profits, after they had been ascertained in a prescribed manner or after they were earned. In the Indian Radio & Cable case, abovementioned, Lord Maugham said that it is not universally true to say that a payment out of profits or 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. He mentioned as a typical exception, the case of payment to a director or manager of a commission on the profits of a company, which has consistently been held to be a deductible business expenditure. Lord Macmillan who had made the observation in the Pondicherry case himself qualified it almost contemporaneously in the case of Union Cold Storage Co. Ltd. v. Adamson ((1931) 16 T C 293) wherein he said that his observa--tion in the Pandicherry case must be read with reference to the special facts of that case, where the obligation was, first of all, to ascertain profits in a prescribed manner, after providing for all outlays incurred in earning them and thereafter to divide the profits.
6. The crucial question, therefore, is what is the underlying object and purpose of the agreement in question and the nature of the payments mad thereunder. Mr. Ali Athar, learned counsel for the respondent company, submitted that the agreement when considered as a whole, shows that the object and intention of the parties was not to engage in a joint venture for participation in profits, but to avoid unfair competition amongst themselves by agreeing to sell kerosene oil at a fixed minimum price and thereby ensuring larger profits for themselves. It cannot be gainsaid that by agreeing not to sell below a minimum fixed price, not only was cut-throat competition avoided. But the possibility of parties selling at higher price was ensured leading to larger profits. He submitted that the agreement was entered into on grounds of commercial consideration or expediency and in order to facilitate its business. The payments of the sums in question, as excess share of profit, were therefore admissible as expenditure incurred for the purpose of its business, there being no dispute of the fact and genuineness of the payments ---The parties to the agreement were agents of leading oil companies, Burmah Shell, Standard Vacuum and Caltex, and they held quotas of kerosene oil in their own right, for which there was a buyers' market. There was, therefore no plausible reason for them to enter into an agreement of joint venture to make profits. The participation of a joint venture was also absent. Each of the parties was to act independently with regard to sales to its own customers and the only connection with each other was that a party selling in excess was to lift from the party selling less and parties could if they wished, lift kerosene from each other ex-Keamari.
7. In support of the submission that payment made under agreement to avoid unfair competition, is an admissible deduction, Mr. Ali Athar relied on Guest, Keer & Nettlefolds, Ltd. v. Fowler (Surveyor of Taxes) (5 Tax Cas. 511). In that case, members of a Steel Hoop Manufacturers Association agreed to sell allotted quantity of steel hoop at an agreed fixed price and in case they sold excess goods, they were to pay to the Association a fixed amount of 10 sh. Per ton on the excess, which excess amount was then distributed in due proportion amongst those members who had sold less than their proportionate quantities. It was held that the object of the arrangement was to keep up prices and prevent competitioners from selling below a fixed price and thereby earn larger profits. The excess payments made by the assessee to the Association were allowed as admissible deductions. The above case was following in Grahamston Iron Company v. Crawford (Surveyor of Taxes) (7 Tax Cas. 25). Mr. Ali Athar further referred to Commissioner o/ Income-tax, Bihar and Qrissa v. Sarbhanga Sugar Co. Ltd. ((1957) 321 T R 64). In that case, a sugar manufacturer, who was member of the Indian Sugar Syndicate, was required under the rules, to sell stocks of sugar on behalf of the Syndicate, retain the price due to him at the basic rate and pay the surplus to the Syndicate. The assesses paid a sum of money to the Syndicate as surplus profit earned by it, which he claimed as a deduction. It was held that on an interpretation of the Articles of the Syndicate, the main object was to fix a basic sale rate of sugar produced by the members of the Syndicate and to prevent uneconomic competition between them. Therefore, it was held that the payment was an allowable business expenditure, Mr. Ali Athar further submitted that payments in question were not made to ward off competition in order to obtain an advantage of enduring nature, but to avoid unfair competition, the benefit of which was to go to all the parties and not only to the respondent Company.
8. We have ourselves construed the terms and conditions of the agreement and are inclined to agree with the submission of Mr. Ali Athar that the object of the arrangement was to maintain a minimum sale price and avoid cut-throat competition amongst themselves also to enable them to make larger profits. It was not a case of joint venture for dividing profits and we agree with the interpretation and the finding by the Appellate Tribunal that the payments were admissible deductions under section 10(2)(xvi) of the Income-tax Act. We are unable to accept the contention of Mr. Mansoor Ahmed Khan that the conclusion reached by the Appellate Tribunal was not supported on the evidence.
9. Mr. Ali Athar submitted an additional ground, in support of his submission, that the agreement in question could not be considered to be an agreement for division of profits. As observed in E. D.
Sassoon & Company Ltd. v. Commissioner of Income-tax Bombay City ((1954) 26 I T R 27) 'profits' according to its conventional meaning, is a figure representing the difference between the assets of the business on the first and the last day in an accounting period of a figure arrived at as representing the difference between total credits and total debits and accrue only at the and of the account year. But 'profit' under clause (5) of the agreement has been defined as representing "minimum sale price less cost", but other expenses and allowances mentioned in clauses (6) and
(7) were not to be taken into consideration in arriving at 'profits' as defined in clause (5). Moreover, under clause (3) of the agreement the parties had agreed to prepare a monthly statement of the profit and after scrutiny, to adjust their share of profits amongst each other by payment through cheques against receipt. Counsel submitted that it was absurd to suggest that profits which are not even gross profits under clause 5 could come into existence at the end of each month. The word 'profit' referred to in the agreement, was, therefore, unreal and a misnomer. There is force in this submission of Mr. Ali Athar, which we accept.
10. For the foregoing reasons, we would answer the question referred to us in the affirmative and held that the payments of the sums in question g were admissible deductions within the meaning of section 10(2)(xvi) of th Income-tax Act. The respondent will be entitled to the costs of the Reference.