TMI Blog1973 (3) TMI 36X X X X Extracts X X X X X X X X Extracts X X X X ..... 2-3-1973 - Judge(s) : M. R. A. ANSARI., D. K. KAPUR. JUDGMENT The judgment of the court was delivered by KAPUR J.- Messrs. Delhi Safe Deposit Co. Ltd. is a public limited company which was also a partner in a managing agency firm named Messrs. Morari Lal Batra Co., which was managing another public limited company, Messrs. Bharat Carbon Ribbon Manufacturing Co. Ltd. Messrs. Delhi Safe Deposit Co. Ltd. (hereinafter referred to as " the assessee ") held a 25% share in the managing agency firm. There were two other partners, one of whom held a 50% share and the other a 25% share in the firm. At the instance of the partner holding the major share of 50%, a large sum was advanced on behalf of Messrs. Bharat Carbon Ribbon Manufacturing Co. Ltd., that is the managed company, to a firm in Calcutta which repudiated having received that sum, but only accepted receipt of Rs. 11,409. The managed company, therefore, was put to a loss to the extent of Rs. 1,90,092. The other two partners in the firm including the assessee-company took upon themselves the liability to bear a loss of Rs. 95,092 out of which the assessee's portion amounted to Rs. 47,500. The balance of the amount los ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n if that loss was not claimed by the partnership concern. The Tribunal observed that the share of profit or of loss of a partner could be determined and assessed directly in the hands of the partner without determining the same in the hands of the firm. In its discussion of the question posed, the Tribunal stated in paragraph 4 of its order that the assessee was entitled to claim the loss in its own assessment and the department was competent to consider the claim for whatever worth it was, rather than to reject it. The Tribunal also considered the question whether the agreement to bear the loss was in connection with its business and held on facts enumerated in paragraph 5 of its order that in making the payment the assessee was only acting as a prudent businessman for the purposes of earning profits. The Tribunal then remitted the case to the Income-tax Officer on the limited question as to whether or not, the quantum of loss claimed by the assessee was correct. The Commissioner of Income-tax, Delhi, sought a reference from this court under section 256(2) of the Income-tax Act, 1961, in Income-tax Case No. 13-D of 1966, and a direction was issued by the court calling upon the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he business of the managed company and made the advance in question to M/s. H. K. Sinha Sons, who denied receipt of the advance. It was observed that Shri V. K. Batra had either misappropriated the amount or had advanced the money unwisely. The managed company did not enter into any litigation, but held Shri V. K. Batra responsible for the loss amounting to Rs. 1,90,092 from whom nothing was recovered, and so it became the liability of the firm and the other partners. The managing agency firm did not have any assets, so the liability was taken over by the two remaining partners, i.e., the assessee and Lal Balwant Roy and a stranger, Shri R. K. Batra, brother of Shri V. K. Batra. Shri V. K. Batra is stated to have separated from the firm before 2nd June, 1960, and his place taken by Shri R. K. Batra. By an agreement dated 19th July, 1961, the new firm of M/s. Morari Lal and Co. became the managing agents of M/s. Bharat Carbon Ribbon Manufacturing Co. Ltd. According to the Appellate Assistant Commissioner, the two firms were different entities. The loss of the original firm was a loss in relation to a closed business. Here it may be mentioned that the Appellate Assistant Commissi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s not open to the Income-tax Officer to reject the claim merely on the ground that the firm had not claimed it and the total quantum of loss had not been determined in the assessment of the firm and the share thereof could not be allocated in the hands of the partners. The departmental authorities were, however, entitled to examine the claim of the assessee and determine whether the quantum of loss claimed by the assessee was correct. The Tribunal also dealt with the question whether the loss in question was a business loss. In this connection, it held that the loss was occasioned by the incorrect act of one of the co-partners in the managing agency firm and as the assessee's share of remuneration from that firm had been increasing, being Rs. 5,600 approximately in 1961-62, and Rs. 6,250 in 1962-63, it could be " safely concluded that it was only with a view to not losing this remuneration that the assessee agreed to bear and pay its share in the loss occasioned by the imprudent act of one of its partners ". From this, the Tribunal concluded that the act of the assessee-company in accepting the loss was the act of a prudent businessman for the purpose of promoting its commercial ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ated that it was not a loss of the managing agency firm, because it was never mentioned in either the accounts of the closed business, i.e., the previous managing agency firm, or in the accounts of the newly constituted firm, which became the managing agents from 19th July, 1961. It is also obvious from the order that Shri V. K. Batra left the managing agency firm before 2nd June, 1960, and it is not at all obvious as to what were the terms on which the managing agency continued in the period 3rd June, 1960, to 31st July, 1961, and as to who were the partners of the firm at that time. It is impossible to resolve this inconsistency in these proceedings and, therefore, we propose to deal with the question referred to us on two different footings. Firstly, the question can be examined on the footing that the loss resulting from the transaction to M/s. Bharat Carbon Ribbon Manufacturing Co. Ltd. was taken over by three persons in their individual capacity, one of those persons being the assessee-company. Secondly, the question can be analysed from the point of view of the loss being that of the original managing agency firm of which the assessee was a partner of which part has been t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a Co., had to take place. Reliance is also placed on section 67, which reads: " 67. Method of computing partner's share in the income of the firm.- (1) In computing the total income of an assessee who is a partner of a firm, whether the net result of the computation of total income of the firm is a profit or a loss, his share (whether a net profit or a net loss) shall be computed as follows :- (a) any interest, salary, commission or other remuneration paid to any partner in respect of the previous year shall be deducted from the total income of the firm and the balance ascertained and apportioned among the partners ; (b) where the amount apportioned to the partner under clause (a) is a profit, any salary, interest, commission or other remuneration paid to the partner by the firm in respect of the previous year shall be added to that amount, and the result shall be treated as the partner's share in the income of the firm ; (c) where the amount apportioned to the partner under clause (a) is a loss, any salary, interest, commission or other remuneration paid to the partner by the firm in respect of the previous year shall be adjusted against that amount, and the result shall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e partner claims a share in the loss ? Obviously, this will not be in accordance with section 67 of the Act. In the present case, it seems to be the agreed position of the parties that the amount of loss claimed has not found place in the partnership accounts of either the original managing agency firm or even the reconstituted firm. It will, therefore, be necessary to examine if the loss of a partnership firm can be taken over in the personal assessment of an individual partner if that partner makes a contribution of that loss to the firm. This aspect of the case will be considered after reference has been made to the various cases cited before us. On the second submission made on behalf of the department, it is submitted that there was no legal obligation on the assessee to make good the loss occasioned to the managed company by reason of the transaction with the Calcutta firm. The defect in the statement of the case in this respect has already been referred to. There is no doubt that the managed company did not indulge in any litigation either against the Calcutta firm or against the managing agency firm and in this sense this can be said that the assessee-company was under no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llel with the present case, if we treat the assessee's payments as being contributions to the loss sustained by M/s. Bharat Carbon Ribbon Manufacturing Co. Ltd. If the payment is considered as being payment to the managing agency firm of which the assessee is a partner, then this consideration does not arise, because the assessee-company was in any event responsible for paying the loss to that firm being one of its partners. In Commissioner of Income-tax v. Ramniklal Kothari, it was held by the Supreme Court that an assessee whose taxable profits were derived from being a partner in four different business firms was entitled to deduct from those profits, amounts paid by him as salary and bonus to his staff and other expenses expended in earning the income from the firms. This authority supports the view that a partner can deduct expenses incurred in relation to a partnership firm even though those expenses have been incurred by him from his personal account. Thus, a partner can incur business expenses in relation to a partnership which do not find place in the partnership accounts. Several High Court judgments were cited with approval by the Supreme Court wherein it had been he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In Commissioner of Income-tax v. Nainital Bank Ltd., the Supreme Court dealt with the case of a bank which had in its possession a large quantity of jewellery which had been pledged to it by its constituents. Due to a dacoity, this jewellery and also currency notes held by the bank were stolen by the dacoits. The bank claimed a loss due to payments made to the owners of the jewellery. The Supreme Court held that the payments made by the bank were made to preserve the goodwill of the business of the bank's relations with the clientele. It was observed : " The bank had evidently two courses open : to enforce its rights strictly according to law, and thereby to lose the goodwill it had built up among the constituents, or to compensate the constituents for loss of their jewellery, and maintain its business connections and goodwill. In choosing the second alternative, in our judgment, the bank laid out expenditure for the purpose of its business. Paying to the constituents the price of the jewellery stolen in a robbery or a burglary was, therefore, expenditure for the purpose of the business. There can be no doubt that the expenditure was wholly and exclusively in the interest of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assumed that the assessee-company did undertake to pay a portion of the loss suffered by M/s. Bharat Carbon Ribbon Manufacturing Co. Ltd. for business purposes and the claim cannot be disallowed on the ground that it was made for other purposes. The next question is whether this loss should have been first determined in the assessment of the partnership, i.e., the managing agency firm, or whether it could be directly debited by the assessee-company. In this respect, section 182 of the Income-tax Act, 1961, has already been referred to. The requirements of sub-section (2) are that if the share of a partner is a loss, he can set it off in the manner provided by sections 70 to 75. Similarly, in section 67 of the Act, the method of computing a partner's profit or loss from the firm is set out. On close analysis, it seems that the " loss " referred to in these provisions is the " loss " which would result from the ascertainment of a partner's share on taking the accounts of the firm. Thus, if the amount now in question had been paid by the managing agency firm itself, it would first have to be shown as a debit entry in the accounts of the firm and then divided among the various part ..... X X X X Extracts X X X X X X X X Extracts X X X X
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