TMI Blog1969 (4) TMI 17X X X X Extracts X X X X X X X X Extracts X X X X ..... ourse of money-lending business and did not represent the capital contributions of the Daga group of partners ? 2. Whether, in the facts and circumstances of the case, the Tribunal was justified in holding that the expenditure on litigation and the remuneration paid to Shri R. K. Saran were admissible under section 10(2)(xv) of the Act ? " For assessment year 1955-56 only. " 3. Whether on the facts and circumstances of the case, the Tribunal was justified in holding that the sum of Rs. 10,614 do not constitute profit under section 10(2)(vii) of the Act ? " This reference arises out of the assessment proceedings in respect of the income of the firm, R. B. Bansilal Abirchand for the assessment years 1944-45 to 1955-56. The Income-tax Officer by his orders passed separately for the years in question, disallowed the claim of the assessee for the civil court expenses and allowed on estimate only a portion of the salary paid to Mr. Saran. The Appellate Assistant Commissioner, in appeal against the orders of the Income-tax Officer, agreed with the decision of the Income-tax Officer in all these assessment cases and confirmed his orders. The assessee, as well as the department, fil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... chased other properties and entered into the business in manganese mining. They also acquired some collieries and ginning factories and carried on these businesses in partnership. This partnership firm came to be known as " Bisesar House " or the " suit firm " as it has been variedly referred to by the income-tax authorities. I shall also adopt the same nomenclature for the purposes of this decision. Sir Kasturchand Daga died on 21st of January, 1917, leaving behind four sons : (1) Bisesardas Daga, (2) Narsingdas Daga, (3) Badridas Daga and (4) Ramnath Daga, as his sole surviving coparceners of the Hindu undivided family. The business which was being carried on by Sir Kasturchand Daga and Mr. Manekji (who was later conferred with Knighthood) was continued in the same manner in partnership by Bisesar Daga, the eldest son of Sir Kasturchand Daga, in his capacity as the head of the family. The joint family consisting of these four brothers had eight annas share in the business of the " Bisesar House " and Sir Manekji, who was the remaining partner, had the remaining eight annas share in the same. The four Daga brothers referred to above separated some time in or about the year 192 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... referred to in this clause meant the account in which Sir Manekji Dababhoy was debited with the amount of Rs. 15,00,000, that is, in the colliery business). 8. If any partner shall advance any sum of money to the partnership firm the same shall be a debt due from the to the partners advancing the same and shall carry interest at the rate of 6 per cent. per annum during the continuance of the loan. 9. The Kamptee firm of the parties hereto of the first part shall be the bankers of the partnership. 10. The net profits of the partnership in each concern after payment of all outgoings and the interest on the monies due to the said firm and interest on current loans (if any) and after setting apart sufficient amount for depreciation at the rate as hitherto done shall belong to the partners in accordance with the shares herinbefore mentioned and credited to the loan account of Rai Bahadur Bansilal Abirchand in each concern separately as hitherto done. 12. The entire management of all the partnership businesses and properties shall be under the mutual joint management and control of the parties hereto but in the event of the death of Sir M. B. Dadabhoy the sole and entire control ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... found by the Kamptee firm that the business of " Bisesar House firm " which was being exclusively looked after by Sir Manekji was not being carried on in their interests, but it was carried on in such manner that it was proving detrimental to their interests. The relations, therefore, between Sir Manekji and the other partners of the firm " Bisesar House " became strained and there were allegations and counter-allegations against each other. One of the terms of the partnership, which is in clause 23, was as follows : " 23. This partnership agreement shall not be terminated by any of the parties hereto until the whole amount due by Sir M. B. Dadabhoy at foot of the said accounts is fully paid to the said firm. " In spite of this term in the agreement, the Daga partners of the firm found it impossible to carry on the business in partnership with Sir M. B. Dadabhoy and as a result of this straining of relations between the parties the four Daga partners who were the partners of the Kamptee firm and were the partners of the " Bisesar House firm" along with Sir M. B. Dadabhoy filed a civil suit against Sir M. B. Dadabhoy making several allegations and charges against the managemen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f clause (16) of the said deed. (c) The defendant has in contravention of clause (12) of the said deed continuously prevented the plaintiff's firm from participating in the management of the suit-firm. (d) The defendant has contrary to the terms of clause (11) of the said deed and in breach of his obligations as a partner wrongfully made secret profits in the business of the suit-firm and failed to render a true and faithful account of his management. The plaint then alleged in paragraph 15 as under : " 15. The plaintiffs further say that the defendant also has, as hereinafter specifically mentioned, been guilty of conduct which is likely to affect prejudicially the carrying on of the business of the suit-firm and has so conducted himself in matters relating to the business of the suit-firm that it is not reasonably practicable for the plaintiffs to continue to carry on the business of the suit-firm in partnership with him. " After setting out the various acts of misconduct on the part of the defendant, Sir M. B. Dadabhoy, and his failure to act up to the terms of the partnership agreement, the plaint recites as under : " 49. The plaintiffs submit that in addition to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d odd which they desired to be secured by the defendant. Several reliefs were claimed in this suit and I shall set out some of the reliefs which are material for the purposes of this reference. They are : (1) that the suit-firm may be ordered to be dissolved as from the date of the suit or from such other date as may appear to the court just and proper ; (2) that an account may be taken of the suit-firm by and under the direction of this court and in the said accounts the defendant may be ordered to render an account of all the secret profits, commissions, allowances and other benefits received by him in respect of the partnership dealings and not duly accounted for by the suit-firm ; (3) that the defendant may be ordered to render a true and complete account of his management of the suit-firm on the footing of wilful default ; (4) that the defendant may be ordered to pay to the plaintiffs such sum as may be found due by the defendant to the plaintiffs' firm on proper accounts being made up ; (5) that the defendant may be ordered to pay to the paintiffs the sum of Rs. 8,45,700-l-9 ; (6) that it may be declared that 20,000 shares of the Central Provinces Prospecting Syn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ounts since the plaintiffs were the partners of both these firms. While this suit was pending, the Kamptee Firm also filed another suit on or about 2nd of January, 1945, against the partners of the Bisesar House firm for the recovery of Rs. 55,05,172-10-4 with interest thereon which amount was found due as on 31st December, 1944, from the defendants to the plaintiffs inclusive of compound interest at 6 per cent. per annum with yearly rests. In this plaint it has been averred in paragraph 15 thereof as under : " 15. In view of the facts mentioned in the foregoing paragraphs it is believed that the accounts as between the defendants and the plaintiff firm will be an item in the accounts in the said suit. As, however, since the year 1943 the first defendant has refused to sign the accounts in the plaintiffs' books of accounts when submitted to him each year as theretofore, the plaintiff-firm is filing this suit for greater caution and in order to avoid the possible plea of a bar of limitation. The plaintiff-firm files this suit without prejudice to the rights, remedies and contentions in the said suit No. 8B of 1943." (Suit filed in the year 1942). This would show that, though thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... firm as to whether the interest chargeable on the advances made by the Kamptee firm from the Bisesar House firm from time to time were at compound interest at yearly rests or at simple interest. This made a lot of difference in the amount of interest due to the Kamptee firm and this dispute had also to be settled which was also sought to be settled in this suit. In reply to the allegations made in the plaint in Civil Suit No. 2B of 1942 (then C.S. No. 8B of 1943), this is what the defendant had to say with respect to the nature of the interest to be charged : " 91. The loan due by the partnership to the plaintiffs, though not accepted as correct by the defendants, is according to the plaintiffs as admitted in their exhibit " H " with the plaint, Rs. 62,89,200, which is inclusive of the large sum of Rs. 74,00,203 on account of interest alone as per statement filed herewith (exhibit W.S. 39). This fact leaves no doubt that the entire original loan of capital advanced by the plaintiffs to the partnership is already fully liquidated and the present loan represents not the capital nor the whole interest but a part and not the whole of the amount of accumulated interest, and if the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eement was reached between the parties in pursuance of which a consent order was passed by the High Court on 30th January, 1946, by which the defendants agreed to finance the business of the partnership on certain terms which are agreed to by Sir Manekji. In view of that agreement, the Kamptee firm was held entitled to charge compound interest at 6 per cent. per annum with yearly rests from the date of the preliminary decree to the date of realisation on the amount found due on that date and on the loans advanced by the Kamptee firm after that date. In the decree passed by the High Court several directions were given by the High Court for the taking of the accounts of the partnership. Both the parties were dissatisfied with the judgment of the High Court. Ultimately, the matter went to the Privy Council by special leave and the appeals were subsequently transferred to the Supreme Court. The appeals before the Supreme Court were heard for a number of days and, ultimately, the parties arrived at an agreement which was made the rule of the court. In the appeals before the Supreme Court some of the parties were minors and the Supreme Court after scrutinising the terms of the agreemen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and advances made by the Kamptee firm as bankers to the suit partnership." The other terms of the consent decree are not very material except that in a further term it was stipulated that all the collieries and ginning and pressing factories and property known as " Bisesar House " with all rights in mining leases, prospecting licences, plant, machinery, stores, stocks of coal, spare parts and other articles and things including furniture and fittings lying therein, the cash in hand and at banks or in the transit at the said collieries and factories and also in the hands of the receiver appointed in the said suit, all outstandings and book debts, claims and demands against third parties, claims for refund of taxes paid to the income-tax department, the benefit of all contracts, orders and engagements in connection with the aforesaid business and all profits made by the said businesses up to date and all other assets of the suit partnership wheresoever situate including the goodwill thereof do absolutely belong to and vest in the appellants (Dagas) and the respondents (Sir Manekji's legal representatives) as representing the estate of the original respondent shall have no claim or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... seems plausible but then it is not understood as to how the department wants this court to treat the finding given by the then Nagpur High Court as binding on this court and, in any case, to accept that finding as the only correct finding. If the consent decree is not binding on the revenue, then the High Court's decree is equally not binding for the reason that the department was not a party to the suit between the partners. If the Nagpur High Court's decision is held to be binding, as contended for the revenue, then the decree of the Supreme Court, though on consent, must equally be held to be binding. Though the decree passed by the Supreme Court is on consent, it cannot be lightly brushed aside. It must be seen that the appeals were argued before the Supreme Court, at least for four days as will be seen from the decree itself and thereafter the parties arrived at a compromise with full understanding and in the light of the discussion that must have taken place during the course of the hearing. Further, the Supreme Court must have satisfied itself that the compromise was lawful and, thereafter, it must have passed the consent decree. It has also to be seen that some of the part ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. 5 lakhs) not exceeding Rs. 2 lakhs. This clause would show that the amount to the extent of Rs. 5 lakhs was to be paid by way of contribution on condition that Sir Manekji also contributed a substantial amount and any further sums beyond the amount of Rs. 5 lakhs would be by way of advances. This is further made clear by clause 8 which says : " 8. If any partner shall advance any sum of money to the partnership firm the same shall be a debt due from the firm to the partner advancing the same and shall carry interest at the rate of 6 per cent. per annum during the continuance of the loan. " Clause 9 is still clearer in which it has been stated that the Kamptee firm shall be the bankers of the partnership (Bisesar House). These clauses, therefore, very clearly go to show that the amounts advanced by the Kamptee firm or by the partners of the Kamptee firm to the Bisesar House firm over and above the amount of Rs. 5 lakhs which were to be paid conditionally were in the nature of advances of loan and not by way of capital contribution. I may add that the finding given by the then Nagpur High Court is not binding on this court because, in the first place, it was not as between the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ith respect to the aforesaid suit for dissolution of partnership and accounts which went up to the Supreme Court and the other suit for recovery of debt under section 10(2)(xv) of the Income-tax Act, 1922. In this connection, it is vehemently urged by Mr. G. N. Joshi, the learned counsel for the revenue, that the litigation in respect of which the expenses are claimed had nothing to do with the " Kamptee firm " as such, but was by the partners of the " Bisesar House firm ", namely, the Dagas as partners of the " Bisesar House firm " and not as the partners of the Kamptee firm. It was, therefore, claimed that if the litigation expenses and the remuneration paid to Mr. R. K. Saran could be claimed, they could be claimed only by the plaintiffs in that suit in their individual capacities and not as partners of the Kamptee firm. It was further urged that even the Daga brothers could not claim the litigation expenses as admissible expenses because they had filed the suit as partners of the firm " Bisesar House " for the purpose of winding up the business of the Bisesar House firm which could not be said to be for the purpose of the business. It was contended that when the firm " Bisesar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve of the court wherein the court may direct accounts to be taken and then the payment of the amount due. In Ranchhoddas Khimji and Co. v. Kanramsey Jethalal Co., it has been laid down that Order 30, rule 9, of the Code of Civil Procedure, contemplates the possibility of a suit between firms having one or more partners in common and it proceeds to state what procedure shall apply to such suits as well as what could be done in the case of execution of a decree in any such suit. If, therefore, the Kamptee firm were to file a suit for the recovery of Rs. 62 lakhs and odd against the Bisesar House firm in spite of most of the partners being common, the expenses on such litigation could certainly be claimed by the Kamptee firm. They would be expenses necessary for the purpose of the business of the Kamptee firm and they could be made for the benefit or for the carrying on or for the purposes of the business of the Kamptee firm. Likewise, the Kamptee firm could also have brought a suit against Sir Manekji for a declaration that the New Chirimiri Colliery did not exclusively belong to Sir Manekji, but it belonged to the Bisesar House firm in which the Kamptee firm had a half share. A di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f accounts between them as partners stands on a different footing and where the suit is for the winding up of the business of the firm, it could not be said that the expenses incurred by the partners who bring the suit for dissolution of partnership would be for the purposes of the business of that firm, since so far as the business of the firm is concerned, there would be no longer any such business. But even in such a case where the defending partner were to defend the suit for dissolution of partnership in order to save the partnership from dissolution, such expenses could be said to be for the purposes of the business of the firm. Here, the case stands on a quite different footing. There are certain features in this case which must be kept in mind. The Kamptee firm consists of the Daga partners who are also partners in the Bisesar House firm. In fact, the business in mining, colliery, etc., is the business of the Kamptee firm and in effect it entered into partnership with Sir Manekji Dadabboy to form, Bisesar House firm, but because of the legal difficulties, viz., a firm could not be a partner with another person or with another firm, that the names of the partners of the Ka ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st earned by the Kamptee firm was charged in the hands of the Kamptee firm as an income and the interest amount received by the Kamptee firm has been assessed accordingly. This assessment was the subject of a decision of this court in R. B. Bansilal Abirchand v. Commissioner of Income-tax, which was later on affirmed by the Supreme Court in R. B. Bansilal Abirchand Firm v. Commissioner of Income-tax. It is thus clear that the amounts were advanced from time to time by the Kamptee firm to the Bisesar House firm and not by the individual partners and such advances would be recovered by the Kamptee firm from the Bisesar House firm. It has further to be seen that even after the winding up of the Bisesar House firm either privately or through court, the amounts falling to the share of the Daga partners as well as the other assets which would fall to their share would go to the Kamptee Firm and not to the individual Daga partners and they could not claim those properties as their separate properties. That would form part of the assets of the Kamptee firm and it would be only in the dissolution proceedings of the Kamptee firm that each of the individual partners would claim a separate s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the suit either for the dissolution of partnership or for taking of accounts or for the recovery of the loan of Rs. 62 lakhs and odd or for the injunction against Sir Manekji from interfering with the management and/or other reliefs which have been asked for in that suit, was necessary for the purposes of the business of the Kamptee firm and to save it from colossal loss and the expenditure which has been made in this litigation could be said to be expenditure incurred for the purposes of the business of the Kamptee firm which is the assessee in the present case. The matter could be looked at from another point of view. Besides the capital contributions, other large amounts were invested by the Kamptee firm in the Bisesar House firm by way of loan advances and on the date of the suit as much as Rs. 62 lakhs and odd were recoverable by the Kamptee firm from the Bisesar House firm. That amount had to be saved and there was no prospect of recovering that amount if the deteriorations in the affairs of the Bisesar House firm were allowed to continue. Similarly, the New Chirimiri Colliery was acquired from the funds of the Bisesar House firm, but Sir Manekji was claiming exclusiv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m and to recover the large advances. We may now turn to the authorities cited on behalf of the parties. In Commissioner of Income-tax v. Maharajadhiraja Sir Kameshwar Singh of Darbhanga, the assessee was a shareholder in a company. The assessee's father was carrying on a money-lending business and lent a sum of money to the said company. Some of the shareholders of the company brought a suit against him alleging that he had agreed to take over the management of the mills and to finance it, but in breach of this agreement he failed to furnish the necessary finances with the result that they had suffered heavy losses. During the pendency of that suit, the assessee's father who had advanced the loan died and the assessee was substituted in his place. The suit was ultimately dismissed and the assessee claimed in his assessment case that the sum which he had incurred in defending the suit should be deducted in calculating his income from the money-lending business. It was held in that case that the expenditure was incurred by the assessee solely for the purpose of earning the profits and gains of the money-lending business and he was, therefore, entitled to the deduction claimed. It w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eduction. In Raghunath Prasad v. Commissioner of Income-tax a suit for rendition of accounts between the partners was filed. The Allahabad High Court took the view that the money spent by one partner to enforce his rights against another partner (expenditure incurred by a partner in a firm in a suit against another partner of the firm for rendition of accounts) cannot be said to be money laid out or expended wholly and exclusively for the purposes of the business as it is not an expenditure incidental to the business, nor is the money laid out to increase the profits of the business or secure its property either directly or indirectly. This decision is distinguishable on facts from the present case. By taking the accounts the partner was to get only his dues back and has nothing to do with his business apart from the partnership business as such. This decision, therefore, could not be of any help to the department for the proposition which is before us. Lachminarayan Modi v. Commissioner of Income-tax is, however, a case which is comparable to our case. In this case, the assessee carried on the business of manufacture of salt with some partners. There were differences between t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the legal expenses incurred for dissolution of the partnership on the other, as the two were inextricably mixed up, the entire legal expenses should be held to be for the purpose of protecting the assets of the firm during the transitional period. In the case before us, the suit for dissolution was only a secondary purpose and not the primary one, the primary purpose being the recovery of the large amount of advances of loans made by the Kamptee firm to the Bisesar House firm as well as to establish the title of the Bisesar House firm to the New Chirimiri Colliery in which the Kamptee firm could have half interest and further to establish its claim to compound interest and also to restrain Sir Manekji Dadabhoy from interfering with the management. This was the predominant object of the filing of the suit so that the whole property could be saved for the benefit of the Kamptee firm. The facts of the case in All India Reporter Ltd. v. Commissioner of Income-tax are somewhat different. In this case, a shareholder took proceedings for winding up of the company and the company incurred certain expenditure in defending the winding up proceedings. It was held that such expenditure was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the company in defending the suit in the trial court, they were allowable under section 10(2)(xv) as the plaintiff had claimed the reliefs which, if granted, would have affected the carrying on of the business of the company. On the basis of this decision, it was argued that the suit for dissolution of partnership brought by the Daga partners was not brought in their character as traders, but was brought in their character as partners of the Bisesar House firm and, as such, these expenses could not be claimed by the Kamptee firm. I am unable to agree with this contention. As I have stated already, no doubt the suit is in the form of a suit for dissolution of partnership and rendition of accounts by some of the partners against the other partner, but if the whole essence of the suit is seen, it is a suit in fact by the Kamptee firm in order to protect the assets and the business of that firm of which the plaintiffs in this suit were also the partners and, in order to avoid any technical objection, that form was given to the suit, but besides the dissolution of partnership and taking of accounts of the partnership, several other reliefs were claimed in that suit, which could have b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case the expenses have been incurred by the Kamptee firm. It was do various kinds of businesses including the business which was carried on by the Bisesar House firm. The main object of the suit, as stated heretobefore, could certainly be said to be for the benefit of the assessee's business. Otherwise if the suit had not been brought at that stage, which according to the terms of the partnership would have been premature, the business of the Kamptee firm would have, to a large extent, been affected and all the investments they had made in the Bisesar House firm in the shape of capital as well as loans could have suffered a great loss. The dissolution of partnership was only incidental and was sought for the purposes of achieving the main object. It must, therefore, be held for all these reasons that the expenditure which was incurred on this litigation, namely, Civil Suit No. 2B/42 (8B of 1943) and Civil Suit Ito. 1B of 1945 (5B of 1954) was an expenditure laid out wholly and exclusively for the purposes of the business of the assessee, that is, Kamptee firm, and such, an expenditure would, in my opinion, be an allowable deduction in the assessment of the Kamptee firm. This reason ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... building, machinery or plant is sold, whether during the continuance of the business or after the cessation thereof, exceeds the written down value, so much of the excess as does not exceed the difference between the original cost and the written down value shall be deemed to be profits of the previous year in which the sale took place : . . . . ." It would be apparent that this provision relates only to a case where there has been a sale. In this case there has not been a sale but only, on partition, the house was allotted to Ramnath Daga and the value which was put was only for the adjustment of the shares between the parties to the partition. Section 10(2)(vii), therefore, would have no application to this case. The Tribunal has rightly found that the amount of Rs. 10,614 was not taxable in the hands of the assessee. Having considered all the different aspects in relation to the three questions referred to us, I now give the answers to the questions as follows ; Answer to the question No. 1 for the assessment years 1944-45 to 1955-56 will be in the affirmative and, in the facts and circumstances of the case, the Tribunal was justified in holding that the advances made by th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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