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TMI Blog1969 (4) TMI 17X X X X Extracts X X X X X X X X Extracts X X X X ..... ied 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, filed appeals against the order of the Appellate Assistant Commissioner as both were aggrieved. The Tribunal dismissed all the appeals filed by the department, whereas the assessee's Appeals Nos. 126 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rm 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 1928, and accounts were made of this partnership as on November 2, 1929, and it was found that the " Bisesar House " owed the Kamptee firm " nearly Rs. 81,00,000, on account of principal and interest. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oney 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 and management will rest with the said firm and they shall furnish to the heirs and executors or administrators of Sir M. B. Dadabhoy annual statements of account for their information, but such heirs, exec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat 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 management of Sir M. B. Dadabhoy and claimed several reliefs in the suit. The suit was styled as a suit for dissolution of partnership, taking of accounts and recovery of moneys valued at Rs. 11,72,700-1-9. It may be note ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndant 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 the moneys that may be found due on taking of partnership accounts the defendant is liable to have included the said sum of Rs. 8,45,700-1-9 being the balance due at the foot of the said defendant's account No. 1 in the said ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... irm 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 Syndicate Ltd. (now known as the Central Provinces Manganese Ore Co. Ltd.) have been hypothecated with the plaintiffs by the defendant to secure repayment of the moneys due by the defendant to the plaintiffs on taking of the accounts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 this latter suit was filed by way of abundant caution, the plaintiffs entertained a belief that they would not recover the amount of Rs. 62 lakhs and odd which was then due from the Bisesar House in the suit of 1942. The said suit, which was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 partnership has paid back the whole capital advanced by the plaintiffs, which payment represents half share of the defendant, there could be no earthly reason why the balance of accumulated interest yet due will not be paid off and why the d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ir 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 agreement and satisfying itself that the agreement was lawful, sanctioned the compromise and passed a consent decree in terms of the compromise arrived at between the parties. Some of the terms of the consent decree may be stated : " 1. That the new Ch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roperty 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 interest of any kind whatsoever in the aforesaid properties, movable or immovable, and that this decree were to operate as a transfer and assurance of all the aforesaid properties, movable and immovable, in favour of the appellants (Dagas), freed an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sent 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 parties before the Supreme Court were minors and in according sanction to the said compromise the Supreme Court must have examined the legality of the agreement as well as its being for the benefit of the minors. A faint suggestion was made on behalf of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 parties to these proceedings and, secondly, because this is a different High Court, though the judgment of the Nagpur High Court is entitled to respect. It was also contended that the amount of Rs. 62 lakhs and odd was not a loan advance, but a capital ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 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 House " itself was to be wound up, for which purpose the suit was filed, it could not be for the purpose of the business, that is, for carrying on the business. In no case, therefore, according to the revenue, the Kamptee firm was entitled to claim expendit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 distinction has been made in several cases as to whether, expenditure on ligitation would be claimed. It has been laid down that where such expenditure is of capital nature then it is not a deductible allowance, but where the expenditure is of a revenue nature ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Kamptee firm were put in the agreement entered into with Sir Manekji. In fact, the firm has no legal status and is not a person in the eye of law and it is collectively the partners who form a partnership that is compendiously called a firm, but otherwise the fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 share. It has further to be seen that the expenses for the suit have been met by the Kamptee firm and not by the Daga partners individually and so also the payments made to Shri R. K. Saran for the purposes of this litigation. These expenses, if recovered, woul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 exclusive title in him to the same. That would again have been detrimental to the interest of the Kamptee firm. For that purpose also a suit for declaration would have been necessary. Besides this, there was a dispute between the Kamptee firm and the Bisesar House firm as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing 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 would thus appear that, though the assessee was a shareholder of the company, the suit was defended by him not as a shareholder of the company but as a money-lender of the company and since his money-lending business was under assessment the expenditure was laid out ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed 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 the assessee and his partners and the assessee had to institute a suit for dissolution of partnership and for other dues against the other partners and prayed for appointment of a receiver. A receiver was appointed and it was directed by the court that the receiver sho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 wholly and exclusively for the purposes of the business deductible under section 10(2)(xv) as such expenditure enabled the company to continue to run and earn profits from the business. This decision has not much bearing on the present controversy. In C. T. Narayanan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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 been also separately claimed by the Kamptee firm against the Bisesar House firm and, reading the plaint, as a whole, the whole object of the plaintiffs was to save as much business and property as possible for the benefit of the Kamptee firm of which the plaintiffs were t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee'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 reasoning would also apply with respect to the salary paid to Shri R. K. Saran who was deputed to look after the said litigation. The suit was of a large magnitude involving lakhs of rupees and several eminent advocates were engaged on either side. The suit was very hotly conteste ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the assessee-firm, R. B. Bansilal Abirchand, to the firm, Bisesar House, were in the nature of loans during the course of money-lending business and did not represent the capital contributions of the Daga group of partners. With respect to the question No. 2 relating to the assessmen ..... X X X X Extracts X X X X X X X X Extracts X X X X
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