TMI Blog1969 (7) TMI 25X X X X Extracts X X X X X X X X Extracts X X X X ..... e name and style of Adarsha Dugdhalaya. In the year 1941, the three original partners of the firm took in three more persons, viz., Dabyabhai Morarji Patel, his brother-in-law, Ramjibhai Morarji Patel, and C. V. Mehta. This partnership of six persons commenced from January 1, 1941, and a deed of partnership embodying the terms of this partnership was executed on the 9th December, 1941. It appears that during the continuance of this partnership certain differences arose between the partners. They were, however, settled by the end of October, 1946, and from November 1, 1947, one more person was admitted to the partnership. The shares of all other partners excepting Ramjibhai remained unaltered in this partnership of 7 persons and the 7th member of the partnership, who was admitted, was given a half share of the share previously field by Ramjibhai. A deed of partnership embodying the terms of this partnership was executed on the 13th July, 1948. During the course of this partnership there were differences again between the partners, particularly between Dabyabhai and Ramjibhai on the one hand and the remaining partners on the other. The grievance of the former was that the latter yere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eld that on 31st October, 1949, i.e., on the date of the retirement of Dahyabhai the total value of the partnership assessee was Rs. 18.14 lakhs, and the total liabilities of the firm on the said date were Rs. 15.83 lakhs. Out of the balance of Rs. 2.31 lakhs they directed that a sum of Rs. 72,500 be paid as arbitrators' fees and as fees and costs of the solicitors on both sides, the former being Rs. 21,500 and the latter Rs. 51,000. The balance of Rs. 1.59 lakhs was directed to be divided amongst the partners in accordance with their profit sharing proportion. In Ramjibhai's case, they held that the value of the total assets of the partnership firm on the date of Ramjibhai's retirement, i.e., on 31st October, 1952, was Rs. 16.76 lakhs and the total liabilities were Rs. 14.20 lakhs. Out of the balance of Rs. 2.56 lakhs, Rs. 93,000 were directed to be paid as fees of the arbitrators and solicitors on both sides (Rs. 21,000 as the fees of the arbitrators and Rs. 72,000 as the costs and fees of the solicitors). The surplus of Rs. 1.63 lakhs, which was left over, was directed to be distributed amongst the partners in accordance with their shares in the partnership profits. Payments, as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the decision of the departmental authorities and dismissed the assessee's appeal. On an application under section 66(1) of the Indian Income-tax Act, 1922, it drew up a statement of the case and referred the following two questions to this court : " 1. Whether the purpose for which the expenditure of Rs. 1,65,500 was incurred is a purpose of, or connected with, the carrying on of the assessee-firm's business ? 2. Whether the said expenditure is 'capital expenditure' within the meaning of section 10(2)(xv) of the Act ? " Mr. Mehta, the learned counsel appearing for the assessee, has argued that the expenditure of Rs. 1,65,500 which has been incurred by the assessee is the litigation expense incurred by the assessee in fighting the litigation instituted by the two erstwhile partners making certain claims which, if they were allowed as claimed, would have wiped out its assets and would have adversely affected its business, thus preventing it from carrying on its business and earning profits. It was pointed out that in the suits filed by the two erstwhile partners, the reliefs claimed included dissolution of the firm, the winding up of its business and the appointment of the cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e outgoing partners had retired. In our opinion, therefore, the suit in its essence was a suit for the settlement and adjustment of the rights, inter se, between the partners, and had nothing to do with the subsequent carrying on of the business by the continuing partners. The resistance to the suit by the continuing partners again was in their own interest and not in the interest of the assessee-firm. The assets of the firm which subsequently carried on the business after the retirement of the outgoing partners, would be such assets as would be left over after the adjustment of the accounts of the partnership up to the date of retirement of the outgoing partners. A dispute as to what is the quantum of the claim of an outgoing partner as on the date of retirement cannot be a matter concerning the business of the reconstituted firm continued after the retirement of the partners. It may be that it may have some connection or relation to the assets of the continuing firm on the basis of Mr. Mehta's argument in that the quantum of the claim of the outgoing partners would have the effect of reducing the assets of the continuing partners. It must, however, be remembered that what goes ou ..... X X X X Extracts X X X X X X X X Extracts X X X X
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