TMI Blog1971 (8) TMI 64X X X X Extracts X X X X X X X X Extracts X X X X ..... estion has been referred to this court at the instance of the Commissioner of Income-tax under section 256(1) of the Income-tax Act, 1961 (hereinafter referred to as "the Act of 1961"): "Whether, on the facts and in the circumstances of the case, the assessee was entitled to the deduction of the amount of commission paid to S. R. Dhodi against his share of profit from the Shalimar Cinema?" The matter relates to the assessment years 1962-63 and 1963-64. The assessee, Ganpat Rai Jaggi, is a partner in the firm carrying on business under the name and style of Shalimar Cinema. The other partner in the firm is Razi-ud-din, who owns the cinema hall in which the firm exhibits cinema films. S. R. Dhodi is the son-in-law of the assessee. With effect from May 19, 1955, the assessee, in partnership with Dhodi, carried on the business of exhibiting cinema films in the aforesaid cinema hall. The profits of the business were shared by the assessee and Dhodi in the ratio of 75 : 25. The partnership between the assessee and Dhodi continued till 1957. On December 31, 1957, a deed of partnership was executed by the assessee and Dhodi. According to the partnership deed, the capital of the partner ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or looking after my interest and interest of the firm. 5. That the liability for payment of this interest and commission is my personal liability and not that of the firm. Therefore, the firm, M/s. SHALIMAR CINEMA, will neither be responsible nor liable for this amount. 6. It is understood that you will give your whole-hearted attention to the work and will do your best for the efficient working of the firm so that the receipts are maximum. In confirmation to the above arrangement, please sign the duplicate copy of this letter and send it back to me for my records." Dhodi accepted the above arrangement. A deed of partnership was thereafter executed by the assessee and Razi-ud-din on January 9, 1959. According to that deed, Razi-ud-din was the owner of the Shalimar Cinema building and the machinery and fittings therein and had also the requisite licence to exhibit pictures in that hall. It was stated that Razi-ud-din did not know English and was not conversant with the cinema business. He, therefore, entered into partnership with the assessee for a period of five years to commence the said cinema business with effect from January, 1, 1959. The partnership deed recited that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1963-64 respectively. The assessee claimed a deduction of Rs. 6,132 and Rs. 14,961 for the above-mentioned two years on account of the amounts paid by him to Dhodi in pursuance of the agreement with Dhodi. The Income-tax Officer held that the payment made to Dhodi was only an application of the assessee's income. He accordingly disallowed the claim made by the assessee for deduction. The above order was affirmed on appeal by the Appellate Assistant Commissioner. It was held that the payment made to Dhodi was ex gratia. Dhodi, it was found, was getting a salary of Rs. 250 per mensem as the manager of the cinema, and there was no justification for further payment to him by the assessee. On further appeal the Income-tax Appellate Tribunal held that section 67(3) of the Act of 1961 gave statutory recognition to the wellsettled principle that a partner was entitled to a deduction in computing his share of the firm's profits in respect of interest paid by him on capital borrowed for the purpose of investment in the firm, but that sub-section was not exhaustive of the deductions permissible to a partner in computing his share of the firm's profits. It was urged before the Tribunal that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the partnership business. The assessee then realised that because of his age he was not by himself in a position to discharge the duty imposed upon him by the deed of partnership. The assessee then entered into an arrangement with Dhodi, who had already been looking after the above cinema business in the past, and agreed to pay him commission on gross booking. The above facts, in our opinion, show that it was on account of the compelling circumstances of the business that the assessee had to arrive at an arrangement with Dhodi. The amount paid by the assessee in this connection to Dhodi was a matter of commercial expediency. The assessee, it is manifest, incurred the above expenditure in order to earn the profits from the partnership business. Such an expenditure cannot be considered to be an application of the income but a permissible deduction under section 37 of the Act of 1961. According to that section, any expenditure laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head "profits and gains of business or profession". We are not impressed by the argument that the only dedu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tter, in our opinion, is concluded by a decision of the Supreme Court in the case of Commissioner of Income-tax v. Ramniklal Kothari. The assessee in that case was a partner in four different firms. He claimed an allowance on account of payment of salary and bonus to his staff, expenses for maintaining and depreciation of motor car, travelling expenses and interest. It was held that the assessee was entitled to the deductions claimed by him. Mr. Sharma has referred to the fact that the decision of the Supreme Court in Ramniklal Kothari's case was given in the context of the Indian Income-tax Act of 1922. It is urged that the provisions of section 67 in the Act of 1961 show that the dictum laid down by the Supreme Court in Ramniklal Kothari's case would not hold good under the Act of 1961. We find, however, nothing in section 67 which may indicate a departure from the rule laid down by their Lordships in Ramniklal Kothari's case. There is also no force in the contention that the amount paid by the assessee as commission to Dhodi was for the benefit of the firm and not for that of the assessee. As stated above, the assessee had undertaken the responsibility of running the cinema ..... X X X X Extracts X X X X X X X X Extracts X X X X
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