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TMI Blog1973 (3) TMI 36X X X X Extracts X X X X X X X X Extracts X X X X ..... ners 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 lost to the managed company was undertaken to be paid by Shri R. K. Batra, brother of the partner holding 50% share in the managing agency firm. Shri R. K. Batra also took the place of his brother in the managing agency firm having the same share as his brother formerly had. In the assessment year 1962-63, for which the corresponding accounting year was the calendar year 1961, the assessee paid a sum of Rs. 9,500 towards the sum of Rs. 47,500 it had agreed to bear out of the aforementioned loss. This sum of Rs. 9,500 was claimed as a deduction in the assessment year in question, but the same was disallowed by the Income-tax Officer on the ground that the assessee was not legally bound to make this payment and this was not at all a business expense. On appeal, the Appellate Assistant Commissioner confirmed this view and gave three reasons to reject the assessee's claim. Firstly, he said that it was actually the loss of a firm, which was no more in existence. Secondly, he observed that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Tribunal to state a case on the following question: "Whether, on the facts and in the circumstances of the case, the assessee was entitled to any allowance on account of the share of loss made good by it to the managed company ? " The facts stated earlier have been taken largely from the agreed statement of the case which has been drawn up by the Tribunal and referred to this court. It is agreed by both sides that the statement of the case does not really contain all the material facts and circumstances of the case, although it does summarise the findings of the Tribunal. To explain the true facts of the case, we have been taken through both the assessment order as well as the order of the Appellate Assistant Commissioner. It is now necessary to state the facts in greater detail before dealing with the question referred to us. The managing agency firm initially had as its partners, Shri V. K. Batra, holding a 50% share, Lal Balwant Roy, holding a 25% share and the assessee-company als ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ant 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 Commissioner stated that the sum in question was not even the loss of the closed business, because it never formed part of the profit and loss account and no loss was allocated to the partners. He held that as there was no loss in either the closed or the working business and no allocation was brought forward in the assessment of the partners, no question of setting off or bringing forward any loss against the income from the business of the assessee-company arose. The liability of the assessee was not on account of the Partnership Act, but on account of personal considerations. He, therefore, held that the loss should first have arisen as a loss of the firm and then should have been allocated to the partners. On this argument, he held that the loss was not a business loss and could not be set off against the appellant's business income. When the Tribunal passed its order accepting the assessee's appeal, it set out the facts already narrated and then proceeded to deal with the reasons given by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 activities and for the purpose. of earning profits. There are two major contentions on behalf of the department. Firstly, it is contended that a partner cannot allocate a share in a loss without the same being computed in the assessment of the firm and, hence, the claim of the assessee-company was liable to be rejected outright. Secondly, it is contended that the claim is not a business loss and on this ground also the answer to the question referred should be against the assessee. It is also submitted in connection with both these questions that the facts are somewhat muddled in the statement of the case as well as the order of the Tribunal and the true finding of the Tribunal is that the loss in question was a loss of the partnership firm and not of the individual partners. Referring to the statement of the case as well as the appellate order of the Tribunal, it is submitted that at one place it is stated that the loss was taken over by two of the partners and a stranger, but at another plac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 taken over by the assessee-company. Hence, the question can be examined either on the footing that part of the loss of M/s. Bharat Carbon & Ribbon Manufacturing Co. Ltd. was taken over by the assessee-company, or on the footing that part of the loss occasioned to M/s. Morari Lal Batra & Co. was taken over by the assessee-company. It is now necessary to turn to the first aspect of the submission made on behalf of the revenue. The relevant provisions of the Income-tax Act, 1961, relating to the assessment of firms are section 182 and section 67. Section 182 reads as follows: " 182. Assessment of registered firms.- (1) Notwithstanding anything contained in sections 143 and 144 and subject to the provisions of sub-section (3), in the case of a registered firm, after assessing the total income of the firm,- (i) the income-tax payable by the firm itself shall be determined ; and (ii) the share of each partner in the income of the firm shall be included in his total income and assessed to tax accor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 be treated as the partner's share, in the income of the firm. (2) The share of a partner in the income or loss of the firm, as computed under sub-section (1) shall, for the purposes of assessment, the apportioned under the various heads of income in the same manner in which the income or loss of the firm has been determined under each head of income. (3) Any interest paid by a partner on capital borrowed by him for the purposes of investment in the firm shall, in computing his income chargeable under the head 'Profits and gains of business or profession' in respect of his share in the income of the firm, be deducted from the share. (4) If the share of a partner in the income of a registered firm or a firm treated as registered in accordance with the provisions of clause (b) of section 183, as computed under this section, is a loss, such loss may be set off, or carried forward and set off, in accordance with the provisions of this Chapter. " Here, reliance is placed on sub-section (2) and sub-section ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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 legal obligation to make good the loss or part of it. On the other had, it is contended by counsel for the assessee-company that there is a finding that the payment in question was made for business purposes, and if that is so, it does not matter whether the payment has been made under a legal obligation or not. It is now necessary to refer to the various cases cited. In Commissioner of Income-tax v. A. W. Figgies & Co. their Lordships of the Supreme Court held that a firm did not necessarily change when a partner in a firm changed. This conclusion was based on the express terminology of section 25(4) of the Indian Income-tax Act, 1922. In this judgment, it was also held that the firm and its partners were separate and distinct units for purposes of assessment under the Income-tax Act. This judgment is of little help in dealing with the questions involved in the present case. In Roebank Printing Co. Ltd. v. Commissioners of Inland Revenue, certain amounts were taken away by the managing director of the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 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 held that a partner was entitled to deduct from his profits from a firm amounts spent or incurred by him for commercial expediency, or salary for the purpose of earning profits from the partnership business. Jitmal Bhuramal v. Commissioner of Income-tax is one of the authorities cited with approval in the aforementioned case. In that case, salary was paid to members of a Hindu undivided family which was itself a partner in a firm. The salary payable to one of the partners was treated as an allowable deduction under section 10(2)(xv) of the Indian Income-tax Act, 1922, if it was paid for service to the firm and as being not taxable if it was paid for other reasons. On the facts of that case, it was held that the Tribunal's findings that the salary was paid for other reasons was a finding of fact. In another case decided by the Patna High Court, Commissioner of Income-tax v. Atma Ram Modi, it was held that expenditure incurred by a partner could be allowed as a deduction in his personal assessment if made for commerc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 business. The expenditure was laid out for no other purpose. " There was another case before the Supreme Court relating to the same bank, which is reported as Commissioner of Income-tax v. Nainital Bank Ltd. That was also a case relating to the same burglary, but related to the cash which had been stolen from the bank. It was held that the business of a bank carried with it the risk of embezzlement, theft, dacoity, etc., which was incidental to the carrying on of the banking business. The loss of the cash in question was, therefore, incidental to the carrying on of the business of banking and was deductible as a trading loss. These authorities would support the view that, in certain circumstances, amounts expended by a trader are allowable as proper business expenditure. In this respect, the finding of the Tribunal in the present case is that the amounts paid by the assessee-company to make up a portion of the loss occasioned by the transaction with the Calcutta firm was a payment made in accordance with business princi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en 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 partners according to the shares fixed. The total effect of such an entry on the accounts of that firm would depend on the other income of the firm. It could not be said that in ascertaining the profits of the firm that amount would be shown as a loss in the firm's accounts, because the eventual figure of profit or loss would depend on the other items occurring in the partnership accounts. The payments made by the assessee-company are not really the losses of the firm as such, but payments of a liability of that firm. Payments for such liabilities are not mentioned in either section 67 or section 182 of the Income-tax Act, 1961. It is necessary to illustrate this point from a practical angle. The sum we are dealing with is Rs. 9,500. When the assessee-company pays this amount, it pays it either direct to the managed company or to the firm. We have already assumed these two aspects of the question for the purposes of this case as discussed above. If the payment is made to the firm and then paid to the managing agency company, the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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