TMI Blog1981 (7) TMI 12X X X X Extracts X X X X X X X X Extracts X X X X ..... partnership concern carrying on commission business and engaged in other sundry activities. With the death of one of the assessee's co-partners, the firm dissolved. The dissolution was by agreement between the surviving partners and the heirs of the deceased partner. Under the agreed scheme of dissolution, the assessee took over the partnership business, lock, stock and barrel, as going concern, paying a certain sum of money to the deceased's heirs, by way of purchase of their interest in the partnership assets. After the take over, the assessee carried on business for a time as its sole proprietor. He then converted the business into a partnership, taking his son as partner. This happened after an interval of five years. At this stage, the assessee was faced with a suit instituted by some of the minor sons of the deceased partner of the erstwhile partnership. The plaintiffs in the suit made all kinds of allegations against the assessee, including an allegation of fraud in the settlement of the accounts. They accordingly prayed for the reopening of the earlier dissolution, as a primary relief in the suit. They also asked for an injunction restraining the assessee and his son from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ehind this contention by holding that, under the law, expenditure incurred by an assessee to protect his business would be capital expenditure and not revenue expenditure. The Tribunal's view of the law is, in our judgment, incorrect. The Supreme Court have laid down that expenditure to protect an assessee's trade or to maintain his business is not capital expenditure, but allowable as an item of revenue expenditure. This enunciation of the law is to be found in the following passage in the Supreme Court's judgment in Dalmia Jain Co. Ltd. v. CIT [1971] 81 ITR 754, 757 (SC) : "The principle which has to be deduced from decided cases is that, where the expenditure laid out for the acquisition or improvement of fixed capital asset is attributable to capital, it is a capital expenditure but if it is incurred to protect the trade or business of the assessee then it is revenue expenditure. In deciding whether a particular expenditure is capital or revenue in nature, what the courts have to see is whether the expenditure in question was incurred to create any new asset or was incurred for maintaining the business of the company. If it is the former it is the capital expenditure ; if ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ses properly chargeable to income." A similar view was expressed by Lord Greene M.R. in the same case of Associated Portland Cement Manufacturers Ltd. [1945] 27 TC 103, 114 (CA), when it came up before the Court of Appeal. The learned Master of the Rolls summarised the point of distinction laid down in Borax case [1942] 10 ITR (Supp) 1, [1940] 23 TC 597 (KB), thus (p. 118): "The money that you spend in defending your title to a capital asset, which is assailed unjustly, is obviously a revenue expenditure. There, again, there is all the difference in the world between defending your assets against the claim of somebody who has no claim against them, and acquiring a new asset or adding to an existing asset. " In a later case, Cooke v. Quick Shoe Repair Service [1949] 30 TC 460 (KB), a similar question arose. A shoe repair business was purchased by the taxpayer from another person. Under the purchase, it was the responsibility of the vendor to discharge all outstanding liabilities of the business, as on the date of the sale. The vendor, however, failed to do so. In the end, the taxpayer, as purchaser of the business, had to pay certain sums in discharge of the vendor's liabiliti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the purpose of the expenditure." The House of Lords agreed with the decision of the Court of Session and held that the expenditure was on revenue account. Lord Guest, in the House of Lords adopted the imagery of Lord Cameron that the expenditure incurred in obtaining the supplementary charter was to repair the business machinery and to remove the grit which could cause failure to that machinery. Lord Wilberforce in the same appeal particularly referred to the finding of the Special Commissioners that they " could not see any new capital asset ", and regarded this finding as significant. The Borax case [1940] 23 TC 597 ; [1942] 10 ITR (Supp) I (KB), was decided by Lawrence J. in 1940. The Carron Company's case [1968] 45 TC 18, was decided by the House of Lords in 1968. In between arose the other cases we have mentioned. English text book writers have referred to the payments which have figured in these cases, as " protection money payments ". Throughout the period of three decades or four, after the Borax case was rendered, there has not been one case in which any court had held that protection money laid out to protect or maintain a, taxpayer's business is capital expenditure. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd render their decision in that case to the effect that expenditure incurred to protect the trade or business of the assessee was a revenue expenditure. The Tribunal, however, were apparently unaware of this ruling of the Supreme Court in Dalmia case [1971] 81 ITR 754. There is no knowing whether they knew about the catena of English decisions on expenditure of this kind in which the distinction had been clearly marked. They relied, instead, on an observation to be found in an earlier Supreme Court case in Jaganmohan Rao v. CIT [1970] 75 ITR 373, to support quite the opposite conclusion, namely, that an expenditure on protecting the title to one's business was only a capital expenditure. The passage on which the Tribunal placed reliance was as follows (p. 380) "It is well established that where money is paid to perfect a title or as consideration for getting rid of a defect in the title or a threat of litigation, the payment would be a capital payment and not a revenue payment. " Although the proposition, which had been given expression to in the above passage, is found described, with confidence, as " well settled ", the judgment of the Supreme Court does not refer to any a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... perty. As receiver, the assessee was collecting the rents and profits from the property. Ultimately, the Privy Council decided the appeal in the assessee's favour. They held that the assessee's vendor had absolute and exclusive title to the property. In his assessments to income-tax for the relevant years, the assessee offered the rents and profits which he received from the property as a receiver. He, however, set against those receipts the amount of Rs. 1,15,000 which he paid to the sons of his vendor by way of compromise of their claims. On a reference, the Supreme Court posed the question for their consideration as follows (p. 380) : "What is essential to be seen is whether the amount of Rs. 1,15,000 was paid for bringing into existence a right or asset of an enduring nature. In other words, if the asset which is acquired is in its character a capital asset, then any sum paid to acquire it must surely be capital outlay." They then gave answer to the question posed, in the following terms (p. 382): "It was a lump sum payment for acquisition of a capital asset and the claim of the plaintiffs for the lease money from the property was merely ancillary or incidental to the cla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erroneous since it is opposed to the law laid down directly on the point by the subsequent Supreme Court decision in Dalmia's case. We may, however, observe in passing that the distinction laid down by Lawrence J. in Borax case [1940] 23 TC 597; [1942] 10 ITR (Supp) (KB) had not been accepted, without question, in Australian courts administering more or less similar legislation on income-tax : vide Sun Newspapers Ltd. v. Federal Commissioner of Taxation [1938] 61 CLR 337. In this case Dixon J., in the High Court of Australia, expressed the notion that money paid by a taxpayer with a view to preserve his existing business organization from immediate impairment and dislocation is an out" going of capital and hence not deductible in the computation of taxable business income. For a similar view, see also Broken Hill Theatres Proprietary Ltd. v. Federal Commissioner of Taxation [1952] 85 CLR 423, decision of the Full Court, in which Lawrence J.'s decision in the Borax case was doubted. The views of Australian judges, however, do not seem to be uniform. And more recent trends in judicial pronouncements in that country show a change in emphasis. See, for instance, the observations of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... othing express or implied in the terms of the compromise to suggest that the payment of Rs. 40,000 to the heirs of the deceased partner was towards payment of the balance of the purchase price of the deceased partner's share in the business. In these events, it would be safe and reasonable to hold that so far as the assessee was concerned, the suit was an attack on the title to his business, and so far as his payment of Rs. 40,000 was concerned, the payment warded off that attack. The Tribunal was not justified in assuming that the payment under the compromise decree was the means by which the assessee had acquired a full title to the business. The situation presented by this case is quite different from that which obtained in Jaganmohan Rao's case [1970] 75 ITR 373 (SC), but is almost parallel to the fact-situations found in the Borax case [1940] 23 TC 597 ; [1942] 10 ITR (Supp) I (KB) and the Dalmia case [1971] 81 ITR 754 (SC). One aspect of the case which the Tribunal had overlooked while disposing of the appeal before them needs to be briefly touched upon. As earlier mentioned, the ITO had disallowed the allowance claimed by the assessee for Rs. 40,000 in the year of payment. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thereafter, in partnership with his son. All throughout, the business was the same. There were differences only in the persons carrying on the business at different periods of time. In the year of account relevant to the assessment year under reference, the assessee was but a partner and his income from the business was but a share income from that firm, the other share being that of his son. The assessee, however, is not thereby disentitled to claim a set-off of legitimate expenditure which appertains to that share income. The Department's case had always been that the payment of Rs. 40,000 made by the assessee did relate to the business because it was that business which the assessee had taken over from the partnership business and it was that business which was the subjectmatter of the law suit by the heirs of the deceased partner. If so much is granted, we see no reason why the deduction in question cannot be attributed to that business. The AAC dealt with this point when he decided that the payment of Rs. 40,000 by the assessee would be a proper set-off as against the share income of the assessee from the firm. We are in entire agreement with this view. It was pointed out in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ppuswami Naicker, his son, P. K. Ramadoss, Mohanlal Lekhrajmal and the assessee, Ghansham Singh, who died on January 12, 1971. The firm deposited the amount due under the contract. There were disputes between the firm on the one hand and the Corporation of Madras on the other with regard to the removal of tramway rails, overhead materials, etc., and to the restoration of the Toads to their original condition. It appears that Kuppuswami Naicker himself had expressed desire that the firm should be dissolved and the business should be carried on by the assessee solely, as he had contributed the necessary finances. Before anything could be done in this behalf, Kuppuswami Naicker died on November 15, 1955. The result was that the partnership became dissolved. On November 25, 1955, the remaining partners entered into deed of dissolution under which the widows of Kuppuswami Naicker were paid Rs. 37,000 and his two minor sons, Rs. 26,000. Thereafter, the business was carried on by the assessee as the sole proprietor till October 18, 1960. With effect from October 19, 1960, he took his son as the working partner with an 1/3rd share. Four of the sons of Kuppuswami Naicker, of whom three we ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the mill, paid a sum of Rs. 1,15,000 to the two sons and got release of their interest in the mills. This amount was claimed as deduction in the assessment of the assessee. The High Court held that the amount had been paid for acquisition of the capital assets and that the payment had been made in order to perfect title to the capital, asset. The claim for deduction was, therefore, rejected. In the course of the judgment, at p. 383, it was observed: " It is well established that where money is paid to perfect a title or as consideration for getting rid of a defect in the title or a threat of litigation the payment would be capital payment and not revenue payment." This is not a case where the assessee is trying to perfect his title to the property, as it happened in the case before the Supreme Court. This is a case where the assessee had acquired title to the assets even at the time when he originally entered into partnership with Kuppuswami Naicker. Under the deed of dissolution, he became the sole owner of the assets of the partnership. Whatever consideration was payable for the assets had already been paid and the amount now under consideration is not part of the said amount ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case where the dispute related to the title to the business in its entirety and the question was whether on the death of the previous owner it had vested in his daughter or in certain other relations. The expenses in such a litigation were considered to be outside the scope of allowance and the case, Southern (H. M. Inspector of Taxes) v. Borax Consolidated Ltd. [1940] 23 TC 597; [1942] 10 ITR (Supp) I (KB), was found to be hardly in point. It was pointed out at p. 31 : "If a sum of money is expended for the acquisition or the improvement of a fixed capital asset, it is undoubtedly attributed to capital. But if there is no change in the fixed capital asset, then the expenditure is properly attributable to revenue." The Supreme Court has considered the principle applicable to cases of this kind in two later decisions. The first of them is Sree Meenakshi Mills Ltd. v. CIT [1967] 63 ITR 207 (SC). In that case, a spinning mill distributed the yarn produced by it to the weavers outside the factory. The Textile Commissioner issued an order directing that the company should not so sell or deliver yarn manufactured by it, except to such person or persons as he may specify. The mill cha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... id of a defect in title. Applying this principle it would be clear that in the present case the assessee had already become the owner of the assets in 1955 and he had to defend the attack on the assets. This is thus clearly a case where the expenditure has not brought into existence any capital asset or enduring benefit. The fact that the expenditure has been incurred at a time when the assessee was only a partner and not sole owner of the assets cannot make a difference, as it is well settled that a person carrying on a business in partnership with another is none the less carrying on a business. Another contention urged for the Revenue was that the expenditure related to the very framework of the taxpayer's business and was, therefore, capital. It is not possible to accept this submission. The said principle has been evolved in cases where there was a pooling agreement between companies for sharing profits and losses or where money was paid for the cancellation of an agreement which affected the whole structure of the trader's profit-making apparatus. This is a case where after having acquired the assets and carried on business with them, the assessee finds himself involved i ..... X X X X Extracts X X X X X X X X Extracts X X X X
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