Find a Lawyer

Miscellaneous Judicial Cases Nos. 1274 and 1275 of 1960, decided on 5th October 1963.

Business expenditure-

Share income of partner-Expenditure incurred to earn share income-Whether deductible as business expenditure or on general principles-Indian Income-tax Act, 1922, S. 10 (2) (xv)-[Ishwardas Subhkaran v. Commissioner of Income-tax (Income-tax Reference No. 38 of 1952, decided on 2-6-1953) (unreported) dissented from.]

It is not correct as a general legal proposition to state that a partner of a registered firm is not entitled to claim any deduction against the share of the profits of the firm included in his total income.

The income earned by an individual from his share in a partnership business is income derived from business and so falls within the ambit of section 10 (1) of the Income-tax Act. The profits and gains contemplated by section 10 are the true profits and gains, and ordinarily the true profits and gains of the assessee must be ascertained from the point of view of commercial expediency and commercial accounting. If, therefore, a partner is able to establish that an expenditure claimed by him against his share-income was incurred as a matter of commercial expediency and for the purpose of earning profits from the partnership business, the assessee would be entitled in his individual assessment to claim the deduction of the amount under section 10 (2) (xv) of the Income-tax Act or under general principles. Ishwardas Subhkaran v. Commissioner of Income-tax (Income-tax Reference No. 38 of 1952, decided on 2-6-1953) (unreported) dissented from.

Commissioner of Income-tax v. Chitnavis (S. M.) (1932) 2 Comp. Cas. 464; Commissioner of Income-tax v. New Digvijaysinhji Tin Factory (1959) 36 I T R 72; Jitmal Bhuramal v. Commissioner of Income-tax (1959) 37 I T R 528 and Shanti Kumar Narottam Morarji v. Commissioner of Income-tax (1955) 27 I T R 69 ref.

These two applications filed by the Commissioner of Income-tax under section 66 (1) requiring this Tribunal to draw up a statement of the case and to refer to the High Court a question said to be a question of law arising out of the Tribunal's order are conveniently consolidated. As, in our opinion, a question of law does arise out of the Tribunal's order, we do hereby draw up a statement of the case and refer to the High Court under section 66 (1) the question herein below set out.

2. The statement of the case relates to the assessment years 1955-56 and 1956-57.

3. The assessee was assessed to tax in the status of an individual. The assessee had no independent business of his own but was deriving income from various firms in which he was a partner. The assessee had declared an income of Rs. 77,027 in the assessment year 1955-56 and Rs. 53,340 in the assessment year 1956-57, from the four firms in which he was a partner. As against these share-incomes, the assessee had claimed expenses of Rs. 12,283 in the first year and Rs. 19,380 in the second year. Both these amounts of expenses claimed included items of interest of Rs. 1,935 in the first year and Rs. 1,956 in the second year. These sums of interest were paid to the bank named Virjee & Co., from which the assessee had borrowed money to finance the partnership firm. Excepting these items of interest, the Income-tax Officer disallowed all other expenses on two grounds, viz. (1) the assessee had not been carrying on any independent business of his own; and (2) even if those expenses were at all incurred, they should have been claimed in the accounts of the firm, as the assessee was actually looking after the business of those firms. The Appellate Assistant Commissioner upheld the disallowance of these assessee's claims on the grounds mentioned by the Income-tax Officer in the assessment order.

The assessment orders passed by the Income-tax Officer and the orders of the Appellate Assistant Commissioner are herewith made part of the statement and are annexures "A-1 ", "A-2" and "B-1 ", "B-2".

4. Before the Tribunal, relying upon the decision in Shand Kumar Narottam Morarji v. Commissioner of Income-tax ((1955) 27 I T R 69), the assessee contended that, in order to earn his share-income from the various firms, he had to move about in a car and supervise the firms' business, and for that purpose, he had to incur certain expenses over cars, travelling and in respect of maintenance of a staff' for the purpose and the expenditure was legitimately incurred by him for earning the income and that it was an allowable deduction under section 10. The departmental representative, drawing the attention of the Tribunal to sections 23 (5) and 16 (1) (b), submitted that the partnership firm was an assessable entity under the Income-tax Act and sections 23 and 16 (1) (b) laid down a procedure in taxing the firm's income in the hands of the partner. The income derived by a partner towards his share from the firm's income is the firm's income in the hands of the partner and not the individual income and all the expenses incurred by the assessee for supervision of the business of a different entity could not be allowed in the personal assessment of the partner. In support of that argument, the Department relied upon an unreported case of Messrs Ishwardas Subhkaran v. Commissioner of Income tax, (Income-tax Reference No. 38 of 1952), wherein such expenses were disallowed. Following the decision cited by the assessee, the Tribunal held that the profits and gains earned from a partnership were to be taxed as business income in the hands of the assessee and all those deductions which are permissible under section 10 (2) should be allowed. However, the departmental representative submitted that the Income-tax Officer had disallowed the claim on a legal ground without actually examining whether such expenses had been actually incurred by the assessee and, if so, to what extent they were verifiable and allowable. The Tribunal, therefore, holding that such expenses were permissible deductions under section 10 (2), directed the Income-tax Officer to go into those expenses alleged to have been incurred by the assessee in order to earn his income from the firms and to deduct the same in computing his income. The consolidated order of the Tribunal in both the appeals is herein made part of the statement and is annexure "C". A copy of the unreported case of the Calcutta High Court, relied upon and not forming part of the statement, is annexure "D".

5. On these facts, the following question of law arises out of the Tribunal's order and the same is referred to the High Court under section 66 (1).

"Whether the expenses incurred by the assessee (who was not carrying on an independent business of his own), in earning income from various firms in which he was a partner, are allowable in law as deductions "

6. The draft statement was placed before the parties. The minor suggestion made by the departmental representative in the question framed by us was accepted by us and, accordingly, we have changed a particular word in the question. The learned counsel for the respondent submitted that the words occurring in the question "who was not carrying on an independent business of his own" should be deleted from the question. We do not agree with this suggestion. The statement is accordingly finalised.

Tarkeshwar Prasad for the Commissioner.

S. N. Dutta, Kanhaiyaji and Rameshwar Prasad for the Assessee.

In this case the assessee was assessed to tax in the status of an individual. He had no independent business of his own, but he was deriving income from various firms of which he was a partner. For the assessment year 1955-56 the assessee declared an income of Rs. 77,027 and for the assessment year 1956-57 the assessee declared an income of Rs. 53,340 with regard to the four firms of which he was a partner. As against these share-incomes the assessee claimed expenses of Rs. 12,283 in the first year and Rs. 19,380 in the second year. Both these amounts of expenses included items of interest of Rs. 1,935 in the first year and Rs. 1,956 in the second year. These amounts of interest were paid by the assessee to the bank named Virjee and Company from which the assessee had borrowed money to finance the partnership firms. With the exception of these items of interest the Income-tax Officer disallowed the other expenses. The order of the Income-tax Officer was affirmed by the Appellate Assistant Commissioner in appeal. The assessee took the matter in second appeal before the Income-tax Appellate Tribunal which held that the profits and gains earned from a partnership were to be taxed as business income in the hands of the assessee who was entitled to claim all the deductions which are permissible under section 10 (2) of the Income-tax Act. The Tribunal accordingly ordered that the assessee was entitled to have the expenditure incurred by him in earning his income from the firms allowed in his personal assessment. The Income-tax Appellate Tribunal accordingly remanded the matter to the Income-tax Officer for examining the nature of the expenses alleged to have been incurred by the assessee in order to earn his income from the firms and to deduct the same in computing his income.

At the instance of the Commissioner of Income-tax the Income-tax Appellate Tribunal has submitted the following question of law for the opinion of the High Court under section 66 (1) of the Income-tax Act:

"Whether the expenses incurred by the assessee (who was not carrying on an independent business of his own), in earning income from various firms in which he was a partner, are allowable in law as deductions "

On behalf of the Income-tax Department the learned Standing Counsel put forward the argument that the profits which have come to the assessee from the partnership business have come to him as net profits, and after these profits have so come to the assessee, there cannot be any further deduction on account of expenditure incurred by the partner who received his share of the income. In support of this proposition the learned Standing Counsel referred to the decision of the Calcutta High Court in Messrs Ishwardas Subhkaran v. Commissioner of Income-tax (Income-tax Reference No. 38 of 1952, decided on 2nd June, 1953). With great respect to the Calcutta High Court, we are unable to accept the proposition of law laid down in Income-tax Reference No. 38 of 1952 as correct. It is not correct as a general legal proposition to state that a partner of a registered firm is not entitled to claim any deduction against the share of the profits included in his total income, the share having been arrived at on the assessment of the firm with regard to its profits, it would be open to the partner in a proper case to claim a deduction provided he satisfies the taxing authority that such deduction represents a necessary expenditure, the expenditure being incurred in order to enable him to earn the profits which are being subjected to tax. In the circumstances of the present case, it cannot be doubted that the income earned by the assessee from his share of the partnership business is income derived from business and so falls within the ambit of section 10 (1) of the Income-tax Act. It is also manifest that the profits and gains contemplated by the Legislature under section 10 are the true profits and gains, and ordinarily the true profits and gains of the assessee must be ascertained from the point of view of commercial expediency and commercial accounting. If, therefore, the assessee was able to establish in this case that the expenditure claimed by him was incurred as a matter of commercial expediency and for the, purpose of earning profits from the partnership business, the assessee would be entitled to claim the deduction of the amount under section 10 (2) (xv) of the Income-tax Act or under the general principle laid down by the Privy Council in Commissioner of Income-tax v. S. M. Chitnauis ((1932) 2 Comp. Cas. 464). The view that we have expressed is borne out by the decision of the Bombay High Court in Shantikumar Narottam Morarji v. Commissioner of Income-tax ((1955) 27 I T R 69) and also by a subsequent decision of the Bombay High Court in Commissioner of Income tax v. New Digvijayasinhji Tin Factory ((1959) 36 I T R 72). The same view has been taken by a Division Bench of this High Court in Jitmal Bhuramal v. Commissioner of Income-tax ((1959) 37 I T R 528). In view of the principle laid down by these authorities we are of opinion that the Income-tax Appellate Tribunal has taken the correct view of the law in this case in holding that "the assessee was entitled to have the expenditure incurred by him in earning his income from the firms allowed in his personal assessment" and remanding the matter to the Income-tax Officer for examining the nature of the expenses in order to find out how far those expenses are allowable.

For these reasons we hold that the question of law referred to the High Court by the Income-tax Appellate Tribunal must be answered in favour of the assessee and against the Department. The assessee is entitled to the costs of the reference. Hearing fee Rs. 250.

Question answered in favour of the assessee.

Find a Lawyer Near You

Dealing with a matter like this? Connect with a verified advocate in your city — free on SJP Lawyers Directory.