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Commissioner of Income-tax, Madhya Pradesh, Nagpur Vs. R.B. Bansilal Abirchand Firm - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtMumbai High Court
Decided On
Case NumberIncome-tax Reference No. 76 of 1964
Judge
Reported in[1971]79ITR104(Bom)
ActsIncome Tax Act, 1922 - Sections 10
AppellantCommissioner of Income-tax, Madhya Pradesh, Nagpur
RespondentR.B. Bansilal Abirchand Firm
Appellant AdvocateJ.M. Thjakar and ;C.J. Thakar, Advs.
Respondent AdvocateG.N. Joshi and ;S.V. Natu, Advs.
Excerpt:
(i) direct taxation - nature of amount - section 10 of income tax act, 1922 - whether tribunal justified in holding that advances made by assessee-firm to another firm were in nature of loans during course of money-lending business and did not represent capital contribution of x group of partner - partnership act contemplates advances of loans by partners - merely because word is 'advances' by partners to partnership does not make them capital contribution if agreement specifically shows loans - held, advances made by assessee-firm were loans during course of money lending business. (ii) application - section 10 (2) (xv) of income tax act, 1922 - whether tribunal justified in holding that expenditure on litigation and remuneration paid to 'x' were admissible under section 10 (2) (xv) -.....padhye, j. 1. on being required by this court by its order dated 4th february, 1963, in income-tax applications nos. 13 to 34 of 1961 commissioner of income-tax, madhya pradesh, nagpur and bhandara v. rai bahadur bansilal abirchand, kamptee, the income-tax appellate tribunal, bombay bench-c, has referred to us under section 66(2) of the income-tax act, 1922, the following three question of law arising out of the order of the tribunal dated april 23, 1960. 2. for assessment years 1944-45 to 1955-56. '1. whether, in the facts and circumstances of the case, the tribunal was justified in holding that the advances made by the assessee-firm, r. b. bansilal abirchand, to the firm, bisesar house, were in the nature of loans during the course of money-lending business and did not represent the.....
Judgment:

Padhye, J.

1. On being required by this court by its order dated 4th February, 1963, in Income-tax Applications Nos. 13 to 34 of 1961 Commissioner of Income-tax, Madhya Pradesh, Nagpur and Bhandara v. Rai Bahadur Bansilal Abirchand, Kamptee, the Income-tax appellate Tribunal, Bombay Bench-C, has referred to us under section 66(2) of the Income-tax Act, 1922, the following three question of law arising out of the order of the Tribunal dated April 23, 1960.

2. For assessment years 1944-45 to 1955-56.

'1. Whether, in the facts and circumstances of the case, the Tribunal was justified in holding that the advances made by the assessee-firm, R. B. Bansilal Abirchand, to the firm, Bisesar House, were in the nature of loans during the course of money-lending business and did not represent the capital contribution of the Daga group of partner

2. Whether, in the facts and circumstances of the case, the Tribunal was justified in holding that the expenditure on litigation and the remuneration paid to Shri R. K. Saran were admissible under section 10(2) (xv) of the Act ?'

3. For assessment year 1955-56 only.

'3. Whether on the facts and circumstances of the case, the Tribunal was justified in holding that the sum of Rs. 10,614 do not constitute profit under section 10(2) (vii) of the Act ?'

4. This reference arises out of the assessment proceeding in respect of the income of the firm, R. B. Bansilal Abirchand for the assessment years 1944-45 to 1955-56. The Income-tax Officer by his orders passed separately for the years in question, disallowed the claim of the assessee for the civil court expenses and allowed on estimate only in portion of the salary paid to Mr. Saran. The appellate Assistant Commissioner, in appeal against the orders of the Income-tax Officer agreed with the decision of the Income-tax Officer in all these assessment cases and confirmed his orders. The assessee as well as the department, filed by the department, filed appeals against the orders of the Appellate Assistant Commissioner as both were aggrieved. The Tribunal dismissed all the appeals filed by the department, whereas the assessee's Appeals Nos. 12635, 12637 and 12642 to 12644 were partly allowed and the assessee's Appeals Nos. 12638 to 12641 of 1958-59 were allowed.

5. The department, thereafter, made applications through the Commissioner of Income-tax to the Appellate Tribunal requiring it to refer to the High Court certain questions of law which are said to arise out of the Tribunal's consolidated order in I. T. As. Nos. 12635 to 12644 of 1958-59 and Nos. 12948 to 12954 and 13001 to 13004 of 1958 and 67 of 1959-60. The Tribunal was of the opinion that no question of law arose out of the aforesaid order of the Tribunal and declined to state the case to the High Court under section 66(1) of the Indian Income-tax Act, 1922.

6. The Commissioner of Income-tax thereupon applied to this court under section 66(2) of the Indian Income-tax Act, 1922, for requiring the Income-tax Appellate Tribunal to state the case and refer the questions arising out of the order of the Tribunal which I have stated above.

7. In order to appreciate the contentions between the parties, it will be necessary to state a few facts. The assessee is a firm known as M/s. R. B. Bansilal Abirchand Firm, Kamptee, registered under the Indian Partnership Act as well as under section 26A of the Income-tax Act, 1922, for the purposes of assessments. This firm has been referred to by the income-tax authorities as the 'Kamptee firm' and it shall be referred to by the same name in this judgment also. The business of this firm was that of bankers, money-lenders, shroffs and had interest and connections in the business relating to mining and managing agency of certain mills. Originally, the partners of this firm formed a joint Hindu family and Sir Kasturchand Daga was the manager of karta of the said family. He came in contact with Mr. Manekji Dadabhoy, as he then was, in or about the year 1903. He was then practising law at Bombay. Sir Kasturchand Daga and Mr. Manekji Dadabhoy purchased some land at Hingoli in Hyderabad State, as it then was, with a view to start a ginning and pressing factory. For carrying on the said business they entered into a partnership and executed a deed of partnership dated August 10, 1903. Thereafter, these two persons jointly purchased other properties and entered into the business in manganese maining. They also acquired some collieries and ginning factories and carried on these businesses in partnership. This partnership firm came to be known as 'Bisesar House' or the 'suit firm' as it has been variedly referred to by the income-tax authorities. I shall also adopt the same nomenclature for the purposes of this decision.

8. Sir Kasturchand Daga died on 21st of January, 1917, leaving behind four sons : (1) Bisesardas Daga, (2) Narsinghdas Daga, (3) Badridas Daga and (4) Ramnath Daga, as his sole surviving coparceners of the Hindu undivided family. The business which was being carried on by Sir Kasturchand Daga and Mr. Manekji (who was later conferred with Knighthood) was continued in the same manner in partnership by Bisesar Daga, the eldest son of Sir Kasturchand Daga, in his capacity as the head of the family. The joint family consisting of these four brothers had eight annas share in the business of the 'Bisesar House' and Sir Manekji, who was the remaining partner, had the remaining eight annas share in the same.

9. The four Daga brother referred to above separated some time in or about the year 1928, and accounts were made of this partnership as on November 2, 1929, and it was found that the 'Bisesar House' owed the 'Kamptee firm' nearly Rs. 81,00,000 on account of principal and interest. Thereafter, a fresh partnership was entered into between the major members of the Daga family with Sir Manekji, and Ramnath Daga, the fourth brother, who was then a minor, was admitted to the benefits of the partnership and a fresh deed of partnership was executed on 18th of February, 1930. Losses of the partnership up to 31st March, 1929, in the collieries business were ascertained and found to be Rs. 37,04,865-6-8 and in was agreed that a sum of Rs. 30,00,000 should be credited to the partnership of the collieries and debited to the personal accounts of the parties. It may be noted that the 'Bisesar House' was carrying on different businesses under different heads of which separate accounts were maintained. As regards this amount of Rs. 30,00,000, it was credited to the partnership of the collieries and the Kamptee firm and Sir Manekji were each debited with Rs. 15,00,000 as due from them to the Kamptee firm. As a result thereof the Kamptee firm became a creditor to Sir Manekji Dadabhoy in the sum of Rs. 15,00,000. The business of the firm 'Bisesar House' was thereafter carried on in accordance with the terms of the partnership. The important and material terms of the said partnership deed dated 18th February, 1930, may now be set out :

'7. If any further monies shall at any time or times be considered by the partners to be necessary or expedient for efficiently carrying on the said partnership sum not exceeding Rs. 5 lakhs (exclusive of interest on loans and fresh investment on Chirimiri Colliery) shall be paid to the partnership by the said firm : PROVIDED HOWEVER that Sir M. B. Dadabhoy shall pay for the value of the machinery required for Chirimiri Colliery to the extent of Rs. 2 lakhs to Rs. 3 lakhs from time to time as required and the value of the machinery so provided for by him shall be credited to his account No. 1 and debited in the partnership books of account in the account of the said Chirimiri Colliery and the said firm shall advance to the partnership such amount (over and above the said sum of Rs. 5 lakhs) as may be required for construction of the said colliery not exceeding Rs. 2 lakhs from the date of these presents.' (The account No. 1 referred to in this clause meant the account in which Sir Manekji Dadabhoy was debited with the amount of Rs. 15,00,000, that is, in the colliery business).

8. If any partner shall advance any sum of money to the partnership firm the same shall be a debt from the firm to the partners advancing the same and shall carry interest at the rate of 6 per cent. per annum during the continuance of the loan.

9. The Kamptee firm of the parties hereto of the first part shall be the bankers of the partnership.

10. The net profits of the partnership in each concern after payment of all outgoings and the interest on the monies due to the said firm and interest on current loans (if any) and after setting apart sufficient amount for depreciation at the rate as hitherto done shall belong to the partners in accordance with the shares hereinbefore mentioned and credited to the loan account of Rai Bahadur Bansilal Abirchand in each concern separately as hitherto done.

12. The entire management of all the partnership business and properties shall be under the mutual joint management and control of the parties hereto but in the event of the death of Sir M. B. Dadabhoy the sole and entire control and management will rest with the said firm and they shall furnish to the heirs, executors or administrators of Shri M. B. Dadabhoy will have no right to take any part in the management of the said partnership business and properties. Provided that on the liquidation of Sir M. B. Dadabhoy's share of the liabilities, his heirs, executors and nominees shall have full right to jointly take part in the management and control of the said partnership business and properties.'

10. Clause 13 then mentions the properties of Sir M. B. Dadabhoy and recites that all the debts due by Sir M. B. Dadabhoy in his account No. 1 to the Kamptee firm will be recovered from the properties and income of those properties. Then clause 14 states :

'The said Sir M. B. Dadabhoy agrees with the said firm that the said firm shall hold the right, title and interest of Sir M. B. Dadabhoy in the concerns mentioned in the preceding clause hereof by way of security for payment of the debts for the time being due by him to them until the said debts shall be fully satisfied and that the and his heirs, executors and administrators shall not be entitled to sell, mortgage or otherwise alienate the same or his or their right, title and interest therein till the whole liability of Sir M. B. Dadabhoy to the said firm has been fully liquidated with interest.'

11. Clause 16 then provides that Sir M. B. Dadabhoy will hand over to the Kamptee firm safe custody receipt for 20,000 shares out of the shares standing in his name in the Central Provinces Prospecting Syndicate Ltd. (now known as the Central Provinces Manganese Ore Company Ltd.) after they are received by him from the Eastern Bank, London, wherein they have been deposited at present : provided however that Sir M. B. Dadabhoy shall be entitled during his lifetime to receive and use for his own benefit the dividends during his lifetime to receive and use for his own benefit the dividends which may be declared on the said shares and after his demise his heirs, executors and administrators shall hand over the safe custody receipt of the said 20,000 shares at foot of his said account No. 1. Thus, the 20,000 shares held by Sir M. B. Dadabhoy were to be given as security for the amount due to the Kamptee firm from Sir M. B. Dadabhoy.

12. This partnership of 'Bisesar House' continued for some time and it was found by the Kamptee firm that the business of 'Bisesar House firm' which was being exclusively looked after by Sir Manekji was not being carried on in their interests, but it was carried on in such manner that it was proving detrimental to their interests. The relations, therefore, between Sir Manekji and the other partners of the firm 'Bisesar House' became strained and there were allegations and counter-allegations against each other. One of the terms of the partnership, which is in clause 23, was as follows :

'23. This partnership agreement shall not be terminated by any of the parties hereto until the whole amount due by Sir M. B. Dadabhoy foot of the said accounts is fully paid to the said firm.'

13. In spite of this term in the agreement, the Daga partners of the firm found it impossible to carry on the business in partnership with Sir M. B. Dadabhoy and as a result of this straining of relations between the parties the four Daga partners who were the partners of the Kamptee firm and were the partners of the 'Bisesar House firm' along with Sir M. B. Dadabhoy filed a civil suit against Sir M. B. Dadabhoy making several allegations and charges against the management of Sir M. B. Dadabhoy and claimed several reliefs in the suit. The suit was styled as a suit for dissolution of partnership, taking of accounts and recovery of money valued at Rs. 11,72,700-1-9. It may be noted that the four Daga brothers were carrying on their business as bankers and in other fields in partnership with each other under the name and style of 'M/s. R. B. Bansilal Abirchand Firm', that is, the 'Kamptee firm' and it was the 'Kamptee firm' which had entered into partnership with Sir M. B. Dadabhoy and formed a new firm 'Bisesar House' but since a 'firm', as such could not, under law, enter into a partnership with another firm or an individual the four partners of the 'Kamptee firm' entered into a partnership with Sir M. B. Dadabhoy to form a new partnership, 'Bisesar House firm'. However, the four Daga partners who were common in both these firms completely identified themselves with the 'Kamptee firm' which would appear from the plaint filed in the suit. The said suit was filed on or above 27th July, 1942, in the court of the then Additional District Judge, Nagpur. It appears that before the suit was filed one of the original pertness Sir Bisesardas Daga, died on 18th August, 1941, and his heirs, who also became the partners in the said firm, had joined in the suit.

14. After setting out the relevant clauses of the deed of partnership, the plaintiffs, that is, the 'Kamptee firm', alleged that the defendant in that suit, Sir M. B. Dadabhoy, has wilfully and persistently committed breaches of the terms of the said partnership and gave several breaches alleged to have been wilfully committed by sir M. B Dadabhoy Paragraph 14 of the plaint reads :

'14. The plaintiffs say that as hereinafter specially mentioned the defendant has wilfully and persistently committed breaches of the terms of said partnership in following among other respects :-

(a) The defendant has contrary to his obligation under clause (7) of the said deed failed to pay for value of the machinery required for the Chirimiri Colliery in spite of repeated demands.

(b) The defendant in spite of repeated demands has failed to hand over to the plaintiffs' firm the safe custody receipt in respect of the 20,000 shares of the Central Provinces Prospecting Syndicate Ltd. (now known as the Central Provinces Manganese Ore Company Ltd.) in terms of clause (16) of the said deed.

(c) The defendant has in contravention of clause (12) of the said deed continuously prevented the plaintiff's firm from participating in the management of the suit-firm.

(d) The defendant has contrary to the terms of clause (11) of the said deed and in breach of his obligations as a partner wrongfully made secret profits in the business of the suit-firm and failed to render a true and faithful account of his management.'

15. The plaint then alleged in paragraph 15 as under :

'15. The plaintiffs further say that the defendant also has as hereinafter specifically mentioned, been guilty of conduct which is likely to affect prejudicially the carrying on of the business of the suit-firm and has so conducted himself in matters relating to the business of the suit-firm that it is not reasonably practicable for the plaintiffs to continue to carry on the business of the suit firm in partnership with him.'

16. After setting out the various acts of misconduct on the part of the defendant, Sir M. B. Dadabhoy, and his failure to act up to the terms of the partnership agreement, the plaint recites as under :

'49. The plaintiffs submit that in addition to the moneys that may be found due on taking of partnership accounts the defendant is liable to have included the said sum of Rs. 8,45,700-1-9 being the balance due at the foot of the said defendant's account No. 1 in the said accounts or in the alternative to recover the said balance from the defendant.

50. The plaintiffs say that they are entitled to one-half share of the assets of the suit-firm and a similar share in the profits thereof. The plaintiffs are also the creditors of the suit-firm in the sum of Rs. 62,89,201-0-4 and hold the defendant's share in the suit-firm as their security. The plaintiffs say that the defendant will manipulate the accounts, papers and vouchers of the suit-firm if allowed to participate in the management of the suit-firm with the plaintiffs. The plaintiffs submit that in view of the misconduct of the defendant he may be restrained from interfering with the management of the suit-firm pending the hearing and final disposal of the suit.'

17. It will be clear from paragraph 50 of the plaint quoted above that the plaintiffs as partners of the 'Kamptee firm' claimed the amount of Rs. 62,89,201-0-4 as creditors of the Bisesar House firm and claimed to hold the defendant's share in the suit-firm as their security. One of the principal objects of the suit was, therefore, to secure the large amount of Rs. 62 lakhs and odd which was due to the Kamptee firm from the Bisesar House as being advances made to the Bisesar House from time to time for which the Kamptee firm considered itself to be a creditor.

18. The plaintiffs in that suit being the partners of both the Kamptee firm and the Bisesar House firm felt some technical difficulty in the Kamptee firm filing a suit for recovery of the amount due to it from the Bisesar House firm and it was considered that the advances of amount by the Kamptee firm to the Bisesar House firm could only be recovered on accounts being taken of the Bisesar House firm on the dissolution of partnership, and, hence, the suit was filed by the partners of the Kamptee firm who were also the partners of the Bisesar House firm for dissolution of partnership with Sir M. B. Dadabhoy and for taking of accounts in which they also claimed recovery of certain tentative amount which might be found due on taking of accounts and also asserted that they were creditors of the Bisesar House firm to the extent of Rs. 62 lakhs and odd which they desired to be secured by the defendant. Several reliefs were claimed in this suit and I shall set out some of the reliefs which are material for the purposes of this reference. They are :

(1) that the suit-firm may be ordered to be dissolved as from the date of the suit or from such other date as may appear to the court just and proper;

(2) that an account may be taken of the suit-firm by and under the direction of this court and in the said accounts the defendant may be ordered to render an account of all the secret profits, commissions, allowances and other benefits received by him in respect of the partnership dealings and not duly accounted for by the suit-firm;

(3) that the defendant may be ordered to render a true and complete account of his management of the suit-firm on the footing of wilful default;

(4) that the defendant may be ordered to pay to the plaintiffs such sum as may be found due by the defendant to the plaintiffs' firm on proper accounts being made up;

(5) that the defendant may be ordered to pay to the plaintiffs the sum of Rs. 8,45,700-1-9;

(6) that it may be declared that 20,000 shares of the Central Provinces Prospecting Syndicate Ltd. (now known as the Central Provinces Manganese Ore Co. Ltd.) have been hypothecated with the plaintiffs by the defendant to secure repayment of the moneys due by the defendant to the plaintiffs on taking of the accounts of the suit-firm and the balance due by the defendant to foot of the defendant's account No. 1;

(7) that it may be declared that the amount that may be found due by the defendant to the plaintiffs on taking of partnership accounts and the balance due at foot of the said defendant's account No. 1 are duly charged on the properties mentioned in exhibit 'B' hereto;

(8) that it may be declared that the New Chirimiri Colliery belongs to the suit-firm and that the defendant has no exclusive right or interest therein;

(9) that in the course of such winding-up or otherwise the said 20,000 shares of the Central Provinces Prospecting Syndicate Ltd. (now known as the Central Provinces Manganese Ore Co. Ltd), and the right, title and interest of the defendant in the properties described in exhibit 'B' may be sold by and under the directions of this court and the net sale proceeds thereof may be utilised in or towards the satisfaction of the decree that may be passed in favour of the plaintiffs against the defendant in the suit;

(10) that pending the hearing and final disposal of this suit the defendant may be restrained by an order or injunction of this court from managing the suit firm or from directly or indirectly interfering with or obstructing the management of the suit firm by the plaintiffs or from charging dealing with or disposing of any of the assets of the suit-firm or the said 20,000 shares referred to in prayer (h) hereto or the defendant's right, title and interest in the properties described in exhibit 'B' hereto or from receiving or recovering any of the outstandings thereof.

19. It would be seen that besides claiming the reliefs of dissolution of partnership and taking of accounts thereof, the plaintiffs in that suit claimed several substantial reliefs which were of great importance to the plaintiffs for safeguarding the interest of their firm and the safeguarding the interest of their firm and the safeguarding of which in fact impelled the filing of the suit, which was filed in the manner in which it has been done as it was considered that it could not be done without giving this suit a form of a suit for dissolution of partnership and taking of accounts since the plaintiffs were the partners of both these firms. While this suit was pending, the Kamptee Firm also filed another suit on or about 2nd of January, 1945, against the partners of the Bisesar House amount was found due as on 31st December, 1944, from the defendants to the plaintiffs inclusive of compound interest at 6 per cent. per annum with yearly rests. In this plaint it has been averred in paragraph 15 thereof as under :

'15. In view of the facts mentioned in the foregoing paragraph it as believed that the accounts as between the defendants and the plaintiff firm will be an item in the accounts in the said suit. As, however, since the year 1943 that the first defendant has refused to sign the accounts in the plaintiffs' books of accounts when submitted to him each year as therefore, the plaintiff-firm is filing this suit for greater caution and in order to avoid the possible plea of a bar of limitation. The plaintiff-firm files this suit without prejudice to the rights, remedies and contentions in the said suit No. 8B of 1943.' (Suit in the year 1942).

20. This would show that, though this latter suit was filed by way of abundant caution, the plaintiffs entertained a belief that they would not recover the amount of Rs. 62 lakhs and odd which was then due from the Bisesar House in the suit of 1942. The said suit, which was first numbered as 2B of 1942, was later on numbered as 8B of 1943, on transfer, which was, besides the present suit, not only claiming the dissolution of partnership and taking of accounts of the Bisesar House firm, but the recovery of Rs. 62 lakhs and odd due by the Bisesar House firm to the Chirimiri Colliery which was acquired by Sir Manekji in his own name, claiming to be his own and thus eventually the plaintiffs claimed a declaration of the title of the Kamptee firm to the new Chirimiri Colliery to the extent of its half share. By the suit the plaintiffs who are the partners of the Kamptee firm also claimed a charge on the property of Sir M. B. Dadabhoy falling to his share in the Bisesar House fi rm for the security of the amounts due by the Bisesar House and Sir M. B. Dadabhoy to the Kamptee firm. They also claimed by this suit the security of the 20,000 shares which Sir Manekji Dadabhoy held to secure the loan due from Sir Manekji Dadabhoy. Besides, the plaintiffs also claimed an injunction restraining the defendant, Sir Manekji Dadabhoy, from taking part in the management of the business of the Bisesar House so that the property of the Bisesar House firm and Sir Manekji Dadabhoy. If the plaintiffs' fears were true the assets of the Bisesar House firm could have been dissipated and the plaintiffs could not have been able to get much out of the said firm and the Kamptee firm would also have not get much out of the said firm and the Kamptee firm would also have not been able to recover the large amounts advanced by it to the Bisesar House firm as well as the amount due from Sir Manekji Dadabhoy. The predominant idea in bringing the suit of 1942 was, therefore, to salvage as much property of the Bisesar House firm for the benefit of the Kamptee firm so that it could recover a substantial amount of the advances made by them as well as a substantial part of the assets of the Bisesar House partnership.

21. A dispute had arisen between the Kamptee firm and the Bisesar House firm as to whether the interest chargeable on the advances made by the Kamptee firm from the Bisesar House firm from time to time were at compound interest at yearly rests or at simple interest. This made as lot of difference in the amount of interest of interest due to the Kamptee firm and this dispute had also to be settled which was also sought to be settled in this suit.

22. In reply to the allegations made in the plaint in Civil Suit No. 2B of 1942 (then C. S. No. 8B of 1943), this is what the defendant had to say with respect to the nature of the interest to be charged :

'91. The loan due by the partnership to the plaintiffs, though not accepted as correct by the defendants, is according to the plaintiffs as admitted in their exhibit 'H' with the plaint, Rs. 62,89,200, which is inclusive of the large sum of Rs. 74,00,203 on account of interest alone as per statement filed herewith (exhibit W. S. 39). This fact leaves no doubt that the entire original loan of capital advanced by the plaintiffs to the partnership is already fully liquidated and the present loan represents not the capital not the whole interest but a part and not the whole of the amount of accumulated interest, and if the partnership has paid back the whole capital advanced by the plaintiffs, which payment represents half share of the defendant, there could be no earthly reason why the balance of accumulated interest yet due will not be paid off any why the defendant should try to obstruct such repayment to the utter detriment and disregard of his own interest.'

23. The trial court framed several issues in the suit one of which was :

'21. Whether the plaintiffs are the creditors of the suit-firm to the extant of Rs. 62,89,201-0-4 as alleged by the plaintiffs ?'

24. Though this issue was specifically raised, the trial court held that it was not necessary at that stage to determine to what extent the suit-firm, that is, Bisesar House, was indebted after all the accounts have been made up. The trial court substantially found in favour of the plaintiffs and passed a preliminary decree in favour of the plaintiffs in the suit and gave several direction in the said decree. It was found by the court that there were good grounds for ordering dissolution of the partnership. Being aggrieved by the judgment and decree of the Additional District Judge, the defendant, Sir Manekji Dadabhoy, filed an appeal in the then High Court at Nagpur which was registered as First Appeal No. 115 of 1945. The High Court held that the interest payable was not compound but only simple interest. It further held that the moneys were advances of loan and that the moneys advanced by the Kamptee firm were items in the partnership account and could only be re aisled on the dissolution of the partnership or by a private adjustment of rights between the parties. It was held that no amount was fixed as regards capital to be invested by the partners for the purpose of commencing or carrying on the several partnership businesses and as no limit was put to the capital to be invested by the partners in the several business it cannot be said that they advanced or paid any sums beyond the amount of capital they agreed to subscribe. It was further held that the new Chirimiri Colliery was the exclusive property of Sir Manekji. During the pendency of the appeal a working agreement was reached between the parties in pursuance of which a consent order was passed by the High Court on 30th January, 1946, by which the defendants agreed to finance the business of the partnership on certain terms which are agreed to finance the business of the partnership on certain terms which are agreed to by Sir Manekji. In view of that agreement, the Kamptee firm was held entitled charge compound interest at 6 per cent. per annum with yearly rests from the date of the preliminary decree to the date of realisation on the amount found due on that date and on the loan advanced by the Kamptee firm after that date. In the decree passed by the High Court several directions were given by the High Court for the taking of the accounts of the partnership.

25. Both the parties were dissatisfied with the judgment of the High Court. Ultimately, the matter went to the Privy Council by special leave and the appeals were subsequently transferred to the Supreme Court. The appeals before the Supreme Court were heard for a number of days and, ultimately, the parties arrived at an agreement which was made the rule of the court. In the appeals before the Supreme Court some of the parties were minors and the Supreme Court after scrutinising the terms of the agreement and satisfying itself that the agreement was lawful, sanctioned the compromise and passed a consent decree in terms of the compromise arrived at between the parties. Some of the terms of the consent decree may be stated :

'1. That the new Chirimiri Colliery was held by Sir Manekji B. Dadabhoy (hereinafter referred to as the 'original respondent') for and on behalf of the suit partnership and that accordingly for the purpose of the distribution of the assets of the partnership amongst the parties to the above appeals the 3,000 shares of the Dadabhoy's new Chirimiri Ponri Hill Colliery Coy. Ltd. shall belong to and be divided amongst the appellants to the Appeal No. 166 of 1952, and respondents to Appeal No. 167 of 1952 (hereinafter for brevity's sake called the appellants) on the one hand and the respondents to the said Appeal No. 166 of 1952, and appellants to the said Appeal No. 167 of 1952 (hereinafter for brevity's sake called the respondents) on the other hand in equal share.

2. That the advances made from time to time by the Kamptee firm of the appellants as bankers to the suit partnership since 1st November, 1929, upto the date hereof were by way of loans to the suit partnership and not by way of capital.

3. That notwithstanding any directions to the contrary contained in the said decree of the Nagpur High Court dated 11th April, 1947, the appellants shall be entitled to and shall charge on all advances made by the Kamptee firm from time to time as bankers to the suit partnership interest calculated at the rate of 6 per cent. per annum, on the footing of compound interest with yearly rests from 1st November, 1929, up to 11th April, 1947, but shall not charge interest, simple or compound, on the total amount due as on the 11th April, 1947, by the suit partnership to the said Kamptee firm of the appellants as bankers for the period commencing from the 11th April, 1947, up to the date thereof.

4. That instead of taking accounts of the suit partnership and realising the assets and effects of the suit partnership by sale or otherwise, the assets of the suit partnership shall be divided in specie between the appellants and the respondents in the manner hereinafter mentioned, they having taken into consideration the liabilities of the original respondent to the said partnership and to the appellants including his liability in respect of the loans and advances made by the Kamptee firm as bankers to the suit partnership.'

26. The other terms of the consent decree are not very material except that in a further term it was stipulated that all the collieries and ginning and pressing factories and property known as 'Bisesar House' with all rights in mining leases, prospecting licences, plant, machinery, stores, stocks of coal, spare parts and other articles and things including furniture and fittings lying therein, the cash in hand and at banks or in the transit at the said collieries and factories and also in the hands of the receiver appointed in the said suit, all outstandings and book debts, claims and demands against third parties, claims for refund of taxes paid to the income-tax department, the benefit of all contracts, orders and engagements in connection with the aforesaid business and all profits made by the said businesses up to date and all other assets of the suit partnership wheresoever situate including the goodwill thereof do absolutely belong to and vest in the appellants (Dagas) and the respondents (Sir Manekji's legal representatives) as representing the estate of the original respondent shall have no claim or interest of any kind whatsoever in the aforesaid properties, movable or immovable and that this decree were to operate as a transfer and assurance of all the aforesaid properties movable and immovable, in favour of the appellants (Dagas), freed and discharged from all claims and demand, right, title and interest of the respondents in the same or any part thereof. The other civil suit filed by the Kamptee firm against the Bisesar House for the recovery of Rs. 55 lakhs and odd was under the same consent decree dismissed. It may also be stated at this stage that the High Court had confirmed the decree of the trial court for dissolution of partnership as from 17th October, 1945, and that a receiver of the partnership estate and effects was appointed to get in all outstanding book debts and claims of the partnership and a commissioner was also appointed to take the accounts of the partnership.

27. Having set out the full facts leading up to the decree on consent passed by the Supreme Court, it will be useful now to turn to the questions referred to for the decision of this court under section 66(2) of the Indian Income-tax Act, 1922. In spite of the consent decree passed by the Supreme Court in which it has been expressly stated in clause (2) of the said decree that the advances made from time to time by the Kamptee firm of the appellants as bankers to the suit partnership since 1st November, 1929, up to the date of the consent decree were by way of loans to the suit partnership and not by way of capital, it has been contended on behalf of the revenue that the advances made by the Kamptee firm were by way of capital contribution and not advances of loan. It is urged that the parties themselves, contrary to the decision of the High Court, have agreed to treat the advances as loan and not by way of capital contribution and such an agreement between the parties would not be binding on the department and it would be open to this court, nay binding, to accept the finding given by the High Court which was an adjudication after due deliberation The submission made on behalf of the revenue appears to be based on the fact that the income-tax department was not a party to the consent decree before the Supreme Court and whatever the parties may agree between themselves would not be binding on the department, which was not a party to the agreement. This submission no doubt seems plausible but then it is not understood as to how the department wants this court to treat the finding given by the then Nagpur High Court as binding on this court and in case, to accept that finding as the only correct finding. If the consent decree is not binding on the revenue, then the High Court's decree is equally not binding for the reason that the department was not a party to the suit between the partners. If the Nagpur High Court's decision is held to be binding, as contended for the revenue, then the decree of the Supreme Court, though on consent, must equally be held to be binding. Though the decree passed by the Supreme Court is on consent, it cannot be lightly brushed aside. It must be seen that the appeals were argued before the Supreme Court, at least for four days as will be seen from the decree itself and thereafter the parties arrived at a compromise with full under standing itself and thereafter the parties arrived at a compromise with full under standing and in the light of the discussion that must have taken place during the course of the hearing. Further, the Supreme Court must have satisfied itself that the compromise was lawful and, thereafter, it must have passed the consent decree. It has also to be seen that some of the parties before the Supreme Court were minors and in according sanction to the said compromise the Supreme Court must have examined the legality of the agreement as well as its being for the benefit of the minors. A faint suggestion was made on behalf of the revenue that this compromise was entered into in collusion with a view to deprive the revenue of its legal dues, but there is nothing on record to show that that was the intention of the parties and if the terms of the agreement were entered into in collusion by the said parties, then it would not have been endorsed by the Supreme Court and made a decree of the court. It is true that the department not being a party to the suit at any of its stages, the decree would not operate as res judicata against the department not would it work out any estoppel against it, but so would the High Court decree. Nevertheless, the decree passed by the Supreme Court which would be the only operative decree would have great value in considering the nature of the advances made by the Kamptee firm to the Bisesar House firm. The decree of the Nagpur High Court, on which the learned counsel for the revenue very much relies, has merged in the decree passed by the Supreme Court though on consent and the decree of the High Court is no longer an operative decree and, in my opinion, the revenue is not entitled to take supported of the findings given by the High Court, much less heavily, as is being done.

28. Even if the decrees of the trial court and the Supreme Court are ignored, as is contended, in which case the decree of the High Court will also have to be ignored, the position, to my mind, would not be different from what has been agreed to by the parties before the Supreme Court. The agreement of partnership between the Dagas and Sir Manekji is itself good evidence to show that the amounts advanced by the Kamptee firm were by way of loans and not by way of capital contribution. In clause 7 of the said agreement, the Kamptee firm had undertaken to invest the amount to the extent of Rs. 5 lakhs provided Sir Manekji also invested moneys to the extent of Rs. 2 lakhs to Rs. 3 lakhs for providing machinery for the collieries and the same clause further provides that if any further provides that if any further amount is required for the construction of the Chirimiri Colliery, the Kamptee firm shall advance to the partnership such amount (over and above the said sum of Rs. 5 lakhs) not exceeding Rs. 2 lakhs. This clause would show that the amount to the extent of Rs. 5 lakhs was to be paid by way of contribution on condition that Sir Manekji also contribution a substantial amount and any further sums beyond the amount of Rs. 5 lakhs would be by way of advances. This is further made clear by clause 8 which says :

'8. If any partner shall advance any sum of money to the partnership firm the small be a debt due from the firm to the partner advancing the same and shall carry interest at the rate of 6 per cent. per annum during the continuance of the loan.'

29. Clause 9 is still clearer in which it has been stated that the Kamptee firm shall be the bankers of the partnership (Bisesar House). These clauses, therefore, very clearly go to show that the amounts advanced by the Kamptee firm or by the partners of the Kamptee firm to the Bisesar House firm over and above the amount of Rs. 5 lakhs which were to be paid conditionally were in the nature of advances of loan and not by way of capital contribution. I may add that the finding given by the then Nagpur High Court is not binding on this court because, in the first place, it was not as between the parties to these proceedings and, secondly, because this is a different High Court, though the judgment of the Nagpur High Court is entitled to respect.

30. It was also contended that the amount of Rs. 62 lakhs and odd was not a loan advance, but a capital contribution because this amount was claimed in the suit for dissolution of partnership and was to be recovered in the account that was to take place on dissolution of partnership. It was urged that no specific relief was claimed by the Dagas with respect to this amount of Rs. 62 lakhs and odd as advances of loans. It may be stated that in the plaint, it has been specifically stated in paragraph 50 that the plaintiffs were the creditors of the suit firm (Bisesar House) in the sum of Rs. 62,89,201-0-4 and held the defendant's share in the suit firm as their security. This was also put in issue and by way of abundant caution the Kamptee firm has also filed a separate suit for the recovery of the amount but the same was kept pending in view of the earlier suit for dissolution of partnership and taking of accounts. The omission, therefore, to claim a specific relief with respect to this specific amount of Rs. 62 lakhs and odd in the suit for dissolution of partnership and taking of accounts would not lead one to conclude that the amount was not by way of loan because even if the amount was by way of loan by the partners, the said amount could be claimed as an item of account and would get priority over the distribution of the assets of the partnership amongst the partners in the dissolution proceedings. The Partnership Act itself contemplates advances of loans by partners and there is also a term to that effect in the agreement of partnership. Simply because the word is 'advances' by the partners to the partnership it would not make them a capital contribution if the agreement specifically shows that they are by way of loans.

31. I, therefore, come to the conclusion that the advances made by the assessee-firm, R. B. Bansilal Abirchand (Kamptee firm), to the firm 'Bisesar House', were in the nature of loans during the course of money lending business and do not represent the capital contribution of the Daga group of partners.

32. The next question is of real importance and concerns the allowances claimed by the assessee on account of the expenditure on litigation and the remuneration paid to Shri R. K. Saran with respect to aforesaid suit for dissolution of partnership and accounts which went up to the Supreme Court and other suit for recovery of debt under section 10(2) (xv) of the Income-tax Act, 1922. In this connection, it is vehemently urged by Mr. G. N. Joshi, the learned counsel for the revenue, that the litigation in respect of which the expenses are claimed had nothing to do with the 'Kamptee firm' as such, but was by the partner of the 'Bisesar House firm', namely, the Dagas as partners of the Kamptee firm. It was, therefore, claimed that if the litigation expenses and the remuneration paid to Mr. R. K. Saran could be claimed, they could be claimed only by the plaintiffs in that suit in their individual capacities and not as partners of the Kamptee firm. It was further urged that even the Daga brothers could not claim the litigation expenses as admissible expenses because they had failed the suit as partners of the firm 'Bisesar House' for the purpose of winding up the business of the Bisesar House firm which could not be said to be for the purpose of the business. It was contended that when the firm 'Bisesar House' itself was to be would up, for which purpose the suit was filed, it could not be for the purpose of the business, that is, for carrying on the business. In no case, therefore, according to the revenue, the Kamptee firm was entitles to claim expenditure on litigation and the remuneration paid to Shri R. K. Saran as admissible expenditure under section 10(2) (xv) of the Income-tax Act.

33. It was urged that in the case where there are common partners between two firms, one firm could not sue the other even for the recovery of the debt advanced by the former firm to the latter and the suit could only be by partners for the dissolution of partnership and accounts. Reliance was placed on Rustomji v. Seth Purshotamdas, where it was held that the firm could not be sued by one of the partners for the money lent by him of which he is a members and the advance was an item in the partnership account. However, even in this case, though a suit was brought by one of the partners against the firm, the suit was for recovery of an amount of loan. The suit was not thrown out, but equities were adjusted between the plaintiff as a creditor and the firm in which he was a partner. Since than the position is changed by the Civil Procedure Code of 1908, and Order 30, rule 9, now enables a suit between a firm and one or more of its partners and a suit between firms having one or more partners in common. Thus, even though the partners in the Kamptee firm and the Bisesar House firm were mostly common, there was nothing to prevent the Kamptee firm suing the Bisesar House firm for the recovery of the amount of Rs. 62 lakhs and odd which was advanced as loan by the Kamptee firm, as such a suit could be maintainable and a decree also could be passed. The only thing which rule 9 of Order 30, Civil procedure Code, provides is that the execution will not be issued except by leave of the court and on and application for leave to issue such execution, the court may direct all such accounts and enquiries to be taken and made and direction given as may be just. There was, therefor, no bar to the Kamptee firm suing the Bisesar House for the recovery of Rs. 62 lakhs and odd and incurring expenses for that purpose and the amount found due to Kamptee firm should be paid by the Bisesar House firm without recourse to any execution or should be re covered in the execution proceedings by the leave of the court wherein the court may direct accounts to be taken and then the payment of the amount due. In Ranchhoddas Khimji and Co. v. Karamsey Jethalal & Co., it has been laid down that Order 30, rule 9, of the Code of Civil Procedure, contemplates the possibility of a suit between firms having one or more partners in common and it proceeds to state what procedure shall apply to such suits as well as what could be done in the case of execution of a decree in any such suit. If, therefore, the Kamptee firm were to file a suit for the recovery of Rs. 62 lakhs and odd against the Bisesar House firm in spite of most of the partners being common, the expenses on such litigation could certainly be claimed by the Kamptee firm. They would be expenses necessary for the purpose of the business of the Kamptee firm and they could be made for the benefit or for the carrying on or for the purposes of the business of the Kamptee firm. Likewise, the Kamptee firm could also have brought a suit against Sir Manekji for a declaration that the New Chirimiri Colliery did not exclusively belong to Sir Manekji, but it belonged to the Bisesar House firm in which the Kamptee firm has a half share. A distinction has been made in several cases as to whether expenditure on litigation would be claimed. It has been laid down that where such expenditure is of capital nature then it is not a deductible allowance, but where the expenditure is of a revenue nature then it is deductible. For example, where a property is to be acquired newly by a person and for acquiring such property expenditure is incurred, then in that case, it would be an expenditure of a capital nature, whereas where property has already been acquired and expenditure is incurred to defend or preserve it, then the expenditure incurred for that purpose would be of a revenue nature. As regards the New Chirimiri Colliery the property has already been acquired by Sir Manekji in his own name, though it was contended by the Kamptee firm that it was for and on behalf of the Bisesar House firm and the Bisesar House firm was the owner of that colliery. The property was not to be newly acquired but the Kamptee firm in such a suit would be only claiming a title to half of the said colliery, being eight annas partners in the Bisesar House firm. Such an expenditure would be of a revenue and could be claimed as a deductible allowance. It has, however, to be seen that the eight annas share of Sir Manekji in the Bisesar House as well as his personal property was to be a security for the debts to the Kamptee firm by the Bisesar House firm and it was in the interest of the Kamptee firm to see that all their property was preserved intact so as to afford a good security for the advances. A suit, therefore, to prevent wastage by Sir Manekji and to restrain him from interfering with the management of the Bisesar House firm business, would be a suit in the interest of the business of the Kamptee firm and for the preservation of its property and the expenses incurred would be of a revenue nature. These could be the various tests which could be laid down for finding out whether the expenses of this particular suit could be claimed as deductible expenses.

34. It has to be remembered that the assessee is the Kamptee firm which is claiming the deductions and it has to be seen whether these expenses have been incurred for the purposes of the business of that firm and not for the purpose of the Bisesar House firm. A suit for the dissolution of a partnership simpliciter between the partners of the firm and taking of accounts between them as partners stands on a different footing and where the suit is for the winding up of the business of the firm, it could not be said that the expenses incurred by the partners who bring the suit for dissolution of partnership would be for the purposes of the business of that firm, since so far as the business of the firm is concerned, there would be no longer any such business. But even in such a case where the defending partner were to defend the suit for dissolution of partnership in order to save the partnership from dissolution, such expenses could be said to be for the purposes of the business of the firm.

35. Here, the case stands on a quite different footing. There are certain features in this case which must be kept in mind. The Kamptee firm consists of the Daga partners who are also partners in the Bisesar House firm. In fact, the business in mining, colliery, etc., is the business of the Kamptee firm and in effect it entered into partnership with Sir Manekji Dadabhoy to form Bisesar House firm, but because of the legal difficulties, viz., a firm could not be a partner with another person or with another firm, that the names of the partners of the Kamptee firm were put in the agreement entered into with Sir Manekji. In fact, the firm has no legal status and is not a person in the eye of law and it is collectively the partners who form a partners that is compendiously called a firm, but otherwise the firm or the partners are so identified that they cannot be separated from each other. The Kamptee firm and the Daga partners are thus convertible terms. It has then to be seen that the capital was contributed to the Bisesar House firm not by the individual partners as such but it came from the funds of the Kamptee firm. Similarly, the advances made from time to time as loans were also by the Kamptee firm and not by the individual partners. There is no individual account in the Bisesar House firm of the loans advanced by the partners as such in their individual capacities, but the loans are shown to be due to the Kamptee firm which is the banker and financier and which does several other businesses. The businesses of the Kamptee firm are not done by the individual partners and the partnership agreement with the Bisesar House firm also shows that the Kamptee firm was to supply the funds by way of contribution as well as loans. Similarly, the New Chirimiri Colliery was claimed from the Bisesar House partnership not by the individual Daga partners as such, but by the Kamptee firm which claimed that it belonged to the Bisesar House firm and not to Sir Manekji exclusively. The amount of loans would have been repaid by the Bisesar House firm to the Kamptee firm even without a suit for dissolution as they were not a part of the capital contribution. If such loans were repaid by the Bisesar House firm, they could have gone only to the Kamptee firm and not to the individual partners and the individual partners could have only claimed a share in the profits in the Kamptee firm and could not have claimed a share as such in the repayment of the loans. In fact, interest on the loans advanced has been paid by the Bisesar House firm to the Kamptee firm and not to the individual partners. This payment of interest was subject of income-tax assessments. The Bisesar House firm claimed reduction on account of the payment of interest to the Kamptee firm for the loans borrowed by the Bisesar House firm from the Kamptee firm and such deductions were allowed in the assessment of the Bisesar Ho use firm. In consequence, the interest earned by the Kamptee firm was charged in the hands of the Kamptee firm as an income and the interest amount received by the Kamptee firm has been assessed accordingly. This assessment was the subject of a decision of this court in R. B. Bansilal Abirchand v. Commissioner of Income-tax, which was later on affirmed by the Supreme Court in R. B. Bansilal Abirchand Firm v. Commissioner of Income-tax. It is thus clear that the amounts were advanced from time to time by the Kamptee firm to the Bisesar House firm and not by the individual partners and such advances would be recovered by the Kamptee firm from the Bisesar House firm.

36. It has further to be seen that even after the winding up of the Bisesar House firm either privately or through court, the amounts falling to the share of the Daga partners as well as the other assets which would fall to their share would go to the Kamptee Firm and not to the individual Daga partners and they could not claim those properties as their separate properties. That would form part of the assets of the Kamptee firm and it would be only in the dissolution proceedings of the Kamptee firm that each of the individual partners would claim a separate share.

37. It has further to be seen that the expenses for the suit have been met by the Kamptee firm and not by the Daga partners individually and so also the payments made to Shri R. K. Saran for the purposes of this litigation. These expenses, if recovered would again go to the coffers of the Kamptee firm and not to these individual partners in their individual capacities. Thus, for all practical purposes, it was the Kamptee firm which, acting through its partners, was the partner in the Bisesar House firm and this can also be seen from the partnership agreement itself wherein at several places the Kamptee firm has been mentioned. The plaint also shows the Kamptee firm at several places and even the Supreme Court decree on consent shows that the Kamptee firm was the real partner acting through its partners and there was a complete identity between the Kamptee firm and the Daga partners. It would thus appear that, though the suit for dissolution of partnership and other matters has been brought in the names of the Daga partnership and other matters has been brought in the names of the Daga partners, it was really the Kamptee firm which can be said top have brought the suit for all practical purposes because it was the Kamptee firm which was interested in seeing that its business was not affected in any way. The dissolution of partnership and of taking of accounts was found necessary for the purposes of its business as otherwise if the Bisesar House firm had suffered losses, the losses would have fallen on the Kamptee firm itself which would have affected the business of the Kamptee firm. Not only that, but also the business of the Kamptee firm would have suffered substantially if it had not been able to recover the amount of the advances which it had made to the Bisesar House firm. It could, therefore, be said that this litigation was necessary for the purposes of the business of the Kamptee firm, but since the Kamptee firm as such could not sue for the dissolution, the suit had to be filed by the partners. Bisesar House firm's business is of no consequence in the present case as it is not the assessment of that firm which is under consideration. What has to be seen is whether the expenses were necessary for the purposes of saving or preserving the business of the Kamptee firm or that it was necessary for carrying on the business of the Kamptee firm and in its interest. On the facts appearing in this case, there can be no doubt that the suit either for the dissolution of partnership or for taking of accounts or for the recovery of the loan of Rs. 62 lakhs and odd or for the injunction against Sir Manekji from interfering with the management and/or other reliefs which have been asked for in that suit, was necessary for the purposes of the business of the Kamptee firm and to save it from colossal loss and the expenditure which has been made in this litigation could be said to be expenditure incurred for the purpose of the business of the Kamptee firm which is the assessee in the present case.

38. The matter could be looked at from another point of view. Besides the capital contributions, other large amounts were invested by the Kamptee firm in the Bisesar House firm by way of loan advances and on the date of the suit as much as Rs. 62 lakhs and odd were recoverable by the Kamptee firm from the Bisesar House firm. That amount had to be saved and there was no prospect of recovering that amount if the deteriorations in the affairs of the Bisesar House firm were allowed to continue. Similarly, the New Chirimiri Colliery was acquired from the funds of the Bisesar House firm, but Sir Manekji was claiming exclusive title in him to the same. That would again have been detrimental to the interest of the Kamptee firm. For that purpose also a suit for declaration would have been necessary besides this, there was a dispute between the Kamptee firm and the Bisesar House firm as regards the rate of interest to be charged on the loan advances. The Bisesar House firm through Sir Manekji was claiming that the interest chargeable was simple interest, whereas the Kamptee firm was contending that the interest was compound. That would have made a lot of difference as Sir Manekji has himself stated in the suit that the charging of compound interest. That was, therefore, a major dispute between the two firms. Besides this, the Kamptee firm was to have security from Sir Manekji of all his immovable and movable properties including the 20,000 shares of the Central Provinces Manganese and Ore Company Ltd. and for all these purposes, it was necessary to claim a declaration to claim recovery of the amount, to claim an injunction restraining Sir Manekji from interfering with the management of the Bisesar House firm as it was hithertofore to the detriment of the Kamptee firm and for the appointment of a receiver. All these reliefs were in fact claimed in this suit. The predominant object, therefore, of the Kamptee firm was to secure all these things so as to prevent any wastage of the assets of the Bisesar House firm and to prevent detriment to the Kamptee firm and even though according to the terms of the partnership agreement, the Bisesar House firm was not then dissoluble, a suit had to be filed for all these purposes which was filed in the form of a suit for dissolution of partnership and taking of accounts for the sake of avoiding multiplicity, but the main purpose was not the dissolution of partnership as such, but of securing the assets of the Kamptee firm as far as possible. Though the Bisesar House firm was to be dissolved, its business itself was not to be liquidated. Even though the Bisesar House on dissolution would be non-existent, the business itself would continue and would be carried on by the Kamptee firm by taking the whole or major portion of it to itself, which in fact has been ultimately done. The litigation was, therefore, mainly for saving the business as far as possible for the Kamptee firm and to recover the large advances.

39. We may now turn to the authorities cited on behalf of the parties. In Commissioner of Income-tax v. Maharajadhiraja Sir Kameshwar Singh of Darbhanga, the assessee was a shareholder in a company. The assessee's father was carrying on a money-lending business and lent a sum of money to the said company. Some of the shareholders of the company brought a suit against him alleging that he had agreed to take over the management of the mills and to finance it, but in breach of this agreement he failed to furnish the necessary finances with the result that they had suffered heavy losses. During the pendency of that suit, the assessee's father who had advanced the loan died and the assessee was substituted in his place. The suit was ultimately dismissed and the assessee claimed in his assessment case that the sum which he had incurred in defending the suit should be educated in calculating his income from the money-lending business. It has held in that the expenditure was incurred by the assessee solely for the purpose of earning the profits and gains of the money-lending business and he was, therefore, entitled to the deduction claimed. It would thus appear that, though the assessee was a shareholder of the company, the suit was defended by him not as a shareholder of the company but as a money-lender of the company and since his money-lending business was under assessment the expenditure was laid out for the purposes of that money-lending business to which deduction he was entitled. In the same volume in southern (H. M. Inspector of Taxes) v. Borax Consolidated Ltd., legal expenses incurred by the company in defending its title to a certain property were held an allowable deduction in computing the profits of the company for income-tax purposes. The facts were that the company required land for the purpose of its business. Subsequently, an action was brought against the company claiming that the company's title to the land and buildings erected thereon was invalid and in defending the action the company incurred costs. It was held that the sum was wholly and exclusively laid out by the company for the purposes of its trade and was in allowable deduction in computing the profits of the company for income-tax purposes. It was further held that the legal expenses incurred by the company did not create any new asset at all, but were expenses incurred in the ordinary course of maintaining the assets of the company and the fact that it was maintaining the assets of the company and the fact that it was maintaining the title, and not the value, of the company's business did not make any difference.

40. In Jutharam Jankidas v. Commissioner of Income-tax, the assessee was the money-lender and also a financing partner of another. The partnership was dissolved earlier and the assessee was entitled to receive some profits and capital from the other partner. That another partner took then another person as a new financing partner. It was alleged that the new financing partner of the other partner would pay over the agreed dues of the assessee. That financing partner made some payments and did not pay the remaining balance and, therefore, the assessee filed a suit to recover those dues from the other financing partner. It was held that the amount expended for that litigation was an allowable deduction in computing the profits of the assessee. Thus, it will be seen in this case that, even though the assessee was a partner of the earlier firm and had to recover the amount of his capital and profits, still the expenses laid our for that litigation were held to be an allowable deduction.

41. In Raghunath Prasad v. Commissioner of Income-tax, a suit for rendition of accounts between the partners was filed. The Allahabad High Court took the view that the money spent by one partner to enforce his right against another partner (expenditure incurred by a partner in a firm in a suit against another partner of the firm for rendition of accounts) cannot be said to be money laid out or expended wholly and exclusively for the purposes of the business as it is not an expenditure incidental to the business nor is money laid out to increase the profits of the business or secured property either directly or indirectly. This decision is distinguishable on facts from the present case. By taking the accounts the partner was to get only his dues back and has nothing to do with his business apart from the partnership business as such. This decision, therefore, could not be of any help to the department for the proposition which is before us.

42. Lachminarayan Modi v. Commissioner of Income-tax is, however, a case which is comparable to our case. In this case, the assessee carried on the business of manufacture of salt with some partners. There were differences between the assessee and his partners and the assessee had to instituted suit for dissolution of partnership and for other dues against the other partners and prayed for appointment of a receiver. A receiver was appointed and it was directed by the court that the receiver should carry on the salt business with a view to facilitate the collection of a considerable amounts money advanced to the labourers before the dissolution of the firm and also to complete the business left incomplete at the time of the dissolution. In pursuance of this order the receiver carried on the salt business and out of the total profits realised, a certain sum was paid to the assessee as his share of the income for the relevant previous year. The assessee claimed reduction of certain amount by way of legal expenses incurred by him in connection with the said partnership suit on the ground that it was a permissible deduction under section 10(2) (xv) of the Indian Income-tax Act, being a sum expended wholly and exclusively for the purposes of his business. It was held that though the main purpose of the suit was to bring about dissolution of the partnership and for other consequential reliefs, the protection of the assets of the firm by the appointment of a receiver was also one of the purposes. Thus, this decision goes so far as to hold that even the expenses in a suit for dissolution of partnership and rendition of accounts could be claimed if such a suit was for the purposes of the protection of the assets of the firm by the appointment of a receiver. In the case before us, the suit is much more than that in the Orissa case referred to above. In the case before us not only the property of the Bisesar House firm was to be protected but by protecting that property and business of the Kamptee firm was also to be protected as the Kamptee firm had direct interest in the Bisesar House firm and the decision aforesaid could apply to the present case with much greater force. It has further been decided in this case that for the purposes of section 10(2) (xv) no distinction can be made between the primary or secondary purpose for which the legal expenses could be said to have been incurred in the case of civil litigation and if it is impossible to apportion the total legal expenses between the legal expenses incurred in connection with appointment of a receiver on the one hand and the legal expenses incurred for dissolution of the partnership on the other, as two were inextricably mixed up, the entire legal expenses should be held to be for the purpose of protecting the assets of the firm during the transitional period. In the case before us, the suit for dissolution was only a secondary purpose and not the primary one, the primary purpose being the recovery of the large amount of advances of loans made by the Kamptee firm to the Bisesar House firm as well as to establish the title of the Bisesar House firm to the New Chirimiri Colliery in which the Kamptee firm could have half interest and further to establish its claim to compound interest and also to restrain Sir Manekji Dadabhoy from interfering with the management. This was the predominant object of the filing of the suit so that the whole property could be saved for the benefit of the Kamptee firm.

43. The facts of the cases in All India Reporter Ltd. v. Commissioner of Income-tax are somewhat different. In this case, a shareholder took proceedings for winding up of the company and the company incurred certain expenditure in defending the winding up proceedings. It was held that such expenditure was wholly and exclusively for the purposes of the business deductible under section 10(2) (xv) as such expenditure enable the company to continue to run and earn profits from the business. This decision has not much bearing on the present controversy.

44. In C. T. Narayanan Chettiar v. Commissioner of Income-tax, the question related to the allowance of a bad debt claimed by the assessee under section 10(2) (xv). The assessee was doing money-lending business and was a partner in a firm constituted for the purpose of carrying on business in exports and imports. The partnership deed provided that each partner should contribute a certain amount towards capital and any further sum put in by any partner could be treated as advances of loan at interest. The assessee advanced certain loans to the firm. He had also borrowed certain amounts from the firm at interest. On dissolution of the partner-ship firm, account of the amounts advanced and borrowed was taken and the net credit balance in favour of the assessee was found to be Rs. 78,974. There were certain arrangements with respect to the other matters in the dissolution. This amount of Rs. 78,974 could not be recovered and was claimed as a bad debt. It was held that the assessee had invested the moneys in the firm specifically as advances and in its capacity as a money-lender and the amount could be claimed as a debt. Thus, the two capacities of a partner and the money-lender were kept apart and the amount due on account of the money-lending transaction was permitted as a bad debt.

45. In a decision of the Bombay High Court in premier Construction Co. Ltd. v. Commissioner of Income-tax, it was held that in order that the expenses of a civil litigation could be permissible as an expense wholly and exclusively laid out for the purpose of the business of the assessee, the expense must have been incurred by the assessee in its character as a trader and the transaction in respect of which the proceeding were taken must have arisen out of, or must have been incidental to, the assessee's business and the assessee could be said to have incurred the expenditure in its character as a trader if the litigation was necessary to be carried on by the assessee or defended by it to protect its trade or business or to avert a danger or threat to its carrying on of its business. It was held that with regard to the expenses incurred by the company in defending the suit in the trial court, they were allowable under section 10(2) (xv) as the plaintiff had claimed the reliefs which, if granted, would have effected the carrying on of the business of the company. On the basis of this decision, it was argued that the suit for dissolution of partnership brought by the Daga partners was not brought in their character as traders, but was brought in their character as partners of the Bisesar House firm and, as such, these expenses could not be claimed by the Kamptee firm. I am unable to agree with this contention. As I have stated already, no doubt the suit is in the form of a suit for dissolution of partnership and rendition of accounts by some of the partners against the other partner, but if the whole essence of the suit is seen, it is a suit in fact by the Kamptee firm in order to protect the assets and the business of that firm of which the plaintiffs in this suit were also the partners and, in order to avoid any technical objection, that form was given to suit, but besides the dissolution of partnership and taking of accounts of the partnership, several other reliefs were claimed in that suit, which could have been also separately claimed by the Kamptee firm against the Bisesar House firm and, reading the plaint, as whole, the whole object of the plaintiffs was to save as much business and property as possible for the benefit of the Kamptee firm of which the plaintiffs were the partners and to recover the large dues of the Kamptee firm from the Bisesar House firm. This decision, therefore, is not of much help to the department in the facts and circumstances of this case.

46. In Sree Meenakshi Mills Ltd. v. Commissioner of Income-tax, the test laid down is that the deductibility of expenditure incurred in prosecuting a civil proceedings depends upon the nature and purpose of the legal proceeding in relation to the assessee's business and cannot be affected by the final outcome of that proceeding. It was observed :

'However wrong-headed, ill-advised, unduly optimistic or over confident in his conviction the assessee might appear in the light of the ultimate decision, expenditure in starting and prosecuting a civil proceeding cannot be denied as a permissible deduction in computing the taxable income merely because the proceeding had failed, if otherwise the expenditure was laid out for the purpose of the business wholly and exclusively, that is, reasonably and honestly incurred to promote the interest of the business. Persistence of the assessee in launching the proceeding and carrying it from court to court and incurring expenditure for that purpose is not a ground for disallowing the claim.'

47. It was further held that in order that an expenditure may be admissible as a deduction under section 10(2) (xv) it was not necessary that the primary motive in incurring it must be directly to earn income thereby.

48. These several cases, therefore, lay down a central principle that where the expenditure is incurred for the preservation or the protection of the estate or for saving it from being destroyed or dissipated or wasted and in the interest and for the benefit of the assessee's business, though not for the purposes of earning profits, such expenditure will be an allowable deduction in computing the profits of the assessee. They further lay down that the object of the assessee in starting the litigation must be looked into and if it is for the purposes of its business and in the interest of that business, then such expenditure ought to be allowed. In the facts of this case, the expenses have been incurred by the Kamptee firm. It was doing various kinds of business including the business which was carried on by the Bisesar House firm. The main object of the suit, as stated heretobefore, could certainly be said to be for the benefit of the assessee's business. Otherwise if the suit had not been brought at that stage, which according to the terms of the partnership would have been premature, the business of the Kamptee firm would have, to a large extent, been affected and all the investments they had made in the Bisesar House firm in the shape of capital as well as loans could have suffered a great loss. The dissolution of partnership was only incidental and was sought for the purpose of achieving the main object. It must, therefore, be held for all these reasons that the expenditure which was incurred on this litigation, namely, Civil Suit No. 2B/42 (8B of 1943) and Civil Suit No. 1B of 1945 (5B of 1954) was an expenditure laid out wholly and exclusively for the purposes of the business of the assessee, that is, Kamptee firm, and such an expenditure would, in my opinion, be an allowable deduction in the assessment of the Kamptee firm. This reasoning would also apply with respect to the salary paid to Shri R. K. Saran who was deputed to look after the rupees and several eminent advocates were engaged on either side. The suit was very hotly contested and it was necessary for the Kamptee firm to depute Shri R. K. Saran to look after the litigation for giving instructions to the solicitors, to the advocates and for preparation of whole case on behalf of the Kamptee firm. The services of Shri R. K. Saran were, therefore, absolutely essential for the purposes of the said litigation and the expenses incurred for the salary of Shri R. K. Saran would be an expenditure for the purposes of the said litigation and eventually for the purposes of the business of the Kamptee firm. These expenses also would be allowable as being covered under the head 'Litigation expenses'.

49. The third question is with reference to the sum of Rs. 10,614, said to be income relating to the Kamptee House. This amount was taken as income under section 10(2) (vii). There was a partition between the partners of the Daga family and in that partition this house was allotted to one of the partners, namely, Ramnath Daga. In that partition, the value of the said premises was shown to be Rs. 10,494. The record of the assessee showed that the value of the said house, on which depreciation was allowed, was Rs. 21,108, and, therefore, it was held by the Income-tax Officer that the premises must be taken to have been sold to Seth Ramnath Daga for an amount of Rs. 21,108 and the written down value of the premises being Rs. 10,494 should be taken as income of the assessee and would be taxed under section 10(2) (vii) of the Indian Income-tax Act, 1922. Section 10(2) (vii) deals with sales and not with partitions. It reads :

'(2) Such profits or gains shall be computed after making the following allowances, namely :- .....

(vii) in respect of any such building, machinery or plant which has been sold or discarded or demolished or destroyed, the amount by which the written down value thereof exceeds the amount for which the building, machinery or plant, as the case may be, is actually sold or its scrap value :

Provided that such amount is actually written of in the books of the assessee : Provided further that where the amount for which any such building, machinery or plant is sold, whether during the continuance of the business or after the cessation thereof, exceeds the written down value, so much of the excess as does not exceed the difference between the original cost and the written down value shall be deemed to be profits of the previous year in which the sale took place : ...........'

50. It would be apparent that this provision relates only to a case where there has been a sale. In this case there has not been a sale but only, on partition, the house was allotted to Ramnath Daga and the value which was put was only for the adjustment of the shares between the parties to the partition. Section 10(2) (vii), therefore, would have no application to this case. The Tribunal has rightly found that the amount of Rs. 10,614 was not taxable in the hands of the assessee.

51. Having considered all the different aspects in relation to the three question referred to us, I now give the answers to the questions as follows; Answers to the question No. 1 for the assessment years 1944-45 to 1955-56 will be in the affirmative and, in the facts and circumstances of the case, the Tribunal was justified in holding that the advances made by the assessee firm, R. B. Bansilal Abirchand, to the firm, Bisesar House, were in the nature of loans during the course of money-lending business and did not represent the capital contributions of the Daga group of partners. With respect to the question No. 2 relating to the assessment years 1944-45 to 1955-56, the answer is again in the affirmative and, in the facts and circumstances of the case, the Tribunal was justified in holding that the expenditure on litigation and the remuneration paid to Shri R. K. Saran were admissible under section 10(2) (xv) of the Act. As regards the third question with reference to the assessment year 1955-56 only, the answer is again in the affirmative and, in the facts and circumstances of the case, the Tribunal was justified in holding that the sum of Rs. 10,614 does not constitute profit under section 10(2) (vii) of the Act.

52. In view of the complete success of the assessee, the department will pay the costs of the assessee. Hearing fee for the reference Rs. 250.

Abhyankar, J.

53. I agree.


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