1. This reference is by the Income-tax Appellate Tribunal, Bombay Bench B, under s. 256(1) of the I.T. Act, 1961, at the instance of the assessee, referring the following question to us for our opinion :
'Whether, on the facts and in the circumstances of the case, the litigation expenses of Rs. 25,599 or any part thereof as claimed by the assessee were rightly disallowed by the Tribunal ?.
In this case we are concerned with the assessee year 1958-59. The assessee is an HUF of Bilasrai Juharmal. In the return for the said assessment year the assessee had claimed, amongst others, a sum of Rs. 44,346 as deduction towards legal expenses under the tens s. 10(2)(xv). He, (karta), however, gave particulars only of Rs. 43,581. Out of the said amount of Rs. 43,581 the assessee did not press his claim for Rs. 4,688. The balance of the amount consisted of the following three sums :
(a) Rs. 11,214-legal expenses in connection with a suit filed by the assessee against one Barjoria ;
(b) Rs. 25,599-legal expenses in connection with suit No. 120/57 filed by the assessee against the other partners of the firms of Sarupchand Prithviraj and Juharmal Sarupchand ;
(c) Rs. 2,080 in connection with sundry items.
2. The ITO allowed as revenue expenditure expenses under item Nos. (a) and (c) above, but disallowed item No. (b), viz., Rs. 25,599 on the ground that the said legal expenses were not incurred for the purpose of business.
3. Against the said order of the ITO, amongst others rejecting the assessee's said claim of Rs. 25,599, the assessee filed an appeal to the AAC. The AAC by his order dated November 27, 1964, inter alia, confirmed the order of the ITO disallowing the assessee's said claim.
4. Against the said order of the AAC, the assessee appealed to the Tribunal. The Tribunal found from the material on record that the assessee had gained substantially by filing the suit and had obtained a far higher amount as his share of the partnership property and assets than he would have otherwise got and that the said legal expenses were incurred in connection with the said suit, filed by him against the other group of partners in the said partnerships. However, after referring to various decisions cited across the bar, the Tribunal dismissed the appeal and confirmed the order of the AAC, disallowing the said expenditure as revenue expenditure by observing :
'After considering all the authorities, we are inclined to the view that a partner cannot claim deductions, in his personal assessment, of legal expenses in a suit for dissolution of the firm. Such expenditure is only to settle disputes between partners and is not laid out for the purpose of the business.
5. It cannot be disputed that the assessee's share of profit in the firms is taxed in hos hands as his business income. Therefore, for the legal expenses incurred by the assessee to be allowed as deduction in the assessee's business income under s. 10 (2)(xv) of the Act of 1922, what the court had to see was whether the said expenses incurred by the assessee were expended by him wholly and exclusively for the purpose of his business, i.e., assessee's business.
6. A short question in this case, therefore, would be whether on the facts and circumstances of this case it could be said that the said legal expenses of Rs. 25,599 incurred by the assessee in connection with Suit No. 120/57 filed by him against the other group of partners in the firms of Sarupchand Prithviraj and Juharmal Sarupchand can be considered to have been expended by them wholly and exclusively for the purpose of their business so as be allowed as deduction under s. 10(2)(xv) of the Indian I.T. Act, 1922 (present s. 37(1)), in the computation of the assessee's income from business.
7. It is contended by the learned counsel for the Revenue, mainly relying on the decision of this court in the case of CIT v. R. B. Bansilal Abirchand Firm : 79ITR104(Bom) and in the case of Adarsha Dugdhalaya v. CIT : 80ITR49(Bom) that since in this case the expenses incurred were in connection with the suit filed by the assessee which was only for the dissolution of partnerships and accounts and the same were incurred only for settling disputes between the partners, the said expenses could not be considered to have been expended by the assessee wholly and exclusively for the purpose of their (HUF) business.
8. As against this, the learned counsel for the assessee has, firstly, pointed out that the assessee's said suit was not only for dissolution and accounts. Apart from the fact that it also asked for the appointment of the receiver for the assets of the firms, it was of a complex nature involving other questions based on the allegation, against the other partners, of mismanagement of the firms, misappropriation and fraudulent secret transfer of the assets of the firms and breach of certain settlement between the partners. Therefore, the suit was also for retrieving and protecting the assets of the firm. He also pointed out that the Tribunal had found as a fact that by filing the suit the assessee had got a far higher amount as his share in the partnerships than he would have otherwise got. He, therefore, contended that the said legal expenses incurred by the assessee would fall with in the provisions of s. 10 (2)(xv) as an allowable deduction in computing their (HUF) business income.
9. To appreciate the rival contentions, it would be first necessary to looking into the facts and circumstances of the case, in particular, the nature of the assessee's suit.
10. The assessee, HUF, were partners in two firms called Sarupchand Prithviraj and Juharmal Sarupchand. The firms had two groups amongst its partners. The assessee group, known as Bilasrai group, had 6 annas share wile the other group, known as Barjoria, had 10 annas share, as mentioned in the statement of case.
11. The firms owned several business (Ex. B to the plaint) and had several assets (Ex. C to the plaint) including immovable properties. It appears that some time in 1943 there was an agreement where by it was agreed that certain properties of the firms were to belong to two different groups as their separate properties and that an amount of Rs. 1,72,000 was to be paid to the names of partners belonging to the assessee's group by making transfer credit entries in their names in the books of the firms. The assessee alleged that the other group of partners which was in management of the firms had mismanaged the affairs of the firms, had misappropriated to themselves as well as fraudulently and secretly transferred the assets of the firms and committed a breach of the agreement of 1943. On the basis of the said varied allegation, one of the partners belonging to the assessee's group, viz., Govardhan Rungta, filed the said suit, being Suit No. 120/57 not only for dissolution and accounts but also for appointment of a receiver for the assets of the firms and a declaration that the properties coming to them under the said agreement of 1943 belonged absolutely to them. In the said suit the partners belonging to the assessee's group were the plaintiff and defendants Nos. 7 and 8, while the other defendants, viz., defendants Nos. 1 to 6, belonged to the other group.
12. At the hearing of the reference, since the plaint and other proceedings relating to the said suit though referred to in the Tribunal's order did not form part of the statement of case in the reference, we had asked the learned counsel for the assessee to file copies of the said relevant proceedings. He accordingly filed a compilation consisting of the following :
1. Plaint dt. 9-4-57 (Ex. A)
2. Written statement of defendants Nos. 1,3 and 5 dated 9-2-1958 (Ex. B)
3. Consent judge's order dt. 17-9-1959 (Ex. C)
4. Supplementary pleadings of the plaintiff dt. 8-12-1962 (Ex. D)
5. Consent terms dt. 9-12-1962 (Ex. E)
6. Court receiver's report dt. 7-2-1967 (Ex. F)
7. Letter dt 1-2-1969 to AAC (Ex. I) and nine copies of certificate passed by attorneys of the assessee (Ex. J).
13. The compilation containing the aforesaid documents only was taken on the file and market annex. D. Certain other documents marked in the compilation as Exs. E and H collectively were not, however, taken on the file as not being relevant.
14. Scrutiny of the plant and proceedings shows that the purpose of filing the suit was not simply to seek accounts and dissolution of the firms and getting the partners' shares ascertained and paid. It contains along with the allegation of mismanagement of the business of the firms, several allegations of misappropriation (paras 11 and 12 of the plaint) and fraudulent transfers of the firms' assets by the other group of partners in the management of the firms, of making secret profits (paras 13 and 14 of the plaint) and allegation of breach of the agreement of 1943 (paras 10 and 11 of the plaint) and of setting up their ownership to the firms (paras 8 and 10 of the plaint).
15. The written statement of defendants Nos. 1 to 6, i.e., partners belonging to the other group, though generally admitting the assets of the firms, as stated by the plaintiff, have made similar allegations of misappropriation against the partners of the assessee's group.
16. The plaintiff, one of the partners of the assessee's group, also took out a notice of motion for the appointment of a receiver for the assets of the firms. However, the court appointed the court receiver as receiver, only for the accounts of the business of the said firms.
17. Ultimately, by a consent order dated December 19, 1962, (Ex. E to the compilation), the matters were referred to the arbitration of Shri M. R. Mody, advocate of the court. He made an interim award, declaring that an amount of Rs. 6,67,965.00, being the credit balance as on March 31, 1965, it the name of Brijlal Rangdas (Org. defendant No. 1), Govardhan Shivnarayan (plaintiff) and Bilasrai Juharmal (defendant No. 7) in the books of account of MAN Industrial Corporation and any further interest thereon, belonged to the firm of Sarupchand Prithviraj. On the said interim award orders were made by the court on February 10, 1967. Thereafter, as indicated in the court, s said order, the court received was appointed a receiver for the said amount.
18. It is also a finding of fact by the Tribunal that as result of the assessee filing and prosecuting the said suit, the assessee's group had gained substantially by getting as their share in the firms' assets, a far higher amount than they would have otherwise got.
19. Looking to the nature of the suit filed by the assessee, it is clear that, apart from seeking dissolution and accounts, the main object of the suit was also to prevent mismanagement of the firms and to retrieve to the firms their assets, in which the assessee had a share, which were alleged to have been misappropriated or secretly, fraudulently transferred by the other group of partners or out of which they were alleged to have made secret profits. The suit was also to protect all the assets of the firms by the appointment of a receiver. There is no dispute that the said legal expenses incurred by the assessee were in connection with the suit. Therefore, looking to the aforesaid facts and circumstances of the case, the said legal expenses incurred by the assessee in connection with the suit which was intended for retrieving, preserving and protecting the assets of the firms in which the assessee had a six annas' share, would be considered to have been expended by them wholly and exclusively in connection with the assessee's business. The mere fact that the suit was to settle the disputes between the partners or that the reliefs claimed were for dissolution and accounts, could not be a deciding factor in such a case. The other facts and circumstances will have to be looked into for that purpose.
20. With this it would be convenient to refer to the decisions relied upon at the Bar.
21. The first is the decision of the Orissa High Court, relied upon by the learned counsel for the assessee in the case of Lachminarayan Modi v. CIT : 28ITR322(Orissa) . In that case the assessee carried on business in partnership with others. Due to differences with the other partners, the assessee instituted a suit for dissolution and accounts and also claimed appointment of a receiver for the assets of the firm. On the application of the assessee, the court had appointed a receiver for the assets of the firm and had directed him to carry on the business of the firm with a view to facilitate the collection of the considerable amount of money advanced to the labourers before the suit for dissolution and also complete the business left incomplete at the time of the dissolution and also to complete the business left incomplete at the time of the dissolution. In pursuance of the said order, the receiver carried on the sale business and out of the total profits realised, a sum of Rs. 13,254 was paid to the assessee as his share of income for the relevant previous year. The assessee claimed from the said amount a deduction of Rs. 5,370 being the legal expenses incurred by him in connection with the said suit, on the ground that it was permissible deduction under s. 10(2)(xv) of the Indian I.T. Act, 1922 being 'expenses wholly and exclusively expended for the purposes of his business.'
22. In this case, at the initial stage of reference to the High Court, the court found that there were no sufficient facts to come to a decision and, therefore, remanded the matter to the Tribunal directing it to file a supplementary statement of case. That having been done, the court after examining the facts, found that the purposes of the suit was not only to seek dissolution and accounts of the firm but was also to seek protection of the assets of the firm by the appointment of a receiver which in fact was done. The court, therefore, held that the appointment of a receiver for the assets for their protection was also of the purpose of the suit and that, under the circumstances, the expenses incurred for the proceeding were revenue expenditure deductible under the then s. 10(2)(xv) as they were incurred for utilising the existing assets to the best advantage and that they cannot be considered as capital expenditure as no asset was acquired thereby. The court further held further held that the expenses incurred in civil litigation arising out of matters incidental to the carrying on of a business are permissible deductions in the computation of its profits, and in civil litigation no question could arise as to the primary or secondary purpose for which legal expenses could be said to have been incurred as in the case of criminal prosecutions. On facts, the case before us is much stronger. Apart, from the fact that in this case also a receiver was appointed, not only of the books of account of the firm's business, but also of certain assets of the firm with MAN Industrial Corporation, the object of the suit was also to retrieve and preserve the assets. As a matter of fact, ultimately the assessee had received a much higher amount as his share in the partnerships than he would have otherwise received. To us, the approach of the Orissa High Court to the question approach to be correct.
23. The learned counsel for the Revenue relied upon certain observations of this court in the case of CIT v. R. B. Bansilal Abirchand Firm : 79ITR104(Bom) , Shortly stated, the basic facts in that case were quite different from those of the present case. There the assessee was a firm called Kamptee Firm of which four sons of one Kasturchand Daga were the only partners. There was one other firm called Bisesar House in which initially the said Kasturchand Daga, along with one Manekji, was a partner. On Kasturchand Daga's death, his four sons, who were majors, became partners with the said Manekji, a minor son of Shri Kasturchand being admitted to the benefits. Thereafter, the four sons of Daga separated and on accounts being taken, a sum of Rs. 81,00,000 was found due and payable by Bisesar House to the Kamptee Firm. Again, a fresh partnership agreement was entered into between the said Manekji and the sons of Daga. Losses to the firm in colliery business were ascertained at Rs. 37 lakhs odd and it was agreed that a sum of 30 lakhs should be credited to the partners of the collieries (Kamptee Firm) and debited to the persons accounts of the partners. Accordingly, the said Manekji on the one hand and the partners of the Kamptee firm, viz., sons of Kasturchand Daga on the other came to be debited with a sum of Rs. 15 lakhs each in their persons account with Bisesar as partner in Bisesar House as the amount being due to Kamptee firm. Thereafter, the Daga's as partner of Bisesar House. In that suit the plaintiff, as partners of Kamptee firm, had also claimed Rs. 62,89,201 as the creditors of the firm of Bisesar House and claimed to hold the defendant-Manekji share in the firm as security for the same. In the assessment proceedings of the kamptee firm, the Daga's who were only partner in that firm had claimed legal expenses incurred by them in prosecuting the suit for dissolution and accounts of the firm of Bisesar House as permissible deduction under s. 10(2)(wv) of the Act of 1922.
24. It was under those facts that the court had held that the main purpose of the suit was not the dissolution of the Bisesar House partnership, as such, but of securing the assets of the Kamptee firm. Though the Bisesar House was to be dissolved, its business was not to be liquidated, but 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, was ultimately done. The litigation was mainly for saving the business, as far as possible, of the Kamptee firm and to recover large advances and therefor, the expenses claimed allowable under s. 10(2)(xv) of the Indian I.T. Act, 1922.
25. However, the findings of the court in that case cannot help the learned counsel for the Revenue in their contention, they being admittedly on altogether different facts. The learned counsel in support of contention has relied upon the observations of the court in its judgment to the effect (headnot) :
'Ordinarily, where the suit is for the binding-up of the business of the firm, it could not be said that the expenses incurred by the partners who bring the sins 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, yet, even in such a case, if 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.'
25. The said observations cannot help the learned counsel for the Revenue. Firstly, the said observations are of a general nature and are to be read and understood in the context of the facts and circumstances before the court. There, the court was concerned with a case where the assessees, as partners of a firm, were claiming legal expenses in suit for the dissolution of another firm in which also they were partners, for saving their business in the first firm. It was on that basis that the court had allowed the deductions. While making the said observations the court appears to have proceeded on a wrong basis, viz., that to allow deductions, legal expenses that were required to be incurred, were to be for the business of the firm. In fact what was required to be considered was whether the legal expenses where incurred in connection with the business of the assessee. It appears that in fact on that basis the court had allowed the expenses incurred by the assessee i.e., the partners of the Kamptee firm, in prosecuting the suit for a dissolution of the firm of Bisesar House. The said observations on which the learned counsel for the Revenue had earlier are to be considered as restricted only to the legal expenses were incurred for protection or saving of the assets. Then the expense were allowable as permissible deductions. The said general observations made in altogether a different context cannot be applied in this case.
26. The next decision relied upon by the learned counsel for the Revenue was also of this court in the case of Adarsha Dugdhalaya v. CIT : 80ITR49(Bom) . The assessee in that case claiming deductions was a firm of continuing partners. Unlike in this case, the suit by a retiring partner was only for dissolution and accounts, and neither there were any allegations of mismanagement or falsification or fraudulent transfer nor any such contention was raised at the hearing.
27. The learned counsel for the Revenue relied on the following observations of the court to support his contention (headnot) :
'The suit in its essence was suit for the settlement and adjustment of the rights inter se between the partners and had nothing to do with the subsequent carrying on of the business by the continuing partners. The defence to the suit by the continuing partners again was in their own interest and not in the interest of the assessee-firm. The assets of the firm, which subsequently carried on the business after the retirement of the outgoing partners, would be such assets as would be left over after the adjustment of the accounts of the partnership up to the date of retirement of the outgoing partners. A dispute as to what is the quantum of the claim of an outgoing partner as on the date of retirement cannot be a matter concerning the business of the reconstituted firm continued after the retirement of the partners though it may have some connection or relation to the assets of the continuing firm in so far as in would have the effect of reducing the assets of the continuing partners. The expenditure incurred was not for the purpose of protection the assets but for the purpose of ascertain what they are on settlement of the disputes between the partners in relation to them. Having regard to the essential nature of the litigation and the purpose for which it was contested, the expenses of litigation claimed by the assessee could not be allowed to it as expenditure incurred wholly and exclusively for the purpose of carrying on its business.'
28. The above-quoted observations have to be read and understood in the light of the above-quoted facts and circumstances of the case where the suit was simply for dissolution of accounts with no other dispute between the parties. The said observation cannot have universal application to every suit for dissolution and account irrespective of the facts and circumstances of the case. The facts and circumstances of the case before us being quite different, the said observations cannot necessarily apply to this case.
29. The last decision relied upon by the learned counsel for the Revenue was of the East Punjab High Court in the case of Ram Chandra Munna Lal v. CIT . The said decision can have no relevance in this case as the observations of the court there show that the question was to be determined on the facts and circumstances of each case.
30. As we have pointed out above, looking to the facts and circumstances of the case and, particularly, the nature of the plaint containing the allegations of mismanagment, misappropriation fraudulent and secret transfer of the firm, s assets and the relief for protection of the assets of the firms, the said legal expenses of Rs. 25,599 claimed by the assessee as allowance in computing their business income would be considered in this case to be expended by them wholly and exclusively for the purpose of their business, to be covered by s. 10(2)(xv) of the Indian I.T. Act of 1922.
31. In our view, the tax authorities ought to have allowed the said legal expenses of Rs. 25,599 as deductions in computing the income of the assessee from buiness. In that view of the matter, we would answer the question referred to us a under :
32. In the negative and in favour of the assessee. Revenue to pay costs of the reference.