1. This is a reference under section 66(1) of the Income-tax Act - hereinafter referred to as the Act. We are here concerned with the assessment year 1957-58. The facts giving rise to this reference, as stated in the agreed statement of case, are that one Balaji Laxman and Vishweshwar Rao Dharmarao entered into a partnership some time in August, 1952, to exploit tendu leaves forest in Ahiri and Repanpalli ranges. In the said firm Balaji Laxman had 3/4th share and Vishweshwar Rao 1/4th share. The said partnership of the two carried on business during the years 1953, 1954 and 1955 tendu leaves season (the season usually beings in April and ends with June each year). In open auction, certain forests were taken up by this firm for exploitation during the year 1956 season. Before time came to exploit them, differences arose between the two. Hence the two, that is, Balaji Laxman and Vishweshwar Rao, agreed to separate and dissolve the firm and accordingly an agreement to dissolve the firm was got executed on 11th February, 1956. The said dissolution agreement mentions that the parties to it estimated that if the tendu leaves forests in the said Ahiri and Repanpalli ranges were to be exploited in partnership for the 1956 season, the firm would earn a profit of Rs. 60,000. Hence it was agreed that Balaji should pay Rs. 15,000 to Vishweshwar Rao and on making the payment, he (Balaji Laxman) was to be the sole person entitled to exploit the forests for the 1956 season. In the same deed, Vishweshwar Rao also acknowledged that he had received Rs. 15,000 from Balaji Laxman.
2. Nearly a month thereafter, a new partnership was formed between Balaji Laxman, his sons and the assessee in the present case, namely, Chhotubhai Gopalbhai Patel. The terms on which this partnership was formed for exploiting the two forest ranges for the 1956 season were reduced to writing in a deed executed on March 11, 1956. Clause (1) of the deed recites that the name of the firm shall be 'Firm Balaji Laxman & Sons, Chanda' (referred to as the Chanda firm by the income-tax authorities). Clause (2) provides that the principle place of business shall be at Chanda. Clause (3) provides that the partnership is constituted to work forest, pluck tendu leaves and sell them off from the forest of tendu leaves taken on lease in the name of 'Old Aheri Zamindari'. Clause (4) recites that the partnership was to commence on the date of the execution of the deed and will terminate on the 31st March, 1957. It further provides that if all the partners decide to continue this partnership thereafter it shall continue for the period decided and determined by the partners. Clause (5) enumerates the shares of all the different partners. Suffice it to say that the share of the assessee was four annas in the business of the partnership. Clause (6) provides that each partner shall contribute his share of capital in proportion to his share in profit or loss of the business of the firm. It further provides that Balaji Laxman was the manager partner of the firm. Clause (9) provides :
'Partner No. 1 Balaji Laxman Sahukar has taken on lease the tendu leaves forests of Aheri lease range, Repan Palli lease range and Malampalli lease range for the season of the year 1956. These forest leases have been made available by him for the use and business of this partnership and the same is made the subject-matter of this partnership. The amount invested by Shri Balaji Laxman Sahukar for getting these forest leases will be adjusted and credited to this account.'
3. It is not necessary to refer to the other terms of this deed. It appears that four days after the execution of this deed, that is, on 15th March, 1956, the assessee Chhotubhai Gopalbhai paid Rs. 15,000 to Balaji Laxman and the entry made by him in his own private account book in respect of the said payment is in the following terms :
'Rs. 15,000 - Debited to P. & L. Account on account of 4 As. share in Aheri and Repanpalli forests that belonged to Srimanta Visveshwar Rao, Aheriwala, who was with Balaji Sahukar (i.e, who was a partner with Balaji Sahukar) paid cash to Balaji Sahukar.'
4. In the assessment of the Chanda firm for the assessment year 1957-58, that is, account year ending with March 31, 1957, the profits of the firm were determined at a certain figure, and the assessee's share of the profits in the said firm was determined by the Income-tax Officer at Rs. 4,044 and in his assessment the said figure was taken by the Income-tax Officer as the assessee's income from this source, namely, the business of the Chanda firm. It has been the assessee's contention all along that in determining under section 10 of the Act the quantum of his income from this source, that is, 1/4th share in the Chanda firm, the Income-tax Officer should make a deduction of the said sum of Rs. 15,000 paid by him to Balaji Sahukar. This claim of the assessee has been rejected by the Income-tax Officer, the Appellate Assistant Commissioner and the Tribunal. The view taken by the income-tax authorities and the Tribunal was that the payment of Rs. 15,000 to Balaji Sahukar was not an amount laid out or expended for the purpose of the business but was a payment made by the assessee to Balaji Sahukar for the purpose of acquiring a source of income, that is a share in the Chanda firm and, therefore, was not a permissible allowance under section 10(2) of the Act. The assessee thereafter moved the Tribunal under section 66(1) of the Income-tax Act and the Tribunal has referred the following question to us :
'Whether in computing the assessee's income under section 10 from the source represented by 1/4th share in the Chanda firm, the assessee is entitled to claim deduction under section 10(2) (xv) of the sum of Rs. 15,000 as an item of revenue expenditure ?'
5. Mr. Thakkar, learned counsel for the assessee, contends that the assessee is entitled to claim deduction under section 10(2) (xv) of the sum of 15,000 as an item of revenue expenditure. Because the assessee has expended that amount for getting 1/4th share in the forest produce, it is an expenditure, according to Mr. Thakkar, for acquiring stock-in-trade or raw material. Reliance is placed on a decision of the Privy Council in Mohanlal Hargovind v. Commissioner of Income-tax. In the alternative, it is the contention of Mr. Thakkar that even if it is assumed that the amount of Rs. 15,000 is expended for acquiring 1/4th share in the business of the Chanda firm, the partnership being restricted to that single adventure of one year's duration, no enduring benefit has been secured by the assessee, and, therefore, the expenditure was not of a capital nature but on the other hand it was an expenditure laid out or expended wholly and exclusively for the purpose of such business.
6. Mr. Joshi, learned counsel for the department on the other hand, contends that on the findings of the income-tax authorities the assessee is not entitled to claim Rs. 15,000 as a permissible allowance under section 10(2) (xv) because that amount had been expended for acquiring a source of income namely, 1/4th share in the partnership. Rs. 15,000 had never been entered in the books of account of the partnership and cannot be taken as an expenditure incurred by the firm or laid out by the firm wholly and exclusively for the purpose of such business. In our opinion, the contention raised by the department is well founded. It is to be kept in view that the contention raised by the assessee before the income-tax authorities had been a narrow one, and that was that in determining under section 10 of the Act the quantum of his income from the source, that is, 1/4th share of the Chanda firm, the Income-tax Officer should make a deduction of the said sum of Rs. 15,000. In other words, the deduction of Rs. 15,000 claimed by the assessee was only in the matter of ascertaining his income from the Chanda firm and not in respect of any other business. Keeping this basic fact in view, we will proceed to examine the relevant provisions of section 10. Sub-section (1) of section 10 provides :
'The tax shall be payable by an assessee under the head 'profits and gains of business, profession, or vocation' in respect of the profits and gains of any business, profession or vocation carried on by him.'
Sub-section (2) provides :
'Such profits or gains shall be computed after making the following allowances, viz. :-.....
(xv) any expenditure (not being an allowance of the nature described in any of the clause (i) to (xiv) inclusive, and not being in the nature of capital expenditure or personal expenses of the assessee) laid out or expended wholly and exclusively for the purpose of such business, profession or vocation.'
7. On reading the relevant provisions it becomes clear that what is to be seen is whether the expenditure claimed as a permissible allowance by the assessee is an expenditure laid out or expended for the business the profits of which the income-tax authorities have to ascertain. If it is an expenditure laid out or expended for such business then it is a permissible allowance but if it is not wholly of that nature, then the assessee is not entitled to claim it as a permissible allowance under section 10(2) (xv) of the Act. As already stated, the assessee claims the expenditure of Rs. 15,000 made by him as a permissible allowance for determining the assessee's share of profit in the Chanda firm. It is not an expenditure incurred by the Chanda firm. It necessarily follows that the said expenditure of Rs. 15,000 cannot be claimed as a permissible allowance in ascertaining the profits of the Chandra firm. The provisions of section 23(5) and (6) make it clear that the procedure that has to be followed by the Income-tax Officer is to first ascertain the profits of the firm and then apportion it between the several partners in accordance with their shares. The sum of Rs. 4,044 has been apportioned to the assessee as his share of profits in the Chanda firm. Now, if the amount of Rs. 15,000 cannot be claimed a permissible allowance under section 10(2) (xv) in respect of the business of the Chanda firm it necessarily follows that it cannot also be claimed as a permissible allowance as against the share of profits of the assessee, namely, as against the amount Rs. 4,044.
8. The deed of partnership recites that the partnership is constituted to work forest, pluck tendu leaves from the forests of Aheri lease range, Repanpalli lease range and Malampalli lease range and sell these plucked tendu leaves. The expenditure of Rs. 15,000 incurred by the assessee cannot be said to have been incurred for any of the aforesaid purposes nor can it be said to have been expended for the purpose of acquiring these forest. Clause (9) of the partnership deed makes it clear that these ranges were already acquired by Balaji and under the deed he had thrown them in the partnership. The said amount of Rs. 15,000 also is not shown to have been credited in the books of account of the firm nor taken into account of the business of the firm.
9. On the facts found by the income-tax authorities and on the material on record, it is difficult to uphold the contention of Mr. Thakkar that Rs. 15,000 had been expended by him for acquiring stock-in-trade or raw material, the fact found being that the expenditure incurred by the assessee was for the purpose of acquiring a share in the Chanda firm. The decision on which reliance is placed by Mr. Thakkar is distinguishable on facts and is hardly of any assistance to him. The facts of that case were that the assessees in that case carried on a business at several places as manufacturers and vendors of country made cigarettes known as 'bidis'. These cigarettes were composed of tobacco rolled in leaves of a tree known as tendu leaves, which were obtained by the assessees by entering into a number of short term contracts with the Government and other owners of the forest. Under the contracts, in consideration of certain sum payable by installments, the assessees were granted the exclusive right to pick and carry away the tendu leaves from the forest area described. The assessees were allowed to coppice small tendu plants a few months in advance to obtain good leaves and to pollard tendu trees a few months in advance to obtain better and bigger leaves. The question that had to be determined was whether the payment made by the assessees to the Government or the owners of the forest was a capital expenditure or a revenue expenditure. It was held that the contracts were entered into by the assessees wholly and exclusively for the purpose of supplying themselves with one of the raw materials of their business; that they granted no interest in the land or in trees or plants themselves, and that under the contracts it was the tendu leaves and nothing but the tendu leaves that were acquired and the right to pick the leaves or to go on the land for the purpose were merely ancillary to the real purpose of the contracts and if not expressed would be implied by law in the sale of a growing crop, and that, therefore, the expenditure incurred in acquiring raw material was in a business sense expenditure on revenue account and not on capital account, just as if the tendu leaves had been bought in a shop Mohanlal Hargovind v. Commissioner of Income-tax.
10. As already stated, the payment of Rs. 15,000 made by the assessee was not for the purpose of getting the tendu leaves for the business. That concession had already been obtained by Balaji Laxman and under the 9th clause of the deed of partnership, he had thrown that concession in the partnership. Another decision has also been referred to by Mr. Thakkar in the course of his arguments, Devarajulu Chetty & Co. v. Commissioner of Income-tax. This decision also is distinguishable on facts and has no application to the facts of the present case. The facts of that case were that a firm of five partners had started a wholesale business in piece-goods. The partnership was started in September, 1940. In October, 1942, two of the five partners retired from the firm. The three surviving partners thereafter carried on the business under the same name and style but as a new firm. Each of the two outgoing partners was paid a certain sum for his share of the assets and profits of the old firm up to the date of dissolution as a result of an arbitration award. This settlement was subject, however, to a reservation of the rights of the two retiring partners in respect of certain forward contracts for the purchase of piece-goods from abroad that had already been entered into by the old firm but the deliveries under which had not been effected. In September, 1943, the new firm, which was the assessee before the court, took delivery of the goods and sold them at a considerable profit. In accordance with the direction of the arbitrators the new firm paid the two old partners a sum of Rs. 18,911 in respect of their interest in the goods and their share of profits realised by the sale of the goods. The old partners then executed a deed of release in favour of the new firm. The new firm was assessed to income-tax for the year ending 31st March, 1944, in the sum of Rs. 45,088 which included the sum of Rs. 18,911 paid to the old partners in respect of the goods arrived under the forward contracts. A question arose as to whether the payment of Rs. 18,911 made by the new firm to the two outgoing partners was revenue expenditure as contended by the assessee. The assessee's contention was upheld by the court and it was held that the payment of Rs. 18,911 was revenue expenditure laid out solely and exclusively for the business of the new firm because it was really the price paid by the new firm for the acquisition of the goods, which formed the stock-in-trade of the business. From this decision it may follow that payment made to the outgoing partners as their share in the assets of the firm is an expenditure of revenue nature but such is not the case here. The payment of Rs. 15,000 made by the assessee is entirely different in nature. It has not been paid to Vishweshwar Rao as his share in the assets of the firm on his retirement. On the other hand, that payment was made by Balaji Laxman to Vishweshwar Rao for acquiring 1/4th share in the partnership. The payment in the present case is not a payment made to the outgoing partner but is a payment made by him to Balaji Laxman in order to get 1/4th share in the business of the firm. This case, therefore, is of no assistance to the petitioner.
11. We also find it difficult to accept the contention of Mr. Thakkar that even assuming that the payment of Rs. 15,000 made by him was for the acquisition of 1/4th share in the business of the firm it still is an expenditure laid out wholly and exclusively for the purpose of the business because the business consists of a single adventure of a short duration. In our opinion nothing turns as to whether the partnership is of a short or a long duration. What is to be ascertained is what is that nature of the expenditure and whether in the ordinary commercial sense it can be said that the expenditure is of the nature of working expenses of the business, the profit of which has to ascertained. We have already stated that in the instant case the business, the profits of which are to be ascertained, was the business of the Chanda firm. The amount of Rs. 15,000 cannot be said to be a business expenditure nor has it been shown to have been expended as a business expense of that firm. It may be true that the assessee has paid Rs. 15,000 to Balaji Laxman in expectation that his 1/4th share in the profits of the firm may exceed Rs. 15,000 and thereby he may gain but that idea in the mind of the assessee has no relevance in deciding the question, which falls for consideration in this case.
12. For reasons stated above, our answer to the question referred to us is in the negative. The assessee shall pay the costs of the department.
13. No order on the notice of motion and no order as to costs on the notice of motion.
14. Reference answered in the negative.