1. In this reference we are concerned with the three assessment years 1961-62, 1962-63 and 1963-64. Accordingly, for the first assessment year the reference is under section 66(1) of the Indian Income-tax Act, 1922, whereas for the two later years the reference is under section 256(1) of the Income-tax Act, 1961.
2. The assessee was at the relevant time a partner in a firm of architects known as Messrs. Gregson, Batley & King, with its head office at Chartered Bank Building, Fort Bombay. He claimed deduction of various items of expenditure against his share of the income from the partnership for the three material years. We are not concerned with the details of these expenses, but they pertain to expenses for the running of a motor car, depreciation on the car, entertainment of clients and other expenses. As far as the last mentioned item is concerned, it is indicated in the order of the Income-tax Appellate Tribunal in the appeal that they pertain to purchase of several purchases of several books, periodicals and magazines in connection with his profession as an architect which the assessee studies at home and other expenses pertaining to the studio at him for drawing, designing and planning of jobs. The assessee's claims as to these deductions were disallowed by the Income-tax Officer who observed that an item of expenditure which should have figured in the accounts of the firm itself could not be said to be expenditure incurred by a partner for earning his share of the income. The Income-tax Officer referred to the decision of the Supreme Court in Jitmal Bhuramal v. Commissioner of Income-tax : 44ITR887(SC) in support of his action. For the two assessment years governed by the 1961 Act, the Income-tax Officer also relied upon section 67 and observed that the only permissible deduction was in respect of interest paid on borrowed capital. From the decision of the Income-tax Officer the assessee preferred appeals to the Appellate Assistant Commissioner. The Appellate Assistant Commissioner held that for the assessment year 1961-62 (governed by the Indian Income-tax Act, 1922), the assessee was entitled in principle to the expenditure claimed by him subject to the disallowance of 1/4th of the car expenses which were held by the Appellate Assistant Commissioner as attributable to the personal use of the car by the assessee. For the subsequent two years the Appellate Assistant Commissioner held that the assessments in question were governed entirely by the provisions of the Income-tax Act, 1961, and in view of the express provision made by section 67(3), the assessee was not entitled to any other or further deduction. From the above orders of the Appellate Assistant Commissioner, the department came in appeal to the Tribunal for the assessment year 1961-62 and for the two remaining years the assessee came in appeal. The Tribunal agreed with the assessee that the allowances enumerated in sections 30 to 37 of the Income-tax Act, 1961, were not exhaustive and an item which was not deductible under section 67(3) of the Act may still be allowed as a deduction in the hands of the assessee. The Tribunal further found that the partners of Messrs. Gregson, Bately & King had agreed amongst themselves to incur certain expenditure and these items of expenditure (indicated in paragraph 15 of the consolidated order of the Tribunal dated November 22, 1967, in the three appeals) pertain to the various items in respect of which deductions had been claimed by the assessee. According the Tribunal, further, the assessee could not be regarded as having incurred the expenditure for the purpose of earning his share of the profits of the firm and the expenditure had been incurred for the purpose of the business of the firm and, therefore, was not allowable.
The question referred to us reads as follows :
'Whether, on the facts and in the circumstances of the case, the claim of the applicant to deduct the motor car expenses, entertainment expenses, studio, books and other expenses and depreciation on motor car, in computing his share of income from the firm of Messrs. Gregson, Bately & King has been rightly rejected by the Tribunal ?'
3. On behalf of the assessee, Mr. Dastoor drew our attention to the Supreme Court decision in Commissioner of Income-tax v. Ramniklal Kothari : 74ITR57(SC) , which has affirmed the decision of the Patna High Court in : 54ITR232(Patna) , which Patna decision has been referred to by the Tribunal in paragraph 12 of its appellate order. In Ramniklal Kothari's case : 74ITR57(SC) , the Supreme Court expressly overruled the decision of the Calcutta High Court in Iswardas Subhkaran v. Commissioner of Income-tax (Income-tax Reference No. 38 of 1952) and approved of the Bombay High Court decision in Shantikumar Narottam Morarji v. Commissioner of Income-tax : 27ITR69(Bom) and of the Madras High Court in Basantlal Gupta v. Commissioner of Income-tax : 50ITR541(Mad) . The head-note in Ramniklal Kothari's case : 74ITR57(SC) reads as follows :
'Business carried on by a firm is business carried on by the partners. Profits of the firm are profits earned by all the partners in carrying on the business. The share of the partner is business income in his hands for the purpose of section 10(1) of the Indian Income-tax Act, 1922, and, being purpose of income, expenditure necessary for the purpose of earning that income and appropriate allowance are deductible therefrom in determining the taxable income of the partner.
4. Held, accordingly, that the respondent, who was a partner in four firms but did not carry on any independent business, was entitled to deduct from his share of the profits from the firms amounts paid as salary and bonus to staff, expenses for maintenance and depreciation of motor cars and travelling expenses by him in earning the income from the firms.'
5. The Patna High Court whose decision was affirmed by the Supreme Court had expressly noted that it was not correct as a general legal proposition to state that the partner of a registered firm was not entitled to claim any deduction against the share of the profits of the firm included in his total income. Mr. Joshi, with his usual fairness, also drew our attention to a later decision of the Patna High Court in Commissioner of Income-tax v. Atma Ram Modi : 71ITR199(Patna) , where it was observed that apart from the expenses to be deducted in calculating the profits of the partnership firm, a partner is entitled to further deduction under section 10(2)(xv) of amounts spent by him exclusively to earn his share of the profits of the firms, because the true profits and gains of the assessee must be ascertained from the point of view of commercial expediency and commercial accounting. If, therefore, a partner is able to establish in any case that the expenditure claimed by him was incurred as a matter of commercial expediency and for the purpose of earning profits from the partnership business, the partner would be entitled to claim the deduction of the amount under section 10(2)(xv) of the 1922 Act or under the general principle in respect of years covered by the 1961 Act.
6. In the case before us it would appear that on the facts the position of the assessee is even stronger than decided by the Patna High Court and approved by the Supreme Court. It has been held that the expenses in respect of which deductions were claimed pertained to the profession of the assessee, viz., that of an architect. It was further found that the partners had agreed amongst themselves to incur certain expenditure and the amounts claimed were agreed to be by the partners themselves. If this is so, is the expenditure to be disallowed merely because it has not been brought to the accounts of the partnership Further, can it be properly regarded as not having been incurred for the purpose of earning the assessee's share of the profits of the firm The partnership deed may provide that the share of profits of a particular partner may be 25 paise in a rupee or one-third or one-half. Whatever is expended to enhanced to enhance the share of profits from that firm and once the true position is realised, the argument such as the one which appealed to the true position is realised, the argument such as the one which appealed to the Tribunal must be decisively rejected. By running the motor car for the business of the firm, by entertaining clients in connection with the business of the firm and by incurring other expenses for studio and journals which must have a direct effect on the business of the firm the assessee has sought to increase his share in those profits. If that is so, under section 10(2)(xv), as far as the Indian Income-tax, Act 1922, is concerned, and under the general principles of commercial accounting which would apply to later two years, we are of opinion that the Tribunal was in error in not allowing the deductions claimed by the assessee.
7. In the result, the question referred to us is answered in the negative and in favour of the assessee. The parties will bear their own costs of the reference.