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M.G. Bhatt Vs. Commissioner of Income-tax, Bombay City-ii - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtMumbai High Court
Decided On
Case NumberIncome-tax Reference No. 52 of 1968
Judge
Reported in[1980]123ITR931(Bom); 1978MhLJ457
ActsIndian Income Tax Act, 1922 - Sections 10(1)
AppellantM.G. Bhatt
RespondentCommissioner of Income-tax, Bombay City-ii
Appellant AdvocateV.P. Mehta, Adv.
Respondent AdvocateR.J. Joshi, Adv.
Excerpt:
.....10 (1) of indian income tax act, 1922 - whether claim of applicant to deduct sum of rs. 22116 from share of profits from firm of kore and bhatt for assessment year 1962-63 rightly rejected - assessee was not entitled to predetermined share in profits of firm - it was not obligatory on assessee to totally stop working for firm - expenditure incurred by assessee in form of payment was expenditure incurred wholly and exclusively for purpose of earning his share of profits - held, amount paid by assessee from share of profits from firm of kore and bhatt for assessment year 1962-63 was deductible as expenditure incurred for purpose of earning his income by assessee. - - what the tribunal seems to have over-looked is that if an assessee was one of the partners of the firm of architects..........k. g. kapadia, who was already an employee of the firm on a salary of rs. 500 per month, by which shri kapadia was to attend to the duties, which the assessee was supposed to perform, as directed by the assessee and the assessee was to share with shri kapadia the profits, which he would earn from the partnership firm, to the extent of 11%. the agreement in pursuance of which shri kapadia was to work is filed with the statement of the case as annexure b, which provides that in consideration of shri kapadia agreeing to help the assessee in attending to his business in the conduct of the business of the firm of m/s. kore & bhatt, the assessee shall pay from the said firm 11% of his share of profit to the party of the other part by way of annual remuneration and the assessee will retain the.....
Judgment:

Chandurkar, J.

1. The assessee, who is a qualified architect and civil engineer, was partner in a partnership firm called M/s. Kore & Bhatt, Civil Engineers and Surveyors. Apart from the assessee, there were two other partners in the firm, namely, Shri V. M. Bhatt, the son of the assessee, and one Shri R. M. Vadhelwalla. The assessee's share in the partnership firm was 33 1/2%, that of Shri V. M. Bhatt 15% and that of Shri Vadhelwalla 49 1/2%. The assessment year in question is 1962-63. During that year, according to the assessee, he had entered into an agreement with one Shri K. G. Kapadia, who was already an employee of the firm on a salary of Rs. 500 per month, by which Shri Kapadia was to attend to the duties, which the assessee was supposed to perform, as directed by the assessee and the assessee was to share with Shri Kapadia the profits, which he would earn from the partnership firm, to the extent of 11%. The agreement in pursuance of which Shri Kapadia was to work is filed with the statement of the case as annexure B, which provides that in consideration of Shri Kapadia agreeing to help the assessee in attending to his business in the conduct of the business of the firm of M/s. Kore & Bhatt, the assessee shall pay from the said firm 11% of his share of profit to the party of the other part by way of annual remuneration and the assessee will retain the balance of 24.5% to himself. A further provision made was that the amount to be received by Shri Kapadia was to be reduced by the amount of remuneration which he would receive by way of salary from the firm of Messrs. Kore & Bhatt. In the assessment proceedings for the assessment year in question, the share of the assessee in the books of the firm worked out to Rs. 90,738 and the assessee claimed that out of this amount he had paid a sum of Rs. 22,116 to Shri Kapadia and he, therefore, claimed a deduction of that amount for the purposes of the assessment. The ITO took the view that the amount paid to Shri Kapadia was only an appropriation of the profits and was, therefore, not allowable and he brought to tax the entire income of Rs. 90,738 in the hands of the assessee.

2. In appeal by the assessee, the AAC allowed the appeal and the revenue appealed against the AAC's order to the Tribunal. The Tribunal took the view that there was no agreement between the partners of the firm as such that any remuneration or share of profit should be paid to Kapadia for the work which he was supposed to do for the assessee. On the basis of a letter, which was addressed on behalf of the assessee by his chartered accountants to the ITO dated November 23, 1962, the Tribunal found that the assessee's inability to attend to the work appeared to have started only from 1959. The letter which is also annexed to the statement of the case as annexure G, shows that according to the assessee, in the year 1959, he had been warned by Dr. Shantilal Shah that his heart was not functioning property after his return from pilgrimage to Badri, Kedarnath and that if he continued to work as he used to do, he might get a stroke of paralysis. Therefore, according to the assessee, he had been working less 'and has been passing about six months in a year in quiet places in hill stations or sanatoriums'. This letter further states that if the assessee had not got this work done through Shri Kapadia, the only other possible alternative before his would have been either to part with his share of profits to the other partners or to allow the affairs of the partnership to suffer. The Tribunal, while framing the question which arose in the case which required to be determined, observed :

'What we have to consider in this case is whether it was necessary for the assessee to appoint Shri Kapadia to work for him in the assessment year under appeal and whether it was necessary for him to pay a part of his share of profits to earn the share income from the firm.'

3. While coming to the conclusion that it was not necessary for the assessee to share his profits with anybody else, the Tribunal took the view that the other partners had never stated anywhere that unless the assessee worked for the firm during his illness, if any, they were not willing to give the assessee the proper share in the profits of the firm and that unless and until the assessee worked for the firm he would not have been paid his share of profits in that firm. The Tribunal further found that if it was the intention of the other partners that the assessee should not be allowed to get his share of profits in the firm unless he worked for the firm full time, they would have either agreed to Shri Kapadia being taken in as a partner in the firm or to his being allowed to work for the assessee on certain remuneration or, in the alternative, if Shri Kapadia was not found acceptable, they would have insisted on the appointment of some other person acceptable to the partners. The Tribunal took the view that the fact that the assessee did not completely stop working for the firm, though he had entered into an agreement with Shri Kapadia to work for him, and that Shri Kapadia was already in the employment of the said firm on a certain salary and further that the nature of work done by Shri Kapadia appeared to be quite ordinary which did not require any special remuneration over and above that which was already paid by the firm to him showed that there was no commercial expediency in making the payment said to have been made by the assessee to Shri Kapadia. The Tribunal thus set aside the order of the AAC.

4. On these facts, the question which has been referred to this court, at the instance of the assessee, is as follows :

'Whether, on the facts and in the circumstances of the case, the claim of the applicant to deduct a sum of Rs. 22,116 from the share of profits from the firm of M/s. Kore & Bhatt for the assessment year 1962-63 has been rightly rejected ?'

5. Mr. Mehta, according on behalf of the assessee, has contended that the Tribunal in arriving at the conclusion that it was not shown that it was necessary for the assessee to engage the services of Shri Kapadia has proceeded to consider the question in issue on entirely irrelevant circumstances. According to the learned counsel, the Tribunal seemed to have taken the view that unless the assessee had stopped working for the firm, payment to Kapadia was not justified and that the question of consent of the partners was also irrelevant in order to decide whether the amount paid by the assessee to Kapadia was deductible out of the share of profits of the assessee.

6. Mr. Joshi for the revenue has relied upon the principle on which the question of deductibility as is involved in the present case has to be determined and has contended that the correct principle is to be found in two decisions in Shantikumar Narottam Morarji v. CIT : [1955]27ITR69(Bom) and the decision of the Supreme Court in CIT v. Ramniklal Kothari [1969] 74 ITR 54. According to the learned counsel, the payment in the instant case cannot be said to be expenditure incurred in order to enable the assessee to earn the profits which were being subjected to tax and the Tribunal was, therefore, justified in holding that the amount paid to Shri Kapadia was not deductible from the share income of the assessee.

7. Now, there is no dispute in this case that Shri Kapadia has in fact worked for the assessee inasmuch as he has looked after certain works which were assigned to the assessee in his capacity as a partner of the firm of architects and civil engineers. This is clear from the statement of Shri Kapadia which is also annexed to the statement of the case where he has stated as follows :

'In the beginning I was doing measurements of the work done by contractors and other office routine works. In 1955, after Mr. Manubhai J. Kapadia left I have been (doing) all responsible work that a partner usually does such as valuation report, inviting tenders, supervision of work at site and also court work. I used to attend to the work of the clients of Mr. M. G. Bhatt.'

8. With regard to the payment he has stated that he had drawn in all Rs. 42,000, that is, Rs. 12,000 from the firm and Rs. 30,000 from Mr. M. G. Bhatt, that is, the assessee. The other partner, Vadhelwalla, has also made a statement in which all that he has stated is that he had not given his consent orally or in writing to Mr. Bhatt employing Shri Kapadia on his behalf. One of the annexures to the statement of the case is annexure L which is styled as 'The copy of the list of works with estimated cost of such works brought in by Shri K. G. Kapadia when he was in kore and Bhatt'. this annexure contains a list of 37 names of clients whose total estimated cost of the work amounts to Rs. 54,80,000. There is no finding by any of the tax authorities that Shri Kapadia did not in fact attend to any work for and on behalf of the assessee. The reality and the bona fides of the agreement between the assessee and Shri kapadia has not been disputed, nor has it been disputed that the assessee had in fact paid certain amounts to Shri Kapadia in pursuance of the agreement between them by which Shri Kapadia had agreed to assist the assessee in his work.

9. The only question which, therefore, arises is whether merely because there was no evidence that the partners would have declined to pay to the assessee his share of the profits, it can be said that it was not necessary for the assessee to engage the services of Shri Kapadia. In our view, the entire approach of the Tribunal in this case is fallacious. The Tribunal seemed to have concerned itself merely with the recitals in the document of partnership which referred to the percentage of the share of the profit to which the assessee was entitled. What the Tribunal seems to have over-looked is that if an assessee was one of the partners of the firm of architects and civil engineers, unless he was in a position to efficiently attend to the work of the firm, the total income of the firm would have necessarily dwindled with the result that the share of the profits of the assessee would also have consequently gone down. The fact that the assessee was entitled to a pre-determined share in the profits of the firm was hardly relevant if his failure to work as a partner would have resulted in the consequential fall in the total earnings of the firm. It is not in dispute that the assessee was not in good health. At the same time, it was not obligatory on the assessee to totally stop working for the firm as seemed to have been assumed by the Tribunal. If having regard to the infirm health of the assessee, he wanted to take care that his health should not adversely affect the business of the firm, it is difficult to see why he had not acted prudently in taking the assistance of a third person. It was merely a fortuitous circumstance that this Shri Kapadia happened to be in the employment of the firm. It is not the case of Vadhelwalla, whose statement has been recorded by the ITO, that the routine work which Shri Kapadia was going in his capacity as an employee of the firm had in any way suffered. Not has it been found that the kind of work which Shri Kapadia has described he was going, off and on, on behalf of the assessee was a part of the normal routine work which Kapadia was supposed to do in his capacity as a remunerated employee of the firm. It cannot also be ignored that a certain amount of risk would have been involved if the assessee had taken the assistance of an outsider because there would have been a possibility of the diversion of the clientele to such an outside expert. It is, therefore, apparent in the circumstances which we have pointed out above that the expenditure which was incurred by the assessee in the form of payment made to Shri Kapadia was expenditure incurred wholly and exclusively for the purpose of earning his share of profits. That this is the correct principle on which such a case has to be determined is clear from the very two decisions relief upon by Mr. Joshi.

10. In Shantikumar Morarji's case : [1955]27ITR69(Bom) , this court pointed out that it would be open to a partner to claim a deduction provided he satisfies the taxing authority that such deduction represents a necessary expenditure, the expenditure being incurred in order to enable him to earn the profits which are being subjected to tax. In Ramniklal Kothari's case : [1969]74ITR57(SC) , the Supreme Court pointed out that the share of a partner is business income in his hands for the purpose of s. 10(1) of the Indian I.T. Act, 1922, and, being business income, expenditure necessary for the purpose of earning that income and appropriate allowances are deductible therefrom in determining the taxable income of the partner. The present is an instance where the tests referred to above are fully satisfied.

11. We may point out that the considerations which govern the decision of the question as to whether the expenditure is properly deductible or not have been succinctly set out by the Madras High Court in Newtone Studios Ltd. v. CIT : [1955]28ITR378(Mad) and the following observations made by that court have been quoted with approval by this court in F. E. Dinshaw Ltd. v. CIT : [1959]36ITR114(Bom) :

'Under our taxing system, it is for the assessee to conduct his business, and in his wisdom or otherwise to fix the remuneration to his staff. The Income-tax Act does not clothe the taxing authority with any power or jurisdiction to determine the reasonableness of the amount so fixed and paid by the assessee. The only test for the deductibility of such remuneration is whether the expenditure has been incurred solely and exclusively for the purpose of the business. If the reality of the payment is challenged or is in dispute different consideration arise; so also in cases where the tax authorities are able to point to some consideration other than the purpose of the business as accounting for any portion of the payment made. In such cases, of course, such portion of the amount claimed, which is either not held to have been paid or is held to have been paid for reasons other that business expediency, could and should be disallowed; but the reason for the disallowance is because either the portion disallowed is not paid, or because the expenditure is not solely and exclusively for the business, and not on the ground that in the opinion of the Income-tax Officer or other taxing authority the remuneration is 'unreasonably' high either because the employee does not, in the authority's opinion, deserve so much, or because the assessee could have secured other employees on more favourable terms.'

12. It is enough, therefore, to point out that the entire approach of the Tribunal to the question which it was called upon to decide was vitiated by an error of law and it must, therefore, be held that the amount paid to Shri Kapadia by the assessee, that is, a sum of Rs. 22,116 from the share of profits from the firm of Messrs. Kore & Bhatt for the assessment year 1962-63 was deductible as expenditure incurred for the purpose of earning his income by the assessee.

13. Consequently, the question referred to us is answered in the negative and in favour of the assessee. In the circumstances of the case, costs will be as incurred.


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