1. This case was first heard by a Division Bench of this Court on 16-7-1952, which after discussing the various questions of law that were involved in the reference made by the Income-tax Appellate Tribunal under Section 66 (1), Income-tax Act, directed the Tribunal to send a further statement of all the relevant facts for the purpose of enabling it to give a clear answer to the questions formulated in the original reference. The Tribunal has submitted a supplementary statement of facts along with the report of the Appellate Assistant Commissioner on remand, and we have heard the Counsel for both sides not only on the new question that arose out of the additional statements submitted by the Tribunal but also on the questions which have been - fully dealt with in the previous judgment of this Bench.
2. For the purpose of appreciating the various points involved the relevant facts may be recapitulated as follows. One Lachminarayan Modi was carrying on a partnership business with his four separated brothers with head office at Cuttack and branch offices at Ichhapur, Ganjam and other places. One of the important businesses carried on by the partnership firm was the manufacture of salt at Ganjam and Sumadi. Due to some difference amongst the partners the said Lachminarayan instituted a suit (suit No. 6 of 1941) for dissolution of partnership and for other reliefs in the Court of the Subordinate Judge and prayed in the plaint itself for appointment of a Receiver. The receivership matter was disposed of by the Subordinate Judge by his order dated 7-4-41 in which after appointing an Advocate of Cuttack (Sri P. Mohanty) as Receiver he gave the following directions.
(1) He should carry on the salt business at Ganjam and Sumadi factories with a view to facilitate the collection of the considerable amount of 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.
(2) He should also carry on those businesses and should see that it would not be a loss to the partners.
(3) He should take possession of the stock of salt at Ganjam and Sumadi factories. (The other directions are not material for the purpose of this case).
In directing the Receiver to carry on the salt-business at Ganjam and Sumadi the learned Subordinate Judge was influenced by the following two factors:
(i) For the salt factory at Ganjam about Rs. 20,000/- had been advanced by the partnership firm to the labourers before the dissolution of the partnership and the Subordinate Judge thought that it would be practically impossible to realise the money from the labourers unless the business, was carried on and the labourers were directed to contribute by their labour towards repayment of the sum.
(ii) As regards Sumadi factory, the business had come to a standstill on account of a dispute amongst the partners and the continuance of the dead-lock would cause great loss to the firm. The re-starting of the business was held to be necessary for winding up of the business and moreover, the firm had taken lease of the Sumadi factory from the Government for a limited period which would expire in 1942. Hence, the Sub-ordinate Judge thought that if the firm stopped its business it would forfeit the lease and incur great loss in payment of rent, establishment charges and penalty to the Government.
3. The learned Subordinate Judge had in mind Section 47, Partnership Act, under which even after the dissolution of a firm the mutual rights and obligations of the partners continue so far as may be necessary to complete the transactions begun but left unfinished at the time of the dissolution. To quote the words of the Subordinate Judge-
'Salt manufacture is part of the business of the firm and should be considered incomplete at the time of the lease period. In the interests of the firm and its partners for the purpose of winding up, the said business should be restarted.'
4. In pursuance of this order the Receiver carried on the salt business at both the said places and out of the total profits realised a sum of Rs. 13,254/- was paid to Lachminarayan Modi as his share of the income for the year 1-1-43 to 31-12-43. When Lachminarayan Modi was assessed to income-tax in respect of that income during the assessment year 1944-45 he claimed a reduction of Rs. 5,370/- as legal expenses incurred by him in connection with the said partnership suit and urged that it was a permissible deduction under Section 10 (2) (xv), Income-tax Act, inasmuch as the sum was 'expended wholly and exclusively for the purpose of his business'. The fact that the said sum was incurred for the legal expenses in connection with the partnership suit was challenged by the Income-tax Department.
In fact, in the original statement of the case of the Tribunal it was noted that there was no dispute about the correctness of the figure of Rs. 5,371/-. In the supplementary statement of the case, however, the Appellate Assistant Commissioner has attempted to cast some doubt on the correctness of the figure, especially as regards the purpose for which some of the items of expenditure were incurred. In our opinion, it is no longer open to the Department to challenge the correctness of the figure in view of the first statement of the case by the Tribunal which has concluded this question of fact. We would, therefore, take it as well established that for the year in question the assessee had spent Rs. 5,371/-towards the legal expenses in connection with the dissolution of the partnership suit pending in the Subordinate Judge's Court.
5. The question formulated by the Tribunal for the decision of this Court is as follows:
'Whether on the facts and circumstances of this case the sum of Rs. 5,371/- could be excluded from the assessable income of the assessee under Section 10 (2) (xv)?'
The previous Bench held that the facts necessary for answering this question had not been fully given in the previous reference and therefore directed the Tribunal to state a case as to whether the Receiver was appointed to carry on the business of the firm and for what period he carried on the business of the firm and whether it was for the protection of the assets of the firm. The Tribunal has reported that the business was continued by the Receiver till some time in 1945 and that out of the total profits during the year in question the assessee's share amounted to Rs. 13,254/- and the legal expenses in connection with the dissolution of the partnership suit during that year were Rs. 5,270/-.
6. In -- 'J.B. Advani and Co., Ltd. v. Commr. of Income-tax and Excess Profits Tax', AIR 1950 Bom 297 (A) it was held that
'Where an asset of a business is protected or safeguarded by the assessee carrying on the business in a civil litigation, the costs of such litigation are always a permissible deduction.'
Doubtless, in that case their Lordships were concerned mainly with the expenditure incurred in connection with a criminal case. But the aforesaid observation in respect of civil litigation was accepted as correct by the previous Bench of this Court and it was held that the test to apply in considering whether the deduction was permissible or not was whether by that litigation the asset of the business was protected or safeguarded. There was a further question as to whether the expenditure in connection with such litigation was capital expenditure or revenue expenditure and for a decision of this point the previous Bench relied on -- 'Mahabir Parshad and Sons. v. Commr. of Income-tax, Punjab and NW FP', AIR 1945 Lah 217 (PB) (B) where it was held that
'the test to be applied in determining whether litigation expenses are in a particular case capital expenditure or not is whether the expenses were incurred in acquiring a new capital asset or in improving or altering an existing capital asset'.
7. It was urged by Mr. Das on behalf of the opposite party that the view taken by the previous Bench on the two important questions of law may require some modification in view of the subsequent decision of the Supreme Court reported in -- ('Commr. of Income-tax, West Bengal v. H. Hirjee', AIR 1953 SC 324 (C) where some of the observations of the Bombay High Court in -- 'AIR 1950 Bom 297 (A)', were dissented from. We have carefully gone through the decision of the Supreme Court and we find that though as regards permissible deduction of expenses in connection with criminal litigation, their Lordships of the Supreme Court have expressed dissent from the Bombay view they have, on the contrary, endorsed their view as regards permissible deduction of expenses in connection with civil litigation. They have referred to a previous decision of the Privy Council reported in -- 'Commr. of Income-tax, B. and O. v. Kameshwar Singh', AIR 1942 PC 11 (D) and held that legal expenses incurred in civil litigation arising out of matters incidental to the carrying on of a business were permissible deductions in the computation of its profits. They further pointed out:
'In that class of case (meaning civil litigation) no question could arise as to the primary or secondary purpose for which the legal expenses could be said to have been incurred as in the case of a criminal prosecution.'
In the end they said:
'The deductability of such expenses under Section 10 (2) (xv) must depend on the nature and purpose of the legal proceeding in relation to the business whose profits are under computation and cannot be affected by the final outcome of that proceeding.'
8. Mr. Das referred to an English decision reported in -- 'Smith's Potato Estates Ltd. v. Bolland', 1949-17 ILR, Sup 1 (E) in support of his contention that legal expenses for prosecuting an appeal in the Board of Referees against a decision of the Inland Revenue Commissioners were not an expenditure 'wholly or exclusively laid out or expended for the purpose of the trade.' This decision has been considered by the previous Bench of this Court and held to be not applicable to the present case. With respect, we would agree with the observation of the previous Bench. In any case, in view of the Supreme Court decision mentioned above, reliance cannot be placed on all the observations contained in the decisions based on the English Income-tax Act.
9. Applying those principles to the present case can it be held that the expenses incurred in the suit for dissolution of the partnership were for the purpose of protecting the assets of the firm? Doubtless, the main purpose of the suit was for dissolution of the partnership and for other consequential reliefs. But the appointment of a Receiver was prayed for in the plaint itself and the Subordinate Judge directed the Receiver to carry on the business for the purpose of protecting the assets of the firm and to complete the transactions begun but left unfinished at the time of the dissolution. If the suit had not been brought no Receiver would have been appointed and there would have been a heavy loss in the assets of the firm, especially in respect of the forfeiture of the lease of Sumadi salt factory and the loss of more than Rs. 20,000/- paid to the labourers in Ganjam salt factory.
The clear finding of fact of the Tribunal is that the Receiver did carry on the business of the firm and from the order of the Subordinate Judge appointing the Receiver which is quoted in the report of the Appellate Assistant Commissioner it is also clear that the main object in appointing the Receiver was to protect the assets of the firm during the transitional period. Hence, it will not be unreasonable to say that one of the purposes of the suit was to secure the appointment of a Receiver so as to protect the assets of the firm during the transitional period. It is true that the main purpose of the suit was to bring about dissolution of the partnership and for other consequential reliefs. But the protection of the assets of the firm by the appointment of a Receiver was also one of the purposes and as pointed out by their Lordships of the Supreme Court in --'AIR 1953 SC 324 (C)',
'no distinction can be made between the primary and secondary purposes for which the legal expenses could be said to have been incurred in civil litigation.'
It is impossible to further apportion the total expenses between the legal expenses incurred in connection with the appointment of a receiver on the one hand and the legal expenses incurred for dissolution of the partnership on the other. The two are inextricably mixed up and the entire legal expenses should, in the circumstances of this case, be held to be for the purpose of protecting the assets of the firm during the transitional period. Hence, it would be permissible deduction under Section 10 (2) (xv), Income-tax Act. There can also be no doubt that it is revenue expenditure and not capital expenditure Inasmuch as no new capital asset was acquired but the existing assets of the firm were utilised to the best advantage.
10. We would, therefore, answer the questionreferred to us by the Tribunal in the affirmative.The assessee is entitled to costs. Hearing fee isassessed at Rs. 200/-.
11. I agree.