1. This is a reference under Section 66 (1) of the Indian Income-tax Act made by the Income-tax Appellate Tribunal, Bombay Branch. The assessee is an undivided Hindu family represented by Lachminarayan Modi, the Karta of the said family. Lachminarayan has four brothers who separated long ago. The assessee family carried business mainly in salt and in other articles, such as, Kerosene Oil, Petrol &c.; The Head Office was in Cuttack, and there were branches also in Ichhapur, Ganjam &c.; In Ichhapur, the Firm, known as Tilakchand Hariram, carried on business in manufacture of salt, the partners in the business being Lachminarayan, the 'Karta' of the assessee family, and his divided brothers.
Owing to differences between the partners, Lachminarayan brought Original Suit No. 6 of 1941 in the Court of the Subordinate Judge of Cuttack against his four brothers, the other partners in the partnership business, praying for a declaration that the partnership stood dissolved since 31-10-40; and in case there be any legal flaw in the dissolution, for dissolving the same under orders of the Court; for taking of account and for the appointment of a Receiver, for granting an injunction against the defendants to prevent obstruction in any way in the works of the plaintiff, for calling upon defendant No. 1 to submit and render accounts and for awarding damages and costs &c.;
2. A preliminary decree was passed in the suit on 6-8-43 to the effect:
'That the suit be decreed on contest with costs to be realised in equal shares from the defendants Nos. 1 and 2. It is declared that the plaintiff and defendants 1 to 4 have each three annas four gandas interest in the partnership business and that this partnership shall be deemed to have been dissolved from 31-10-40. It is ordered that a commissioner should be appointed for the examination of accounts for the years 1938-39 and 1939-40.'
In the decree, as printed at pp. 66-71 of the Paper Book, we find that the learned Subordinate Judge gave some directions as to how the accounts were to be taken. In this suit it is stated that a Receiver was appointed for the purpose of taking charge of the management of the business for collecting assets. In the year of account, the assessee received a sum of Rs. 13,254/- from the Receiver in the suit and claimed exemption in respect of Rs. 7,688/- as the money spent for litigation expenses of the said suit. Before the Income-tax Appellate Tribunal, Mr. Mohanty, appearing on behalf of the assessee, confined his claim to Rs. 5,371/-submitting that Rs. 2,317/- was really spent for litigation in the next preceding year. The Income-tax Appellate Tribunal, by their order dated 25-1-52, made a reference under Section 66 (1) to the effect:
'Whether on the facts and circumstances ofthis case the sum of Rs. 5,371/- could be excluded from the assessable income of the assessee under Section 10 (2) (xv)?'
3. The only facts stated are in paragraphs 9 and 10 of the statement which are as follows:
'(9). It has already been stated that the Assessee, Lachminarayan, in his representative capacity as a karta of the family, was a partner of the Firm of Trilokchand Hariram, the other partners being the separated brothers. Owing to differences between the partners a suit was filed by the Assessee before the Subordinate Judge of Cuttack, asking for a declaration that the partnership had been dissolved as on a certain date and for ac-counts to be rendered by the first defendant who was one of the partners in the business. A preliminary decree was passed on 6-8-43 & a receiver was appointed to work out the figures. In the year of account the Assessee received a sum of Rs. 13,254/- from the Receiver in the suit and he also incurred in connexion with that suit an expenditure which he claimed to be Rs. 7,688/-.
The Assessment on Trilokchand Hariram, Cuttack, has not been made in the status of a 'Firm'. The Receiver was keeping a common account book in respect of the income from properties belonging to the Ex-partner-co-sharers. In order to ascertain the amount received on behalf of each beneficiary, the Income-tax Officer first computed the income of the estate and also the amount due to each beneficiary under Section 41. This amount in Assessee's case amounted to Rs. 13,254/-which has been assessed in his hands.
10. It appeared that the suit lasted for several years. In each year certain sums were spent by the Assessee. Out of this Rs. 7,688/-from the accounts given by Mr. Mohanty, appearing on behalf of the Assessee, Rs. 2,317/- was brought forward as having been spent in the next preceding year, i.e., in 1942. It is admitted by Mr. Mohanty that he cannot claim the sum of Rs. 2,317/- as having been incurred in the relevant accounting year. The dispute now is whether Rs. 7,688 minus Rs. 2,317/-. Rs. 5,371/- is an allowable business expense of the Assessee.
There is no dispute about the correctness of this figure. This sum is claimed in the year of account as revenue expenditure under Section 10 (2) (xv). The Tribunal held that this sum was not expended or laid out wholly and exclusively for the purpose of such business but it was spent in a litigation after the partnership firm was dissolved to work out the rights of a partner in a dissolved partnership. We think a question of law does arise from the order of the Tribunal. We therefore refer the following question to the High Court:'
From this it is clear that the assessee had spent Rs. 5,371/- for the litigation in the assessment year.
4. The question now is whether he is entitledto exemption for having spent the amount whollyand exclusively for the purpose of the businessas provided for in Section 10(2)(xv). Sub-clause(xv) of the section runs as follows:
'Any expenditure (not being in the nature ofcapital expenditure or personal expenses ofthe assessee) laid out or expended wholly &exclusively; for the purpose of such business,profession or vocation.'
The point is whether litigation expenses can be deemed to be expenses incurred 'wholly and exclusively' for the purpose of the business. Much will depend upon the purpose of the litigation and its connexion with the business. If the purpose of the litigation is to safeguard or protect the stock-in-trade of the business or even to protect the business from running into losses or ruins, the money spent for the litigation may be considered to be money spent wholly and exclusively for the purpose of the business.
5. We have got the advantage of a very learned discussion on the subject by Chagla C. J. of the Bombay High Court in the case of -- 'J.B. Advani & Co. Ltd. v. Commr. of Income-tax and Excess Profits Tax', reported in : 18ITR557(Bom) . Of course, it was a criminal case ending in acquittal. But Chief Justice Chagla, after review of the most important cases on the topic, has enunciated the principle in very lucid and clear language. There the assessee was a private limited company, the directors having a controlling interest. The assessee's directors and manager were prosecuted for offences under the Hoarding and Profiteering Prevention Ordinance for selling boxboards at a much higher price.
The directors and the salesman were also prosecuted under the Defence of India Rules on the ground that the salesman refused to sell paper. The accused persons having been discharged, the assessee claimed that the sum or expenses incurred in the defence of these prosecutions should be deducted under Section 10 (2) (xv) of the Indian Income-tax Act, 1922 as expenses wholly and exclusively incurred for the purpose of the assessee's business. The ex-emption was allowed. At page 567, in paragraph 2, Chagla C. J. observes as follows:
'The review of these authorities makes it clear that there is no difficulty in the class of cases 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. The difficulty only arises when you have a criminal prosecution. There again where a criminal prosecution ends in a conviction there is no difficulty because the assessee who is guilty of a breach of law cannot be heard to say that the costs of the litigation against him was a permissible deduction because the commission of an offence was not necessary for the purposes of his trade.
The real difficulty arises when you have a case where the prosecution terminates is acquittal. Then the two tests to be applied as Isuggested would be whether the assessee was charged with regard to a transaction which took place in the ordinary course of business and the other test would be whether he was charged in his capacity as a trader. If these two tests are satisfied and the Courtcomes to the conclusion that the primaryobject of incurring the expenditure was to protect the good name of the business then it could be said that the expenditure was wholly and exclusively for the purpose of business.'
On the authority, therefore, the position seems to be almost indisputable that where the expenses are for the purpose of protecting or safeguarding the interest of the assessee in the business in a civil litigation, they are always permissible deductions. The other features which seem to have impressed their Lordships in the case are (i) the close connexion of the litigation with the business, and (ii) the fact that the assessee must have prosecuted the litigation in the capacity as a business man. This will appear from the passage appearing at page 561, which runs as follows
'Now before we deal with the various authorities that have been cited at the Bar it is necessary to notice two or three important facts in connection with the claim made by the assessee company. The charges which the managing directors and the salesman were called upon to meet both at Madras and Karachi were incidental to the business that the company was carrying on. It was the business of the company to sell stationery & the company was charged with having held it in one case contrary to the law and in the other case having refused to sell. Therefore, both the charges were directly in connection with the business of the company as a trader.'
Chief Justice Chagla has discussed the principles laid down in the leading case on the subject -- 'Strong & Co. of Romsey Ltd. v. Woodifield' (1906) A.C. 448, which has been very much relied upon by the learned counsel here appearing on behalf of the Income-tax authorities. He has accepted the principle laid down in the leading case while he observes: 'There are two points emphasised by the Lord Chancellor, viz., that the loss must be incidental to the trade itself and it must fall on the trader in his character as a trader'. But the facts in that case -- 'Strong & Co. of Romsey Ltd. v. Woodfield', are clearly different from the facts before us.
6. Another important case on the subject is a decision of the Privy Council in the case of -- 'Commr. of Income-tax, Bihar & Orissa v. Kameshwar Singh of Darbhanga', reported in (1942) 10 I.T.R. 214. There the assessee's lather who had been carrying on money-lending business had lent a sum of rupees ten lakhs to a company in which he was a shareholder. Some of the shareholders of the company brought a suit against him alleging that he had agreed to take over the management of mills and to finance it, but, in breach of this agreement he had failed to furnish the finances with the result that they had suffered heavy losses.
The suit was ultimately dismissed and the assessee claimed exemption in respect of a sum of rupees two lakhs which he had incurred in defending the suit. Their Lordships of the Privy Council held that the assessee's defence to the action was just as essential for the full protection of his rights as the creditor in the loan of rupees ten lakhs as was his suit for the recovery of the loan. The principle underlying, therefore, is clear that if the litigation is launched for the protection of the assets belonging to the trade then the assessee who is carrying on the trade is entitled to the costs of the litigation.
7. A further question arises
'whether the expense ought to be taken as a capital expense, and, as such, the assessee is not entitled to any exemption, as provided for under Section 10(2)(xv)'.
On this question also, we get sufficient light from the decision of Munir J. of the Lahore High Court in the case of -- 'Mahabir Parshad and Sons v. Commr. of Income-tax, Punjab and N.W.F.P. Lahore', reported in . There the assessee businessman claimed to deduct from the assessable income expenses which he had incurred in a suit for pre-emption of a property which he had purchased for business purposes and which he was using as a godown for the storage of his goods. The question referred to their Lordships was
'Whether legal expenses incurred in defendinga pre-emption or other suits relating to immovable property, acquired as capital assetsfor business purposes, were expenditures inthe nature of capital expenditures within themeaning of Section 10 (2) (xii) of Income-taxAct, 1939'.
After a very careful consideration of severalauthorities on the subject, Munir J. came tothe conclusion that the question whether legalexpenses are, in a particular case, capital orrevenue expenditures should be decided according to the test suggested by Lord Cave andsubsequently, approved in a large number ofcases, in particular by Lawrence J., whetherthe expenses were incurred in acquiring a newcapital asset or in improving or altering anexisting capital asset. In that particular case,it was found that it was neither for acquiringa new capital asset, nor for improving oraltering an existing capital asset, and, as such,the expenses were allowed to be exempted.
8. Learned counsel, appearing on behalf of the Income-tax authorities, has placed very strong reliance in the case of -- 'Smith's Potato Estates Ltd. v. Holland', reported in (1949) 17 ITR (Supp.) 1. There the question was whether legal and accountancy expenses of prosecuting an appeal to the Board of Referees against a decision of the Inland Revenue Commissioners under Section 32 of the Finance Act, 1940, incurred by a tax-payer with a view to reducing the assessment made upon him as a trader for excess profits tax, are to be exempted as disbursements wholly and exclusively laid out for the purpose of the trade. The decision negatived such an exemption. After a careful perusal of the case, we are of the view that that case does not lay down any principle standing in conflict with the other decisions indicated above.
9. We are, therefore, prepared to accept the principles laid down in -- 'J.B. Advani & Co. Ltd. v. Commr. of Income Tax and Excess Profits Tax'. : 18ITR557(Bom) and --'Mahabir Parshad and Sons v. Commr. of Income Tax Punjab and N.W.F.P. Lahore' , raised before us in this case. This, however, is subject to possible modification with reference to expenses incurred in connexion with suits for dissolution of partnership. In such cases, a question may also arise as to whether the expenses incurred by which of the parties can be reasonably said to be so directly connected with the business as to fall within the scope of Section 10(2)(xv) or whether all would be equally entitled -- a question on which we express no opinion.
10. We find, however, that there are not sufficient facts to be gathered from the statement of the case submitted to the Court by the Tribunal to enable us to apply those principles to this case and to come to a decision. The facts, with reference to which our answer is to be given, have to be gathered only from the statement of the case itself, as understood, if need be, with reference to annexures thereto. See -- 'Commr. of Income Tax West Bengal v. Calcutta Agency Ltd.' : 19ITR191(SC) and--'In re G. I. M. Gregory & Co.' : 5ITR12(Cal) . The facts relating to this question are found only in paragraphs 9 and 10 of the statement of the case, already quoted above and appearing at pp. 4-5 of the printed Paper Book. From the said statement, it does not appear clearly that the Receiver was appointed to carry on the business, or that he did so carry on during the year of account.
From the plaint in the suit which was filed in 1941, it appears from paragraph 22 thereof that what was contemplated was to have the property of the Firm applied in payment of the debt and liability of the Firm, if any, and to have the surplus distributed amongst the partners according to their right and hence to have the accounts adjusted and the 'incomplete parts of the business carried on and finished in a business-like way'. In paragraph 26, it is stated that the suit was one for adjustment of accounts, distribution of profits and such other consequential reliefs appertaining to, and connected with, the winding up of the business. In paragraph 27 in (c) and (d) thereof, the relief asked for was for the account being taken and a Receive being appointed.
Under the preliminary decree dated 6-8-43, all that was done was to declare the shares of the parties in a partnership, which should be deemed to have been dissolved from 31-10-40 and to appoint a Commissioner for the examination of accounts for the years 1938-39 and 1939-40 and to give certain directions as to how those accounts are to be taken. This material, by itself, does not show at all that there was a Receiver appointed to carry on the business, or (sic)at what was distributed by the Receiver were (sic) profits of that business and that the ex-(sic)enses incurred were for the purposes of the (sic)usiness.
Even if we refer to the application made by the assessee under Section 66(1), to be found at pp. 22-31 of the Paper Book, the only paragraphs relating to this matter are paras. 12, 13 and 14 at p. 31. These throw no light on the relevant facts. Then again, when we go to the orders of the Income-tax authorities, the only relevant materials are at pp. 9, 17 and 23 of the Paper Book in the orders of the Income-tax Officer, Appellate Asst. Commissioner and the Income-tax Appellate Tribunal. None of these throw any real right upon the questions
'whether the Receiver was appointed to carry on the business and for what period he carried it on and whether the Receiver was appointed and the business carried on for protection of the assets of the Firm.'
Thus on the records available to us, not only is there no statement of the relevant facts by the Income-tax Appellate Tribunal, but there is also no material with reference to which we can find the facts for ourselves even if we had the power to do so.
11. In our opinion, therefore, the statement of the case, submitted to us, does not enable us to come to any definite conclusion as regards the question referred to us. We direct accordingly under Section 66(4) of the Act that the Tribunal should send a further statement of all the relevant facts in the light of the above decisions in -- 'J. B. Advani & Co. Ltd. v. Commr. of Income Tax and Excess Profits Tax' : 18ITR557(Bom) and -- 'Mahabir Parshad & Sons v. Commr. of Income Tax Punjab and N. W. F. P. Lahore' , after giving the assessee an opportunity to place before the Tribunal the necessary materials.
Jagannadha Das C.J.
12. I agree.