JAGANMOHAN REDDY, J. - On the application of the assessee under section 82, Hyderabad Income-tax Act, 8 of 1357 F., the Income-tax Tribunal at Bombay has referred has the following question for determination of this High Court, viz., "Whether the sum of Rs. 5,000 and Rs. 5,029 could be deducted in the present assessment made on the assessee from the assessees share of income from the firm of Messrs. Mohamed Haneef and Abdul Quadar and others ?" From the statement of the case forwarded to this Court by the Tribunal it appears that the assessee was assesses as an individual on his total income which, inter alia, consisted of a share of income from the firm of Messrs. Mohamed Haneef and Abdul Quadar and others, in which the assessee had one-sixth share. This one-sixth was computed at Rs. 25,609. The assessee claimed that in computing the total income, he should not only be allowed to deduct the interest paid on the capital borrowed by him for investment in the partnership but also the amount of commission which he had to pay to one Mohamed Yakoob through whose good offices he procured the loan as an item of expense deductible under section 12 of the Hyderabad Income-tax Act, corresponding to section 10 of the Indian Income-tax Act.
The Income-tax Officer disallowed this contention, but the Appellate Assistant Commissioner allowed a sum of Rs. 5,000 towards interest and a sum of Rs. 5,029 paid to Mohd. Yakoob. In an appeal filed by the Department against this order the Appellate Tribunal, without going into the merit of the case, viz., whether the amount claimed by the assessee was valid or not, held that on reading of section 21(b), 31(5) and 31(6), the whole share of the partnership income of Rs. 25,609 is taxable without making any deduction either towards interest or towards commission paid by the assessee.
The learned advocate for the assessee contends that when the share of profits from the partnership firm is included in the total income-tax of the assessee, the allowable deductions under the scheme of taxation are set out under section 12 of the Hyderabad Income-tax Act.
He refers particularly to clause (iii) of sub-section (2) of section 12 which is as under : "12. (I) The tax shall be payable by an assessee under the head profits and gains of business, profession or vocation in respect of profits or gains of any business, profession or vacation carried on by him.
(2) Such profits or gains shall be computed after making the following allowances. viz., (iii) in respect of capital borrowed for the purpose of the business, profession or vocation, the amount of the interest paid : (X) any sum paid to an employee as bonus or commission for services rendered, where such sum would not have been payable to him as profits or dividend if it had been paid as bonus or commission : Provided that the amount of bonus or commission is of reasonable amount and with reference to : (b) the profits of the business, profession or vacation for the year in question; and (XV) any expenditure (not being in the nature of capital of expenditure or personal expenses of the assessee) laid out or expended wholly and exclusively for the purposes of such business, profession or vocation." Before we deal with this contention, it is necessary to examine the provisions of sections 20(I)(b), 31(5)(a) and 31(6) of the Hyderabad Income-tax Act to which a reference has been made by the Tribunal.
Section 20(I)(b) (which corresponds to section 16(I) of the Indian Income-tax Act) is as under : "When the assessee is a partner of a firm, than, whether the firm has made a profit or loss, his share (whether a net profit or net loss) shall be taken to be any salary, interest, commission or other remuneration payable to him by the firm in respect of previous year increased or decreased respectively by his share in the salary, commission or other remuneration payable to any partner in respect of the previous year : Provided that if his share so computed is a loss, such loss may be set offend carried forward in accordance with the provisions of section Section 31(5)(a) and 31(6) correspond to section 23(5)(a) and 23(6) of the Indian Income-tax Act and are set out as under : "31. (5) Notwithstanding anything contained in the foregoing sub-section when the assessed is a firm and the total income of the firm has been assessed under sub-section (I), sub-section (3), or sub-section (4) as the case may be - (a) in the case of a registered firm, the sum payable by the firm itself shall not be determined but the total income of each partner of the firm including therein his share of its income, profits and gains of the previous year, shall be assessed, and the sum payable by him on the basis of such assessment shall be determined : Provided that if such share of any partner is a loss, it shall be set off against his other income or if necessary carried forward or set off in accordance with the provision under section 32." "31. (6) Whenever the Income-tax Officer makes the determination in accordance with the provisions of sub-section (5) he shall notify to the firm by an order in writing, the amount of the total income on which the determination has been and the apportionment thereof between the several partners." Section 20(I)(b) lays down a formula for computation of partners share in the profits or losses of the firm. The mode of computation is to take any salary, interest, commission or other remuneration payable to a partner by the firm and to add to or subtract as the case may be from the partners share in the balance of profit or loss after deduction.
For the purposes of computing the taxable income of the firm, however, these deductions are not taken into account. The assessment on the firm is governed by sub-section (5) of section 31 which inter alia provides that the assessment of a partners share of income in registered firm is to be computed with his other income. If the profits of a partnership are not taxed at source then that amounts is treated as the partners individual income which, along with his other income will become assessable.
In computing the taxable income, firm is treated as a unit but with respect to the determination of the tax payable, it is necessary to see whether the firm is registered or unregi stered, because the section draws a distinction between these two. If it an unregistered firm, the tax is leviable on the income of the firm and not on the individual shares of the partners. This certainly makes the tax yield higher than what it would be if the firm was a registered one.
In the case of a registered firm the share of the partner is computed in accordance with the provisions of section 20(I)(b) and that share along with the other income of the individual is assessable as the total income of the assessee.
All that sub-section (6) of section 31 requires is that whenever the Income-tax Officer determines the total income of a partner including the share of his income-tax in the partnership, in accordance with sub-section (5) he shall, by an order in writing notify to the firm the amount of total income on which the determination has been based and the apportionment made between the several partners. Any of the partners who are aggrieved by the order determining the amount of the firms total income or the apportionment thereof between the several partners may appeal against it under the second proviso to sub-section (I) of section 42.
From a reading of these sections referred to by the Income-tax Appellate Tribunal there appears to be nothing which justified the drawing of a conclusion that the interest paid by the assessee towards capital borrowed by him for investment in the partnership business is excluded or is to be alloweded.
When an Income of a share of a partner of a registered firm is taxable as total income in the hands of assessee, in the same manner as any income derived by the assessee from any other source, the provisions of section 12 of the Hyderabad Income-tax Act become applicable, because it is only after deduction of the necessary expenses or amounts to be expended for the purpose of earning the income that the net profits could be computed.
The Income-tax Officer therefore should levy the tax on the net income after making deductions in accordance with the provisions relating to expenses and deduction; consquently the assessee is entitled if he could bring the items claimed within the four corners of the provision of section 12. The assessee can always contend that unless the interest payable by him on capital borrowed for purpose of investing in the partnership is deducted, his true profits cannot be ascertained.
It would also be open to him to claim deduction provided he satisfies the taxation authority that the deduction was necessary to earn the profits which were being subjected to tax.
The assessee further claims that the amount paid to the agent for procuring the loan which was invested as capital in the partnership firm is deductible either under clause (X) or (XV) of sub-section (2) of section 12. It is clear from the very wording of clause (X) that the deduction cannot be claimed under it, because Mohammed Yakub is not an employee of the the assessee, but is an agent which is quite a different thing.
In order to claim deduction under the residuary clause (XV) it must be show that the expenditure was in respect of the business which was carried on by the assessee in the accounting year and the profits of which are computed and assessed; that it was not in the nature of personal expenses of the assessee, that it was not in the nature of a capital expenditure and that it was laid out wholly and exclusively for the purpose of such business.
There is no doubt that the amount paid to Mohammed Yakub is neither in the nature of a capital expenditure nor can it be said to be the assessees personal expenses. The only question is whether it is laid out or expended voluntarily and exclusively for the purpose of such business. It is not denied that this amount was actually paid by the the assessee for the obtaining of a loan. It is pertinent to cite the observations of Viscount Cave, L.C., in Atherton v. British Insulated and Helsby Cables Ltd. "A sum of money expended, not of necessity and with a view to a direct and immediate benefit to the trade, but voluntarily and on the ground of commercial expediency, and in order indirectly to facilitate the carrying on of the business, may yet be expended wholly and exclusively for the perpose of the trade." This dictum was followed with approval in Tata Sons, Ltd. v.Commissioner of Income-tax, Bombay. Even in a case where certain commission is payable by reference tp profits for rendering expert technical or financial advice, it has been held that commission is one which is wholly and exclusively spent for the trade.
On an interpretation of the provision or fule (3) of Cases 1 and 2 of Schedule D corresponding to section 12(2)(XV) of the Hyderabad Income-tax Act, it was held in British Sugar Manufacturing, Ltd. v.Harris, that such an amount was money wholly and exclusively laid out for the purpose of the trade. Reference has been made with approval in that case to the case of Indian Radio and Cable Communication Co. Ltd. v. Commissioner of Income-tax, Bombay Presidency & Aden.
For these reasons, in our view, the commission paid to the agent for the purpose of procuring money with a view its being invested in the partnership business is money laid out or expended wholly and exclusively for purpose of the business within the meaning of clause (XV) of sub-section (2) of section 12 of the Hyderabad Income-tax Act.
Our answer to the reference is that the amounts of Rs. 5,000 and Rs. 5,029 are deductible items from the assessees share of income from the firm of Messers. Mohd. Haneef and Abdul Khader. Let the reference be answered accordingly. The assessee will have his costs which we assess at Rs. 250.