This is a petition under section 66(2) of the Indian Income-tax Act for requiring the Appellate Tribunal to state the case and refer to this court the following question of law :-
'Whether the expense incurred by the assessee are an admissible deduction under section 10(2)(xv) ?'
The facts giving rise to these proceedings may be briefly stated as follow : The assessee, namely, the firm Messrs. Ram Chandra Munna Lal is a joint Hindu family firm who carry on the business of cloth merchants and also of money-lending in Delhi. The assessee firm through Mahabir Prashad entered into an agreement with three others for promoting a limited company to be styled as Shahdara Delhi Iron Works, Ltd. According to the term of the agreement the assessee firm land two of the other three were to contribute a sum of Rs. 15,000 each to the capital of the company while a sum of Rs. 3,000 was to be contributed to the said capital by the fourth party. It was also agreed that during the period of the promotion of the company and before the company was actually floated the business of the Iron works was to be carried on on partnership basis by the four, each having a one-fourth share in the profit and loss of the partnership. On incorporation of the company the partnership consisting of the four parties was to become a firm of managing agents. It was also agreed that any of the four parties dancing any money to the venture in excess of that agreed to be contributed to the capital could do so and on the money so advanced the parties would be entitled to get interest at the rate of 6 per cent. per annum. It seem that the company was never floated but the business of the Iron Works was actually commences at some time in August 1939. It appears that after the business had been started the party who had agreed to contribute a sum of of Rs. 3,000 to the capital of the business retired, thus leaving only three parties to the agreement in the field. In the months of September, 1942, the assessee firm served the other two parties with notice of their intention to terminate the partnership and calling upon them to dissolve the partnership and to render accounts. On October 21, 1942, Mahabir Prashad and Munna Lal brought a suit for dislocation of the partnership and rendition of accounts but on an objection taken by the defendants Mahabir prashad alone elected to continue the suit in his own name although during the course of the trial it was made clear by him that he had joined the partnership as a representing the joint Hindu family. On April 29, 1944, the subject granted Mahabir Prashad a preliminary decree for dissolution of partnership and for rendition of accounts, it being provided in the decree that the partnership was to be deemed to have been dissolved with effect from September 1942. On an appeal by the defendants the High Court, on March 2, 1945, set aside the preliminary decree, holding that no partnership had come into existence between the parties and that, accordingly, no suit for dissolution of partnership or rendition of accounts was competent. However, the plaintiff was given the option of amending the plaint and cavorting the suit into one for partition of the joint property or for joint possession of the plaintiffs undivided share in such property or for joint possession of the plaintiffs undivided share in such property or for recovery of the sum of Rs. 15,000 contributed by the plaintiff to the capital of the proposed partnership together with interest thereon. An appeal from the decree of the High Courts is said to be pending in the Privy Council.
During the course of the assessment for the year 1945-46 the assessee firm claimed a sum of Rs. 4,723 as the expanses of the above litigation. The Income-tax Officer by means of his order, dated September 10, 1945, declined to allow this deduction on the ground that the expenditure being one for obtaining a capital asset and not being in any way connected with the earning of profit for the accounting year in question could not be allowed under section 10(2)(xv). On appeal the Assistant Commissioner of Income-tax Remanded the case the case to her Income-tax Officer. In the remand report submitted by the said officer on January 19, 1946, it was stated that the expenditure had been incurred for acquiring the capital asset which was negatived by the High Court and that the suit not being in connection with the running of the business or in respect or realisation low capital and its yield, the expenditure incurred in connection therewith could only be regarded as a capital outlay and was inadmissible as a deduction under section 10(2). The Assistant Commissioner in dismissing the assessees appeal held that the appellant had been found by the Highs Court to be co-owner of the Delhi Steel Rolling Mills and not a partner in that business and that the expenses on litigation had been incurred in connection with the realisation of the capital invested in that property and the deduction claimed had, therefore, been rightly disallowed as not connected with the money-lending activities of the assessee. The appeal of the assessee was also dismissed by the Appellate Tribunal. The assessee thereupon moved the said Tribunal under section 66 of the Indian Income-tax Act for stating the case and for referring to this court the question of law mentioned above. The Tribunal disallowed the application of the assessee on the ground that on the facts of the case no question of law arose. The assessee has now come up to this court under sections 66(2).
After hearing the learned counsel for the parties at length we are of the opinion that the Income-tax Tribunal has rightly held that on the facts of this case no question of law arises.
It is not disputed that the only business carried on by the assessee firm is that of cloth merchants and that of money lending. It is not the petitioners case that they have ever carried on business in iron or any business of which of which the business done by the Shadhra Iron Works, Ltd., could be said to be an extension. A feeble attempt was made by Mr. Kirpa Ram Bajaj, learned counsel for the petitioner, to show that the assessee firm had also been during the business of dealing in secretaries. Even if it is assumed that the firm did any business in securities that cannot make any difference to our decision in the present case.
Section 10 of the Indian Income-tax Act provides for assessment of income-tax on income derived from business profession or vocation. The relevant portion of the section reads as follows :-
'Section 10.(1) The tax shall be payable by an assessee under the head profit and gains of business, profession or vocation in respect of the profits or gains of any business, profession or vocation carried on by him.
(2) Such profit or gains shall be computed after making the following allowances, newly :-
(xv) any expenditure (not being in the nature of capital expenditure or personal expresses of the assessee) laid out to expended wholly and exclusively for the purpose of such business, profession or vocations.'
The language used by the legislature in the above provision clearly shows that the expenditure which can be allowed in computering the profits or gains of any business carried on by the assessee during the accounting period must be an expenditure which, besides not being in the nature of either capital or a personal expense, has been laid out or expended wholly and exclusively for the purpose of the particular business. There can be little doubt that the words 'such business' in clause (xv) of the second sub-section have reference to the business mentioned in the first sub-section. If an assessee was carrying on more business than one in any particular year the expenditure incurred by him for the than one in any particular year the expenditure incurred by him for the purpose of one business cannot be allowed in computing the profits or gains of another business even though such expenditure incurred by him for the purpose of the one business cannot be allowed in computing the profits or gains of another business even though such expenditure fulfill all the other requirements of the clause by reason of its not being in the nature of a capital or a personal expenditure and of having been laid out or expended wholly and excursive; for the purpose of the business.
'Business' has been defined in Section 2(4) as including 'any trade, commerce, or manufacture or any adventure or concern in the nature of trade, commerce or manufacture.' Whether an assessee carries on different varieties of trade, commerce, or manufacture each variety will have to be regarded law a separate business for the purpose of section 10 unless of course one or more varieties are so closely connected with each other to be capable of being regard as one business. The following observation in the judgment in South Indian Industrial Ltd., Madras v. Commissioner of Income-tax, Madras, appearing at pages 438 - 440 of the report are fully illustrative of this proposition :-
'The fallacy underlying the assessee argument is that because a company carries on servile concern those concerns are all one business, namely, the companys business. That is not so A company can carry on several distinct and separate business and it must always be a question of fact whether those business are separate business or whether they are so interlocked with the main chief business of the company to be really on be business; for example, a railway company carrying on a steam boat business in connection with it railway. This distinction has been recognised in cases under the Income-tax Acts in England. One of these is scales v. George Thompson and Co. Ltd. There, the respondent company was incorporated in 1905 to take over as a going concern the business of George Thompson and Co., shipowners, ship and insurance brokers, underwriters and merchants. As regards their partners who acted on behalf of the partnership as names or members of a syndicate whose credit was used by an under writing agent in underwriting risks at Lloyds. The monetary deposit made at Lloyds in respect of these two partners was transferred to the company, but since Lloyds will not recognize a company as a name these two partners continued to act as nominees and agents of the company to which all underwriting profits were handed over, the company being responsible for any losses. These profits were brought into the companys accounts with those of the rest of their business. In 1919 open of these nominees retired and in 1920 of the other died, whereupon the underwriting business ceased. The company claimed that the underwriting business was a business separate from their other activities and that it should be treated as a separate business in computing their liability. The Special Commissioner allowed their appeal. It was held by the High Court that the question was one of fact and that there was evidence on which the Commissioner could come to their decision. Rowlatt, J., in his judgment says :-
This company carried on the business of underwriting. It also had a fleet of steamers. I cannot conceive two business that could be more easily separated than those two....... One does not depend upon the other; they are not interlaced; they do not dovetail into each other; except that the people who are in them known about ships; but the actual conduct of the business shows no dovetailing of the one into other at all. They might stop the underwriting; it does not affect the ships. They might stop the ships and it does not affect the underwriting.
The same observations can be applied to the present case equally well. The company could cease any one or more of its activities without stopping the others and without getting rid of their share-holding in the Chittivalsah Jute Mills Company, Limited. Similarly, they could get rid of their Chittivalsah Jute Mill shares without stopping any of the other concerns. Cases like the present are dealt with the Commissioner of Income-tax, Madras v. Best and Co., Madras. The five concerns in question here were separate business and, if those business had been carried on during the year of account, the profits and gains of each of them separately would have been arrived at under section 10(1) and (2) of the Act after making the allowances given in sub-section (2).'
The language of the relevant portion of section 10 also shown that the business in respect of the profits or gains of which an assessee can be required to pay income-tax, and consequently expenditure laid out or expended in which can be allowed in assessing such profits or gains must be a business which was actually carried on during the accounting period.
In Commissioner Of Income-tax, Bengal v. Shaw Wallace and Company, the assessees carried on business in Calcutta as merchants and agents of various companies and had branch officers in different parts of India. For a number of years prior to 1928, they had acted as distributing agents in Indian of the Burma Oil Company and the Anglo - Persian Oil Company, but had no formal agreement with either company. In or about the year 1927, the two companies combined and decided to make other arrangements for the distribution of their products. The assessees agency of the Burma Company was, accordingly, terminated on the December 31, 1947, and that of the Anglo-Persian Company on the 30th June following. Some time in the early part of 1928, the Burma Company paid to the assessed a sum of Rs. 12,00,000 as full compensation for cessation of the agency, and in August of the same year, the Anglo-Persain Company paid them another sum of Rs. 3,25,000 as compensation for the loss of the office as agents to the company. The Income-tax Officer, in computing the assessable income of the assessee for the relevant years ending the December 31, 1928, and after allowing certain deductions therefrom in respect of compensation paid by the assessees to the various employees assessed them to income-tax on the balance left. The Assistant Commissioner of Income-tax confirmed the assessment. Thereafter on the requisition of the assessees, the Commissioner drew upon a statement of the case and referred three questions of law to the High Court for decision, one of the questions formulated running as follows :-
'Was not the sum of Rs. 9,83,361, which had been included in the total income of the assessees for purposes of assessment for 1929-30, in the nature of a capital receipt and, therefore, not income, profits or gains within the meaning of the Income-tax Act.'
The question was, however, restated by the High Court as follows :- 'Whether these sums are income profits or gains within the meaning of the Act at all ?' and the learned Judges of the High Court came to the conclusion that they were not. With this conclusion their Lordships of the Privy Council concurred. In delivering their judgment their Lordship made the following observations at pages 1350-51 :-
'The sources from the which the taxable income under the Act are to be derived are enumerated in section 6, which runs as follows :-
'Save as otherwise provided by this Act, the following heads of the income, profits and gains shall be chargeable to income-tax in the manner hereinafter appearing, namely :-
(iv) Business. . .
The claim of the taxing authorities is that the sum in question is chargeable under head (iv) business. By Section 2(4) business includes any trade, commerce or manufacture, or any adventure or concern in the nature of trade, commerce or manufacture. The words used are to no doubt wide, but underlying each of them is the fundamental ideal of the continuous exercise fan activity, under Section 10, the tax is to be payable by an assessee under the head business in respect of the profits or gains of any business carried on by him. Again, their Lordships think the same central idea. The words italicised are an essential consistent of that which is to produce the taxable income : it is to be the profit earned by a process of production. And this is borne out by the provision for allowance which follows. They include rent paid for the premises where the business of carried on; the cost of current repairs in respect of such premises; interest on money borrowed for carrying on the business, etc.'
At page 1352 are to be found the following observations :-
'Following the line of reasoning above indicated, the sums which the appellant seeks to charge can, in their Lordships opinion, only we taxable if the they are the produce, or the result, of carrying on the agencies of the oil companies in the year in which they were received by the respondents. But when once it is admitted that they were sums received, not for carrying on this business but as some sort of solatium for its compulsory cessation, the answer seems fairly plain.'
The following observations at the end of the judgment of their Lordship further show that in order to bring the case within the four concern of section 10, the particular business must have been carried on during the accounting period and it is not enough that the assessee was carrying on some other business during the said period :-
'It is contended for the appellant that the business of the respondents did in fact go on throughout the year, and this is no doubt true in a sense. They had other independent commercial interests which they continue to pursue, and the profits of which have been taxed in the ordinary course without objection on their part. But it is clear that the sum in question in this appeal had no connection with the continuance of the respondents other business. The profits earned by them in 1928 were the fruit of different tree, the crop of a different field.'
In South Indian Industrials Ltd., Madras v. Commissioner of Income-tax, Madras, also the following observation appearing at page 441 of the report leads to the same result :-
Section 10 only deals with the business which are being carried on and not business which have ceased to be carried on.'
In the present case, on the assessees own showing the partnership business was not carried on during the accounting period. The preliminary decree passes by the Subordinate Judge of Delhi on April 28, 1944, which was reversed by the High Court but which the assessee is trying to have resuscitated by means of appeal to the Privy Council, declared the partnership to have been dissolved with effect from September, 1942. In any event, the expenditure claimed cannot be said to have been laid or expended wholly and exclusively for the purpose of the partnership business. Indeed, it was laid and expended for terminating the business. In strong and Co., of Romsey Ltd. v. Woodified, their Lordships had to deal with a parallel provision of the English Income tax and to decide whether the deduction claimed was a disbursement or expense wholly and exclusively laid out or expended for the purpose of the appellant trade within the meaning of the relevant rule. Lord Davey in dealing with the question observed that the above words as used in the rule meant 'for the purpose of enabling to person to carry on and earn profits in the trade' and that it was not enough that the disbursement claimed had been made in the course of or arose out of or was connected with the trade, or was made out of the profits of the trade. It was necessary that must have been made for the purpose of earning the profits. These dicta of Lords Davey have been cited with approval in the judgment of the House of Lords in a very recent case, namely, Smiths Potato Estates Ltd. v. Bolland; and Smiths Potato Crisps ( 1929) Ltd. v. Inland Revenue Commissioners.
In the circumstances, on the facts states by the assessee himself the application of section 10(2)(xv) cannot be said to be attracted and no question of law can be said to arise. The judgment of the High Court of Patna in Jutharam Jankidas v. Commissioner of Income-tax, which was relied on by Mr. Kirpa Ram Bajaj does not seem to have any bearing on the present case and is otherwise of no assistance to the assessee. In that case a sum of Rs. 9,606 spend by the assessees who was carrying on business of money-lending, on litigation resorted to for the purposes of recovering from one Kartar Singh the balance of the amount advanced by him to the latter for financing a contract which he had obtained from Tata Company and a share of the profits of that contract which the said Kartar Singh had agreed to pay him was allowed as a legitimate business expenditure. It is true that the assessee had described himself as the financing partners of Kartar Singh and the legal expenses allowed to him had been incurred after the dissolution of the so-called partnership. The true rural relationship between the assessee and Kartar Singh, however, was not that of partnership. A money-lender who agrees to finance a business adventure of another on the latters undertaking to pay him a share of the profits in lieu of interest does not become in law a partner of the latter and for the purpose of section 10 of the Income-tax Act the transaction cannot be regarded as otherwise than a money-lending transaction. The following observation at page 403 appear to show that this was the ground on which the legal expenses in question were allowed to the assessee in that case :-
'In my opinion upon the facts which I have stated above, the assessee is entitled to succeed. It is not disputed that this amount was incurred as litigation expense in the previous year, that it was spend to realise the capital invested in the business of the assessee as money -lender and to realise some profit also which had accrued to the assessee in that money-lending business and which were agreed to be paid to him by his successor Puranmal Dulichand.'
It was urged by Mr. Bajaj that in the present case also the assessee should be deemed to have advanced the sum of Rs. 15,000 to the Shahdara Delhi Iron works, Ltd., or the persons carrying on that business for the purpose of financing the business and the transaction should be regarded as no money lending transaction and as such a part of the business which he was actually carrying on during the accounting period. This contention of the learned counsel is, however, wholly without force and runs counter to what has been his case all along. He has maintained throughout the course of these proceedings that the sum of Rs. 5,000 was paid by him as his contribution to the capital of the partnership and can certainly not be permeated to take a somersault at this late stage of the case, because he discovers his original stand to be inconvenient.
An advantage was sought by the learned counsel for the assessee to be taken of the judgment of the High Court given in appeal from the preliminary decree. It was urged that the aforesaid judgment gave him the option of converting his suit into one for reverie of the sum of Rs. 15,000 advanced by him and interest. We are, however, quite clear that even if he does excise the option given to him in the High Court judgment, the assessees suit will not be one for re-payment of the loan advanced by him in the course of his money-lending business but will be essentially one for refund of the sum advanced on an existing consideration which has subsequently failed and damages, or for compensation for breach of the contract to flat a limited company.
It was also contended by Mr. Bajaj that the expenditure claimed by the assessee can at least be deemed to have been incurred by him for making goods his title to property acquired as an investment out of the assets of the money-lending business and, therefore, itself, a part of those assets and can therefore legitimately be regarded as an expenditure wholly and exclusively incurred for the purpose of that business. We however, see no force in this contention. Investment of the income derived from money-lending business in the purchase of property can by no stretch of imagination be regarded as trisection made in furtherance of that business itself or as otherwise constituting a part of that business.
Learning counsel drew out attention to the judgment of the Kings Bench Division in Southern v. Barax Consolidated, Ltd. In that case a company which was domiciled in the United Kingdom and whose business consisted in the mining, manufacture and sale of borax, acquired, for the purpose of its business, land in California near the city of Los Angeles, upon which a subsidiary company erected wharves and buildings. The city of Los Angeles brought an action against the company alleging that the companys title to the land and buildings was invalid. The company defended that action and in so doing incurred cost amounting to Pound 6,249, which sum the company claimed to be entitled to dedicators a business expenses in computing its profits for the purpose of assessment to income-tax on the ground that those costs had been wholly and exclusively incurred for the purpose if its trade. It was contended by the Crown that the expenditure was a capital expenditure as the action was contested in order to preserve the capital assets of the company. It was held that, as the land in connection with which the expenditure as incurred was land situated abroad and not subject to income-tax under Schedule A, the Inland Revenue Commissioners were entitled to find on the evidence that this expenditure was wholly and exclusively laid out for the purposes of the company;s trade and was an allowable deduction in computing the profits of the company for income-tax purposes. We fail to see what bearing this judgment can possibly have on the fact of the present case.
As observed by the Tribunal, the question whether the amount claimed by the assessee in the present case had been laid out or expended wholly and exclusively for the purpose of the business against the profits whereof it was sought to be set off was essentially one of fact, and, in the circumstances of the present case, we cans find no reasonable ground for holding that the Tribunal could not find as a fact that this expenditure had not been so laid out or expended.
We are of the opinion that the question of law formulated by the assessee or, for the matter of that, any other question of law does not arise out of the judgment of the Tribunal and we accordingly dismiss this petition. In the circumstances of the case, however, we leave the parties to bear their own costs. Counsels fee is assessed at Rs. 150.