1. This is a petition under Section 66(2), Income-tax Act, for requiring the Appellate Tribunal to state the case and refer to this Court the following question of law:
Whether the expenses incurred by the assesses are an admissible deduction under Section 10(2)(xv)?
2. The facts giving rise to these proceedings may be briefly stated as follows: The assessee, namely, the firm Messrs. Bam 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 Prasad entered into an agreement with three others for promoting a limited company to be styled as Shahdara Delhi Iron Works, Ltd. According to the terms of the agreement the assessee firm and 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. 3000 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 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 advancing 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 seems that the Company was never floated but the business of the Iron Works was actually commenced 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 Rs. 3000 to the capital of the business retired, thus leaving only three parties to the agreement in the field. In the month of September 1942, the assessee firm served the other two parties with a notice of their intention to terminate the partnership and calling upon them to dissolve the partnership and to render accounts. On 2lst October 1942, Mahabir Parshad and Munna Lal brought a suit for dissolution of the partnership and rendition of accounts but on an objection taken by the defendants Mahabir Parshad 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 representing the joint Hindu family. On 29th April 1944, the Sub-Judge granted Mahabir Parshad 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 2nd March 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 converting the suit into one for partition of the joint property or for joint possession of the plaintiff's 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 Court is said to be pending in the Privy Council.
3. During the course of the assessment for the year 1945-46, the assessee firm claimed a sum of Rs. 4723 as the expenses of the above litigation. The Income-tax Officer by means of his order, dated 10th September 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 to the Income-tax Officer. In the remand report submitted by the said officer on 19th January 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 a business or in respect of the realization of 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 assessee's appeal held that the appellant had been found by the High 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, 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 Section 66(2).
4. 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.
5. 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 the business done by the Shahdara Iron Works, Ltd., could be said to be an extension. A feeble attempt was made by Mr. Kirpa Ram Bajaj, learned Counsel for the petitioners, to show that the assessee firm had also been doing the business of dealing in securities. 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.
6. Section 10, Income-tax Act provides for assessment of income-tax on income derived from a 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 'profits and gains of business, profession or vocation' in respect of the profit or gains of any business, profession or vocation carried on by him.
(2) such profits or gains shall be computed after making the following allowances, namely:
* * * *(XV) any expenditure (not being in the nature of capital expenditure or personal expenses of the assessee) laid out or expended wholly and exclusively for the purpose of such business, profession or vocation.
The language used by the Legislature in the above provision clearly shows that the expenditure which can be allowed in computing 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 a 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 Sub-section (2) have reference to the business mentioned in Sub-section (1). If an assessee was carrying on more businesses 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 fulfils 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 exclusively for the purpose of the business.
7. 'Business' has been defined in Section 2(4) a including any trade, commerce, or manufacture or any adventure or concern in the nature of trade, commerce or manufacture. Where an assessee carries on different varieties of trade, commerce or manufacture, each variety will have to be regarded as a separate business for the purposes of Section 10 unless, of course, one or more varieties are so closely connected with each other as to be capable of being regarded as one business. The following observations in the judgment in South Indian Industrials Ltd., Madras v. Commissioner of Income tax, Madras A.I.R.1935 Mad.330. appearing at pp. 538, 540 of the report are fully illustrative of this proposition:
The fallacy underlying the assessees' argument is that because a company carries on several concerns those concerns are all one business, namely, the company's business. That is not so. A company can carry on several distinct and separate businesses and it must always be a question of fact whether these businesses are separate businesses or whether they are so interlocked with the main chief business of the company as to be really one business; for example, a railway company carrying on a steam-boat business in connection with its railway. This distinction has been recognised in oases under the Income-tax Acts in England. One of these is Seales v. George Thompson and Co., Ltd. (1927) 13 T.C.83. 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 underwriting business the firm had been represented by two of their partners who acted on behalf of the partnership as 'names' or members of a syndicate whose credit was used by an underwriting agent in underwriting risks at Lloyd's. The monetary deposit made at Lloyd's in respect of these two partners was transferred to the company, but since Lloyd's 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 company's accounts with those of the rest of their business. In 1919 one of these nominees retired and in 1920 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 Commissioners 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 Commissioners 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 businesses 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 know about ships; but the actual conduct of the business shows no dovetailing of the one into the 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 observation 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 Co., Ltd. Similarly, they could get rid of their Chittivalsah Jute Mills shares without stopping any of the other concerns. Cases like the present are dealt with in the Commissioner of Income-tax, Madras v. Siddha Gowder and Sons A.I.R.1932 Mad.375 S.B. and Commissioner of Income-tax, Madras v. Best and Co. Ltd., Madras A.I.R.1932 Mad.434. The five concerns in question here were separate businesses and, if those businesses had been carried on during the year of account, the profits and gains of each of them separately would have been arrived at under Sections 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 shows 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 on which can be allowed in assessing such profits or gains, must be a business which was actually carried on during the accounting period.
8. In Commissioner of Income-tax, Bengal v. Shaw Wallace and Co. , the assessees carried on business in Calcutta as merchants and agents of various companies, and had branch offices in different parts of India. For a number of years prior to 1928, they had acted as distributing agents in India of the Burma Oil Co. and the Anglo-Persian Oil Co., 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 31st December 1927, and that of the Anglo. Persian Company on 30th June following. Some time in the early part of 1928, the Burma Company paid to the assessees a sum of Rs. 12,00,000 as full compensation for cessation of the agency, and in August of the same year, the Anglo-Persian 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 assessees for the relevant year, took these two receipts into account as profits or gains of their business in the year ending 3lst December 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 Com-missioner drew up 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. 983361, 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 Lordships made the following observations at p. 1850-51:
The sources from which the taxable incomes 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 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, of any adventure or concern in the nature of trade, commerce or manufacture. The words used are no doubt wide, but underlying each of them is the fundamental idea of the continuous exercise of an 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 constituent 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 allowances which follows. They include rent paid for the premises where the business is carried on; the cost of current repairs in respect of such premises; interest on money borrowed for carrying on the business, etc.
9. At p. 1352 are to be found the following observations:
Following the line of reasoning above indicated, the Bums, which the appellant seeks to charge can, in their Lordships' opinion, only be taxable if 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.
10. The following observations at the end of the judgment of their Lordships further show that in order to bring the case within the four corners 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 continued 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 a different tree, the crop of a different field.
In South Indian Industrials Ltd., v. Commr. of Income-tax, Madras A.I.R.1935 Mad.330., also the following observation appearing at page 441 of the report leads to the same result:
Section 10 only deals with businesses which are being carried on and not businesses which have ceased to be carried on.
11. In the present case, on the assessee's own showing, the partnership business was not carried on during the accounting period. The preliminary decree passed by the Subordinate Judge of Delhi on 29th April 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.
12. In Strong and Co. of Romsey v. Woodfield (1906) A.C.448, their Lordships had to deal with a parallel provision of the English Income, tax Act and to decide whether the deduction claimed was a disbursement or expense wholly and exclusively laid out or expended for the purpose of the appellants' 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 a person to carry on and Ram 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 it must have been made for the purpose of earning the profits. These dicta of Lord Davey have been cited with approval in the judgment of the House of Lords in a very recent case, namely, Smith's Potato Estates Ltd. v. Bolland; Smith's Potato Crisps (1929) Limited v. Inland Revenue Commissioners reported as : 17ITR1(Mad) .
13. In the circumstances, on the facts stated 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 : 12ITR344(Patna) ), 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. 9606 spent by the assessee, 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 partner 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 assesses and Kartar Singh, however, was not that of partnership. A money-lender who agrees to finance a business adventure of another on the tatter's 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 |he purposes of Section 10, Income-tax Act, the transaction cannot be regarded as otherwise than a money-lending transaction. The following observations 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 a litigation expense in the previous year. That it was spent to realise the capital invested in the business or the assessee as a money-lender and to realise some profits also which had accrued to the assessee in that money-lending business and which were agreed to be paid to him by his successor Puranrnal Duliehand.
14. 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 basinesa for the purpose of financing the business and the transaction should be regarded as no more than a 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. 8000 was paid by him as his contribution to the capital of the partnership and can certainly not be permitted to take a somersault at this late stage of the case, because he discovers his original stand to be inconvenient.
15. 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 recovery of the sum of rupees 16,000 advanced by him and interest. We are, however, quite clear that even if he does exercise the option given to him in the High Court judgment, the assessee's 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 float a limited company.
16. 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 good 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 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 a transaction made in furtherance of that business itself or as otherwise constituting a part of that business.
17. Learned Counsel drew our attention to the judgment of the King's Bench Division in Southern v. Borax Consolidated Ltd. (1941) 1 K.B.111. 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 company's title to the land and buildings was invalid. The company defended the action and in so doing incurred costs amounting to 6249, which sum the company claimed to be entitled to deduct as a business expense in computing its profits for the purpose of assessment to income-tax on the ground that those coats had been wholly and exclusively incurred for the purposes of 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 connexion with which the expenditure was 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 facts of the present case.
18. 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 can 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.
19. 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. Counsel's fee is assessed at Rs. 160.