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Commissioner of Income-tax Vs. Delhi Safe Deposit Co. Ltd. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtDelhi High Court
Decided On
Case NumberIncome-tax Reference No. 65 of 1968
Judge
Reported in[1974]96ITR597(Delhi)
ActsIncome Tax Act, 1961 - Sections 67 and 182(2)
AppellantCommissioner of Income-tax
RespondentDelhi Safe Deposit Co. Ltd.
Appellant Advocate S.K. Aiyar and; M.B. Lal, Advs
Respondent Advocate S.T. Desai, Sr. Adv. and ; J.K. Kohli, Adv.
Cases ReferredC) and H.M. Kaskiparekh & Co. Ltd. v. Commissioner of Income
Excerpt:
direct taxation - deduction - sections 67 and 182 (2) of income tax act, 1961 - whether assessed entitled to any allowance on account of share of loss made good by it to managed company - payments directly debited to assessed's account - payments to be shown in individual assessment of assessed-company - amounts expended for business purposes and wholly and exclusively laid out for purposes of business - payments allowable deductions in trading account of assessed - question answered in affirmative. - - delhi safe deposit co. delhi safe deposit co. 13-d of 1966, and a direction was issued by the court calling upon the tribunal to state a case on the following question :whether, on the facts and in the circumstances of the case, the assessed was entitled to any allowance on account of.....kapur, j.1. messrs. delhi safe deposit co. ltd. is a public limited company which was also a partner in a managing agency firm named messrs. morari lal batra & co., which was managing another public limited company, messrs. bharat carbon & ribbon . messrs. delhi safe deposit co. ltd. (hereinafter referred to as 'the assessed') held a 25% share in the managing agency firm. there were two other partners, one of whom held a 50% share and the other a 25% share in the firm. at the instance of the partner holding the major share of 50%, a large sum was advanced on behalf of messrs. bharat carbon & ribbon ., that is the managed company, to a firm in calcutta which repudiated having received that sum, but only accepted receipt of rs. 11,409. the managed company, thereforee, was pat to a loss to.....
Judgment:

Kapur, J.

1. Messrs. Delhi Safe Deposit Co. Ltd. is a public limited company which was also a partner in a managing agency firm named Messrs. Morari Lal Batra & Co., which was managing another public limited company, Messrs. Bharat Carbon & Ribbon . Messrs. Delhi Safe Deposit Co. Ltd. (hereinafter referred to as 'the assessed') held a 25% share in the managing agency firm. There were two other partners, one of whom held a 50% share and the other a 25% share in the firm. At the instance of the partner holding the major share of 50%, a large sum was advanced on behalf of Messrs. Bharat Carbon & Ribbon ., that is the managed company, to a firm in Calcutta which repudiated having received that sum, but only accepted receipt of Rs. 11,409. The managed company, thereforee, was pat to a loss to the extent of Rs. 1,90,092. The other two partners in the firm including the assessed-company took upon themselves the liability to bear a loss of Rs. 95,092 out of which the assessed's portion amounted to Rs. 47,500. The balance of the amount lost to the managed company was undertaken to be paid by Shri R.K. Batra, brother of the partner holding 50% share in the managing agency firm. Shri R.K. Batra also took the place of his brother in the managing agency firm having the same share as his brother formerly had. In the assessment year 1962-63, for which the corresponding accounting year was the calendar year 1961, the assessed paid a sum of Rs. 9,500 towards the sum of Rs. 47,500 it had agreed to bear out of the aforementioned loss. This sum of Rs. 9,500 was claimed as a deduction in the assessment year in question, but the same was disallowed by the Income-tax Officer on the ground that the assessed was not legally bound to make this payment and this was not at all a business expense.

2. On appeal, the Appellate Assistant Commissioner confirmed this view and gave three reasons to reject the assessed's claim. Firstly, he said that it was actually the loss of a firm, which was no more in existence. Secondly, he observed that the loss was borne by the assessed on personal considerations and, lastly, he held that the loss was a loss to the managing agency firm and not to the partners personally and since the managing agency firm had not claimed that loss in its return, the partners could not claim it.

3. On a further appeal to the Tribunal, the assessed's claim was accepted. Dealing with the three grounds or reasons given by the Appellate Assistant Commissioner, the Tribunal held that even if the constitution of the managing agency firm had changed, the assessed was a partner in the firm earlier and continued to be one. thereforee, the mere change in the constitution of the firm did not cease to make the assessed liable in respect of its share of the loss. With regard to the second reason of the Appellate Assistant Commissioner, the Tribunal observed that the assesses was a public limited company and could have no personal considerations. The company was always motivated by the sole intention to do business and the payment of the sum of Rs. 9,500 could have no other purpose but to keep up its business. With regard to the last criticism made by the Appellate Assistant Commissioner, the Tribunal observed that it was true that initially the loss in question arose to the managing agency firm, but all the same, a partner of the firm was not prohibited under the law to claim that loss in its own assessment even if that loss was not claimed by the partnership concern. The Tribunal observed that the share of profit or of loss of a partner could be determined and assessed directly in the hands of the partner without determining the same in the hands of the firm. In its discussion of the question posed, the Tribunal stated in paragraph 4 of its order that the assessed was entitled to claim the loss in its own assessment and the department was competent to consider the claim for whatever worth it was, rather than to reject it. The Tribunal also considered the question whether the agreement to bear the loss was in connection with its business and held on facts enumerated in paragraph 5 of its order that in making the payment the assessed was only acting as a prudent businessman for the purposes of earning profits. The Tribunal then remitted the case to the Income-tax Officer on the limited question as to whether or not, the quantum of loss claimed by the assessed was correct.

4. The Commissioner of Income-tax, Delhi, sought a reference from this court under Section 256(2) of the Income-tax Act, 1961, in Income-tax Case No. 13-D of 1966, and a direction was issued by the court calling upon the Tribunal to state a case on the following question :

'Whether, on the facts and in the circumstances of the case, the assessed was entitled to any allowance on account of the share of loss made good by it to the managed company '

5. The facts stated earlier have been taken largely from the agreed statement of the case which has been drawn up by the Tribunal and referred to this court. It is agreed by both sides that the statement of the case does not really contain all the material facts and circumstances of the case, although it does summarise the findings of the Tribunal. To explain the true facts of the case, we have been taken through both the assessment order as well as the order of the Appellate Assistant Commissioner. It is now necessary to state the facts in greater detail before dealing with the question referred to us.

6. The managing agency firm initially had as its partners, Shri V.K. Batra, holding a 50% share, Lal Balwant Roy, holding a 25% share and the assessed-company also holding 25% share. Shri V.K. Batra had advanced a sum of Rs. 2,01,500 to M/s. H. K. Sinha and Sons of Calcutta, who were suppliers of M/s. Bharat Carbon & Ribbon ., the managed company. M/s. H. K. Sinha & Sons denied receipt of the amount and there was a dispute. The managed company eventually decided not to enter into any litigation with M/s. H. K. Sinha & Sons. According to the Income-tax Officer, it was alleged that Shri V.K. Batra had no assets and, hence, shri R.K. Batra, who had become a partner in the managing agency firm in his place persuaded the assessed and its other partner, Lal Balwant Roy, to pay Rs. 47,500 each and himself volunteered to pay the balance amount of Rs. 95,091.87 in ten half-yearly Installments. This would cover the loss of the managed company. These facts would show that the loss which had resulted to the managed company, M/s. Bharat Carbon & Ribbon . was met by the partners of the managing agency firm and the loss of Shri V.K. Batra was met by Shri R.K. Batra, his brother. The share of the loss was divided in nearly the same ratio as their shares in the managing agency firm. These are the facts appearing from the Income-tax Officer's order.

7. There are a few additional facts to be found in the Appellate Assistant Commissioner's order. It is there stated that Shri V.K. Batra was looking after the business of the managed company and made the advance in question to M/s. H. K. Singha & Sons, who denied receipt of the advance. It was observed that Shri V.K. Batra had either misappropriated the amount or had advanced the money unwisely. The managed company did not enter into any litigation, but held Shri V.K. Batra responsible for the loss amounting to Rs. 1,90,092 from whom nothing was recovered, and so it became the liability of the firm and the other partners. The managing agency firm did not have any assets, so the liability was taken over by the two remaining partners, i.e., the assessed and Lal Balwant Roy and a stranger, Shri R.K. Batra, brother of Shri V.K. Batra. Shri V.K. Batra is stated to have separated from the firm before 2nd June, 1960, and his place taken by Shri R.K. Batra. By an agreement dated 19th July, 1961, the new firm of M/s. Morari Lal and Co. became the managing agents of M/s. Bharat Carbon & Ribbon . According to the Appellate Assistant Commissioner, the two firms were different entities. The loss of the original firm was a loss in relation to a closed business. Here it may be mentioned that the Appellate Assistant Commissioner stated that the sum in question was not even the loss of the closed business, because it never formed part of the profit and loss account and no loss wasallocated to the partners. He held that as there was no loss in either the closed or the working business and no allocation was brought forward in the assessment of the partners, no question of setting off or bringing forward any loss against the income from the business of the assessed company arose. The liability of the assessed was not on account of the Partnership Act, but on account of personal considerations. He, thereforee, held that the loss should first have arisen as a loss of the firm and then should have been allocated to the partners. On this argument, he held that the loss was not a business loss and could not be set off against the appellant's business income.

8. When the Tribunal passed its order accepting the assessed's appeal, it set out the facts already narrated and then proceeded to deal with the reasons given by the Appellate Assistant Commissioner for rejecting the assessed's claim. It first dealt with the question whether a change in the constitution of the partnership made any difference to the claim of the assessed. It held that the assessed did not cease to be liable because of the change in the constitution of the firm as it continued to be a partner in the firm. It also failed to appreciate how personal considerations could bear on the payment of the loss claimed by the assessed. In dealing with the last criticism of the Appellate Assistant Commissioner, it held that, although the loss of the money actually arose to the firm, it (the assessed) was not prohibited under law from claiming the loss even though the same was not claimed by the partnership. It was stated that there were cases showing that the Income-tax Officer could determine the share of profit or loss of a partner directly in his hands without determining the profit or loss of the firm. For this purpose, it referred to the fact that an assessed who was a partner in a registered firm had to put in his return, which contained a complete picture of his profits and losses in respect of all his business and other activities. It, thereforee, followed that a partner of a firm was entitled to claim his share of loss in his individual return even if such share of loss was not determined in the assessment of the firm. It was not open to the Income-tax Officer to reject the claim merely on the ground that the firm had not claimed it and the total quantum of loss had not been determined in the assessment of the firm and the share thereof could not be allocated in the hands of the partners. The departmental authorities were, however, entitled to examine the claim of the assessed and determine whether the quantum of loss claimed by the assessed was correct. The Tribunal also dealt with the question whether the loss in question was a business loss. In this connection, it held that the loss was occasioned by the incorrect act of one of the co-partners in the managing agency firm and as the assessed's share of remuneration from that firm had been increasing, being Rs. 5,600 approximately in 1961-62, andRs. 6,250 in 1962-63, it could be 'safely concluded that it was only with a view to not losing this remuneration that the assessed agreed to bear and pay its share in the loss occasioned by the imprudent act of one of its partners'. From this, the Tribunal concluded that, the act of the assessed-company in accepting the loss was the act of a prudent businessman for the purpose of promoting its commercial activities and for the purpose of earning profits.

9. There are two major contentions on behalf of the department. Firstly, it is contended that a partner cannot allocate a share in a loss without the same being computed in the assessment of the firm and, hence, the claim of the assessed-company was liable to be rejected outright. Secondly, it is contended that the claim is not a business loss and on this ground also the answer to the question referred should be against the assessed. It is also submitted in connection with both these questions that the facts are somewhat muddled in the statement of the case as well as the order of the Tribunal and the true finding of the Tribunal is that the loss in question was a loss of the partnership firm and not of the individual partners. Referring to the statement of the case as well as the appellate order of the Tribunal, it is submitted that at one place it is stated that the loss was taken over by two of the partners and a stranger, but at another place, it is found that it was a loss of the firm.

10. It is quite true that the facts stated both in the order of the Tribunal as well as those in the statement of the case are not at all clear. For example, there are no dates mentioned in any of the orders as to when the liability was taken over by the assessed-company and the other partners, Lal Balwant Roy and the stranger, Shri R.K. Batra. It is also not clear as to how and by what agreement these three persons undertook to take over the liability to pay the amount in question. Undoubtedly, it can be inferred from the facts that the amount has been paid to the managed company, M/s. Bharat Carbon & Ribbon ., but as to who were the parties to such an agreement is not at all clear. It is, however, clear that there is an inconsistency in both the orders as well as in the statement of the case, because at one point it is mentioned that this liability has been taken over by these three persons and at another, it is treated as the liability of the firm. A similar inconsistency is to be found in the Appellate Assistant Commissioner's order. For example, at one point he states that Shri V.K. Batra had either misappropriated this money or advanced it unwisely and, thereforee, the managed company treated him as responsible and, consequently, a responsibility of the managing agency firm. At another place, he stated that it was not a loss of the managing agency firm, because it was never mentioned in either the accounts of the closed business, i.e., the previous managing agency firm, orin the accounts of the newly constituted firm, which became the managing agents from 19th July, 1961. It is also obvious from the order that Shri V.K. Batra left the managing agency firm before 2nd June, 1960, and it is not at all obvious as to what were the terms on which the managing agency continued in the period 3rd June, 1960, to 31st July, 1961, and as to who were the partners of the firm at that time. It is impossible to resolve this inconsistency in these proceedings and, thereforee, we propose to deal with the question referred to us on two different footings. Firstly, the question can be examined on the footing that the loss resulting from the transaction to M/s. Bharat Carbon & Ribbon . was taken over by three persons in their individual capacity, one of those persons being the assessed-company. Secondly, the question can be analysed from the point of view of the loss being that of the original managing agency firm of which the assessed was a. partner of which part has been taken over by the assessed-company. Hence, the question can be examined either on the footing that part of the loss of M/s. Bharat Carbon & Ribbon . was taken over by the assessed-company, or on the footing that part of the loss occasioned to M/s. Morari Lal Batra & Co. was taken over by the assessed-company.

11. It is now necessary to turn to the first aspect of the submission made on behalf of the revenue. The relevant provisions of the Income-tax Act, 1961, relating to the assessment of firms are Section 182 and Section 67. Section 182 reads as follows :

'182. Assessment of registered firms.--(1) Notwithstanding anything contained in Sections 143 and 144 and subject to the provisions of Sub-section (3), in the case of a registered firm, after assessing the total income of the firm,--

(i) the income-tax payable by the firm itself shall be determined ; and

(ii) the share of each partner in the income of the firm shall be included in his total income and assessed to tax accordingly.

(2) If such share of any partner is a loss it shall be set off against his other income or carried forward and set off in accordance with the provisions of Sections 70 to 75.

(3) When any of the partners of a registered firm is a non-resident, the tax on his share in the income of the firm shall be assessed on the firm at the rate or rates which would be applicable if it were assessed on him personally, and the tax so assessed shall be paid by the firm.

(4) A registered firm may retain out of the share of each partner in the income of the firm a sum not exceeding thirty per cent. thereof until such time as the tax which may be levied on the partner in respect of that share is paid by him ; and where the tax so levied cannot be recoveredfrom the partner, whether wholly or in part, the firm shall be liable to pay the tax, to the extent of the amount retained or could have been so retained.'

12. Reliance is placed on Sub-section (2) and it is contended that if the amount in question was a loss of M/s. Morari Lal Batra & Co., it had to be first ascertained and then brought to the account of the partners and set off in the manner provided in Sections 70 to 75. In other words, it is contended that the loss could not be directly transferred to the accounts of the assessed-company, because of the manner in which the assessment of the firm, M/s. Morari Lal Batra & Co., had to take place. Reliance is also placed on Section 67, which reads:

'67. Method of computing a partner's share in the income of the firm.--(1) In computing the total income of an assessed who is a partner of a firm, whether the net result of the computation of total income of the firm is a profit or a loss, his share (whether a net profit or a net loss) shall 'be computed as follows:--

(a) any interest, salary, commission or other remuneration paid to any partner in respect of the previous year shall be deducted from the total income of the firm and the balance ascertained and apportioned among the partners ;

(b) where the amount apportioned to the partner under Clause (a) is a profit, any salary, interest, commission or other remuneration paid to the partner by the firm in respect of the previous year shall be added to that amount, and the result shall be treated as the partner's share in the income of the firm ;

(c) where the amount apportioned to the partner under Clause (a) is a loss, any salary, interest, commission or other remuneration paid to the partner by the firm in respect of the previous year shall be adjusted against that amount, and the result shall be treated as the partner's share in the income of the firm.

(2) The share of a partner in the income or loss of the firm, as computed under Sub-section (1) shall, for the purposes of assessment, the apportioned under the various heads of income in the same manner in which the income or loss of the firm has been determined under each head of income.

(3) Any interest paid by a partner on capital borrowed by him for the purposes of investment in the firm shall, in computing his income chargeable under the head 'Profits and gains of business or profession' in respect of his share in the income of the firm, be deducted from the share.

(4) If the share of a partner in the income of a registered firm or a firm treated as registered in accordance with the provisions of Clause (b) of Section 183, as computed under this section, is a loss, such loss may be setoff, or carried forward and set off, in accordance with the provisions of this Chapter. '

13. Here, reliance is placed on Sub-section (2) and Sub-section (4). Thus, it is claimed that the two sections read together show that the loss has first to be ascertained in the assessment of the firm and then brought into the account of the individual partner. This contention does riot seem to be wholly true, because a partner has also to submit his return at the same time as the partnership firm, and it would not be in accordance with the scheme of the Income-tax Act for the petitioner to await the assessment of the firm. In normal practice, a partner is bound to show his profit and loss from the firm in his own assessment. In case the eventual assessment of the firm results in the figure being altered, the Income-tax Officer would be entitled to revise the partner's assessment under Section 155(1) of the Act. The purpose of Section 155(1) is to enable a partner's assessment being amended in accordance with the assessment order passed against the firm. It is, thereforee, not possible to accept the contention of learned counsel that the assessment of the partner cannot take place till after the assessment of the firm has taken place, and it is also not in accordance with the scheme of the Income-tax Act, that a partner's share in the loss of a, registered firm should be claimed by the individual partner only after the assessment of the firm is over. But what is to happen if the partnership does not claim a loss but the partner claims a share in the loss Obviously, this will not be in accordance with Section 67 of the Act, In the present case, it seems to be the agreed position of the parties that the amount of loss claimed has not found place in the partnership accounts of either the original managing agency firm or even the reconstituted firm. It will, thereforee, be necessary to examine if the loss of a partnership firm can be taken over in the personal assessment of an individual partner if that partner makes a contribution of that loss to the firm. This aspect of the case will be considered after reference has been made to the various cases cited before us.

14. On the second submission made on behalf of the department, it is submitted that there was no legal obligation on the assessed to make good the loss occasioned to the managed company by reason of the transaction with the Calcutta firm. The defect in the statement of the case in this respect has already been referred to. There is no doubt that the managed company did not indulge in any litigation either against the Calcutta firm or against the managing agency firm and in this sense this can be said that the assessed-company was under no legal obligation to make good the loss or part of it. On the other had, it is contended by counsel for the assessed-company that there is a finding that the payment in question was made for business purposes, and if that is so, it does not matter whetherthe payment has been made under a legal obligation or not. It is now necessary to refer to the various cases cited.

15. In Commissioner of Income-tax v. A. W. Piggies & Co., : [1953]24ITR405(SC) their Lordships of the Supreme Court held that a firm did not necessarily change when a partner in a firm changed. This conclusion was based on the express terminology of Section 25(4) of the Indian Income-tax Act, 1922. In this judgment, it was also held that the firm and its partners were separate and distinct units for purposes of assessment under the Income-tax Act. This judgment is of little help in dealing with the questions involved in the present case.

16. In Roebank Printing Co. Ltd. v. Commissioners of Inland Revenue [1928] 13 T.C. 864 certain amounts were taken away by the managing director of the assessed-company, but the same could not be recovered from the said managing director. The loss was claimed by the company, but was disallowed on the ground that it was a result of the confusion of the affairs of the company and was, thereforee, not a good deduction from the company's trading account. This authority would be of help in determining whether the loss of Rs. 1,90,092 occasioned by the default of Shri V.K. Batra was a good deduction in the assessment of M/s. Morari Lal and Co. As that is not the question before us, it is unnecessary to deal with this case for the purpose of the question before us.

17. In Commissioner of Income-tax v. Chandulal Keshavlal & Co., : [1960]38ITR601(SC) a managing agent waived a portion of its commission because of the unsatisfactory position of the managed company. The Appellate Tribunal found that the amount had been given up for reasons of commercial expediency and not as a bounty. It was held by the Supreme Court that the finding that the amount was expended for reasons of commercial expediency was a finding of fact and if there was evidence to support such a finding, the deduction had to be treated as admissible. Reference was made in the judgment to the fact that the waiving of the amount would strengthen the trading position of the managed company and thus eventually be of benefit to the managing agency firm. This case is on a parallel with the present case, if we treat the assessed's payments as being contributions to the loss sustained by M/s. Bharat Carbon & Ribbon . If the payment is considered as being payment to the managing agency firm of which the assessed is a partner, then this consideration does not arise, because the assessed-company was in any event responsible for paying the loss to that firm being one of its partners.

18. In Commissioner of Income-tax v. Ramniklal Kothari, : [1969]74ITR57(SC) , it was held by the Supreme Court that an assessed whose taxable profits were derived from being a partner in four different business firms was entitled to deduct from those profits, amounts paid by him as salary and bonus to his staff and other expenses expended in earning the income from the firms. This authority supports the view that a partner can deduct expenses incurred in relation to a partnership firm even though those expenses have been incurred by him from his personal account. Thus, a partner can incur business expenses in relation to a partnership which do not find place in the partnership accounts. Several High Court judgments were cited with approval by the Supreme Court wherein it had been held that a partner was entitled to deduct from his profits from a firm amounts spent or incurred by him for commercial expediency, or salary for the purpose of earning profits from the partnership business.

19. Jitmal Bhuramal v. Commissioner of Income-tax : [1959]37ITR528(Patna) is one of the authorities cited with approval in the aforementioned case. In that case, salary was paid to members of a Hindu undivided family which was itself a partner in a firm. The salary payable to one of the partners was treated as an allowable deduction under Section 10(2)(xv) of the Indian Income-tax Act, 1922, if it was paid for service to the firm and as being not taxable if it was paid for other reasons. On the facts of that case, it was held that the Tribunal's findings that the salary was paid for other reasons was a finding of fact.

20. In another case decided by the Patna High Court, Commissioner of Income-tax v. Atma Ram Modi : [1969]71ITR199(Patna) . it was held that expenditure incurred by a partner could be allowed as a deduction in his personal assessment if made for commercial expediency or for the business of the partnership. It was also observed that the view that a partner could not make deductions in his personal assessment from the profit or loss allocated to him from the partnership was not correct.

21. These several authorities support the view that a partner can claim deductions in respect of amounts expended by him personally, even though they are expended in relation to a partnership firm of which he is a member. The deduction is only to be allowed as legitimate if the same can be justified as being for commercial expediency or made for the purpose of earning profits from the business. Some other cases have been referred to for the purpose of showing that payments made for commercial expediency can be made in unusual circumstances.

22. In Bangalore Race Club v. Commissioner of Income-tax : [1970]77ITR435(KAR) the facts of the case were that the Mysore Race Club had entered into two agreements by which it undertook to conduct races at Mysore and bear losses, if any. There was actually a loss in this respect but the claim was disallowed by theTribunal on the ground that it was a gratuitous payment. It was held by the Mysore High Court that the payments in question were made in terms of lawful agreements and thus could not be termed as gratuitous payments. They were, thereforee, allowable deductions in the profit and loss account.

23. In Commissioner of Income-tax v. Nainital Bank Ltd., : [1966]62ITR638(SC) the Supreme Court dealt with the case of a bank which had in its possession a large quantity of jewellery which had been pledged to it by its constituents. Due to a dacoity, this jewellery and also currency notes held by the bank were stolen by the dacoits. The bank claimed a loss due to payments made to the owners of the jewellery. The Supreme Court held that the payments made by the bank were made to preserve the goodwill of the business of the bank's relations with the clientele. It was observed:

'The bank had evidently two courses open: to enforce its rights strictly according to law, and thereby to lose the goodwill it had built up among the constituents, or to compensate the constituents for loss of their jewellery, and maintain its business connections and goodwill. In choosing the second alternative, in our judgment, the bank laid out expenditure for the purpose of its business. Paying to the constituents the price of the jewellery stolen in a robbery or a burglary was, thereforee, expenditure for the purpose of the business. There can be no doubt that the expenditure was wholly and exclusively in the interest of the business. The expenditure was laid out for no other purpose.'

24. There was another case before the Supreme Court relating to the same bank, which is reported as Commissioner of Income-tax v. Nainital Bank Ltd., : [1965]55ITR707(SC) . That was also a case relating to the same burglary, but related to the cash which had been stolen from the bank. It was held that the business of a bank carried with it the risk of embezzlement, theft, dacoity, etc., which was incidental to the carrying on of the banking business. The loss of the cash in question was, thereforee, incidental to the carrying on of the business of banking and was deductible as a trading loss. These authorities would support the view that, in certain circumstances, amounts expended by a trader are allowable as proper business expenditure. In this respect, the finding of the Tribunal in the present case is that the amounts paid by the assessed-company to make up a portion of the loss occasioned by the transaction with the Calcutta firm was a payment made in accordance with business principles. The finding that the payment made was that of a prudent businessman made to preserve the managing agency firm and thus to get the remuneration from that agency is a finding which would show that the expenditure was one within the rule laid down by the aforementioned cases.

25. Reference has also been made to two cases in which it has been held that the real profits of an assessed have to be determined under Section 10(1) and the amount in question is deductible as being a proper allowance for the purpose of ascertaining real profits. In this case, reference has been made to Poona Electric Supply Co. Ltd. v. Commissioner Income-tax, : [1965]57ITR521(SC) and H.M. Kaskiparekh & Co. Ltd. v. Commissioner of Income-tax, : [1960]39ITR706(Bom) . It is unnecessary to deal with these cases in any detail in the present case.

26. It is now necessary to analyze the question referred in the light of the law laid down in the authorities aforementioned. If the payment of the loss by the assessed is treated to be made for the purpose of earning profits by preserving the managing agency, or for the purpose of commercial expediency, the only question which will remain is, as to how the amount should be claimed by the assessed-company. The finding of the Tribunal that the payment was made as a prudent businessman for preserving the managing agency is conclusive for this purpose. It must, thereforee, be assumed that the assessed-company did undertake to pay a portion of the loss suffered by M/s. Bharat Carbon & Ribbon . for business purposes and the claim cannot be disallowed on the ground that it was made for other purposes.

27. The next question is whether this loss should have been first determined in the assessment of the partnership, i.e., the managing agency firm,or whether it could be directly debited by the assessed-company. In thisrespect, Section 182 of the Income-tax Act, 1961, has already been referredto. The requirements of Sub-section (2) are that if the share of a partneris a loss, he can set it off in the manner provided by Sections 70 to 75.Similarly, in Section 67 of the Act, the method of computing a partner'sprofit or loss from the firm is set out. On close analysis, it seems that the'loss' referred to in these provisions is the 'loss' which would resultfrom the ascertainment of a partner's share on taking the accounts of thefirm. Thus, if the amount now in question had been paid by the managingagency firm itself, it would first have to be shown as a debit entry in theaccounts of the firm and then divided among the various partners accordingto the shares fixed. The total effect of such an entry on the accounts ofthat firm would depend on the other income of the firm. It could not besaid that in ascertaining the profits of the firm that amount would be shownas a loss in the firm's accounts, because the eventual figure of profit or losswould depend on the other items occurring in the partnership accounts.The payments made by the assessed-company are not really the losses ofthe firm as such, but payments of a liability of that firm. Payments forsuch liabilities are not mentioned in either Section 67 or Section 182 of theIncome-tax Act, 1961. It is necessary to illustrate this point from a practical angle. The sum we are dealing with is Rs. 9,500. When the assessed-company pays this amount, it pays it either direct to the managed company or to the firm. We have already assumed these two aspects of the question for the purposes of this case as discussed above. If the payment is made to the firm and then paid to the managing agency company, there will be no result in the accounts of the managing agency firm, because the debit and credit entries will cancel each other in its profit and loss account. It is, thereforee, not possible for the amount to be allocated to the share of any partner. The real fact of the matter is that if the payment is made to the firm as urged by learned counsel for the department, then the amount will not show itself as a debit entry in the accounts of the managing agency firm but as a credit entry. If, on the other hand, the amount, is paid direct to the managed company, as indeed it appears to be the case, then there will be no entry at all in the partnership-firm's account. Hence in either view of the matter, there will be no debit entry in the accounts of the managing agency firm and, hence, there can be no allocation of the loss after assessment under Section 182 of the Act as urged by the learned counsel for the department.

28. The true effect of the payments made by the assessed-company seems to be that these payments are directly debited to the assessed's account and to no other account and, hence, they cannot but be shown in the individual assessment of the assessed-company. Once it is found, as it has been found, that the amounts have been expended for business purposes and wholly and exclusively laid out for purposes of business, the payments become allowable deductions in the trading account of the assessed-company.

29. In view of this conclusion it must be held that the payment of Rs. 9,500 by the assessed-company is an allowable deduction subject to verification regarding the correctness of the quantum of loss claimed, etc., as directed by the Tribunal. In view of these conclusions, the answer to the question referred has to be in the affirmative, in favor of the assessed and against the department. The assessed will be entitled to costs. Counsel's fee Rs. 250.


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