A.M. Ahmadi, J.
1. The assessee, a registered partnership firm, is engaged in the manufacture of machinery spare parts since November, 1967. The partnership then consisted of two adults and two minors were admitted to the benefits of the partnership. Minor, Chandrakant Ambalal, attained majority on January 31, 1970, which necessitated a change in the constitution of the firm. Accordingly, the firm was reconstituted under the partnership deed of February 2, 1970, annexure 'F', to the statement of the case. According to this partnership deed, three adults, namely, (1) Ambalal Khodidas; (2) Kashiben Khodidas and (3) Chandrakant Ambalal, constituted the firm with minor, Manubhai Ambalal, admitted to the benefits of the partnership. The minor was given 20 ps. share in the profits with no liability to share the losses. The rest of the 80 ps. were divided amongst the three partners, Ambalal taking 30 ps. in a rupee and the other two partners 25 ps. each. However, so far as the liability to share the losses was concerned, Ambalal was liable to the extent of 50 ps. in a rupee while the other two adult partners were each made liable to the extent of 25 ps. in a rupee. The partnership was at will.
2. It appears that the firm desired to insure the lives of its partners Ambalal Khodidas, Chandrakant Khodidas as well as the minor, Manubhai Khodidas. The firm submitted proposals in that behalf to the Life Insurance Corporation of India. The Life Insurance Corporation by their letter dated February 28, 1970, informed the firm that ordinarily a partnership firm does not have an insurable interest on the life of any of the partners per se, but it will have an insurable interest if by the death of any partner, it will sustain a loss or pecuniary liability. In view of this, it expressed willingness to consider the proposals only after the partners entered into an agreement to the effect that the insurance money will be payable to the firm on the death of the insured partner and the firm will purchase the share of the deceased from the amount of insurance money received by it by paying off the heirs of the deceased partner. The firm was also directed to furnish information regarding the current valuation of interest of each partner with supporting proof.On receipt of this letter, the three adult partners of the firm entered into an agreement dated 31, 1970, annexure 'A', to the statement of the case. The introdu-ctory part of this agreement gives two reasons for the execution thereof Expressed in the following words :
'WHEREAS it is desired to provide for the uninterrupted continuation of the partnership firm without loss of momentum regardless of death, retirement, permanent incapacity, insanity, insolvency, expulsion, introduction et cetera of a partner or any changes in the constitution of the firm as a result thereof so long as at least two surviving or continuing partners desire to carry on the business of the firm with the property of the firm purchasing the interest of the deceased or outgoing partner.
AND WHEREAS it is decided to create a ready market and prompt payment in cash for the interest of a deceased or outgoing partner and to acquire such interest in order to be able to continue the business without the necessity of forced sales or liquidation and an Accounting of Receivership, AND ALSO, to protect against the pecuniary loss of human asset which would result from the premature death and resultant effect on the profitability of the firm's operation.'
3. With the above in view, the partners of the firm covenanted that notwithstanding that the partnership is at will, if two of the surviving partners desire to carry on the business of the firm, they shall be at liberty to do so and the expression 'partnership at will' would mean that no partner can be forced to continue as a partner against his will, presumably meaning thereby that if a partner dies, his heirs may not join the partner-ship if they do not desire to do so or if any one partner desires to sever
4. relations with the firm, he may do so but without dissolving the firm, that is, by retirement. The agreement then proceeds to state that provision is required to be made 'for the purchase of the share of outgoing or deceased partner for the account of the surviving or continuing partners from the partnership funds furnished in whole or in part for this purpose by Sinking Fund Method of Insurance on the lives of all insurable partners, owed by, paid for by and payable to the partnership firm'. The agreement then proceeds to stipulate as under :
'If during the continuance of the partnership, any partner shall die or retire or become insolvent or permanently incapable of performing his duties as partner or be expelled from the firm by any majority of the partners acting in good faith, the share of the deceased or outgoing partner shall as from his so dying or ceasing to be a partner belong to the remaining (surviving or continuing) partner or partners and if more than one in shares proportionate to their shares in the profits of the partnership and the partnership shall be continued between the remaining partners if more than one under the provisions of this agreement so far as applicable and the outgoing partner or his estate or the legal representatives of the deceased partner (as the case may be) shall be entitled to a sum equal to the value of the share of such outgoing or deceased partner in the said partnership...'
5. The agreement lastly provides that upon the termination of the partnership, each partner shall be entitled to acquire the policies on his own life after completing necessary financial adjustment. After this agreement was executed between the partners of the firm, the insurance company informed the partnership firm that the proposals made by the firm for insuring the lives of two adult partners and the minor, Manubhai, had been accepted. Accordingly, four life insurance policies were taken out as detailed below :
Name of the Sum assured Instalment/Remarks life assuredpremiumpayableRs. Rs.A. K. Panchal 40,000 4,754-80 The instalment/pre-80-00 mium includes extrafor double accident.A. K. Panchal 10,000 1,191-20 do.20-00ChandrkantA. PanchalManubhai 1,00,000 2,137-00A. Panchal (minor) 1,00,000 1,756-00
6. It will be seen from the above that the life of the senior partner, A. K. Panchal, was covered under two different policies while the lives of his two sons, Chandrakant and Manubhai, were covered under two separate policies each in the sum of Rs. 1,00,000.
7. In the assessment year 1971-72, the previous year being Samvat year 2026 ending on October 30, 1970, the assessee-firm paid a sum of Rs. 9,839 by way of insurance premium for the aforesaid four life insurance policies. The assessee claimed deduction of this amount of Rs. 9,839 fromthe total income of the firm under section 36(1)(i) of the Income-tax Act, 1961 (hereinafter called 'the Act '). That was on the premise that under the terms of the aforesaid four insurance policies, the proposer being the assessee-firm, it was liable to pay the insurance premia on the said policies and was entitled to the sum assured under the said policies on maturity or in the event of the death of the assured, as the case may be. To put it differently, according to the assessee-firm, even though the lives of the partners including the minor admitted to the benefits of the partnership were insured under the aforesaid four policies, the assessee-firm and not the individual partner would derive the benefit and would be entitled to the sum assured in the event of maturity or death of the assured and hence the expenditure incurred by way of premia was deductible under section 36(1)(i) of the Act. The Income-tax Officer, however, did not accede to this claim made by the assessee-firm. Being aggrieved by the decision of the Income-tax Officer refusing permission to deduct the amount of insurance premia from the taxable income of the firm, the assessee preferred an appeal to the Appellate Assistant Commissioner, Ahmedabad. It was contended before the said appellate authority that the expression 'stock' would include any partnership property and since the insurance money was to be paid to the partnership firm on the death of a partner for payment to his heirs, it would attract the provisions of section 36(1)(i) of the Act inasmuch as the policies cover the risk of the partnership assets getting depleted on being required to pay the share capital belonging to the deceased partner on his demise to his heirs. Alternatively, it was contended that this was an expenditure wholly and exclusively incurred for the purposes of business and would, therefore, be deductible under section 37(1) of the Act. This line of reasoning found favour with the Appellate Assistant Commissioner who allowed the assessee's claim for deduction. The Revenue challenged the said order before the Appellate Tribunal. The Tribunal, however, agreed with the line of reasoning adopted by the Appellate Assistant Commissioner and observed that it was not necessary to consider Whether the deduction fell strictly under section 36(1)(i) or not as it was clearly an expenditure deductible under section 37(1) of the Act. It accordingly dismissed the Revenue's appeal.
8. The Revenue, feeling dissatisfied with the view which found favour with the Appellate Assistant Commissioner as well as the Tribunal, sought a reference under section 256(1) of the Act. Thereupon, the Tribunal has referred the following question for this court's opinion :
'Whether, on the facts and in the circumstances of the case, the insurance premium of Rs 9,839 was an allowable deduction in computing the income of the assessee under section 36(1)(i) or section 37(1) of the Income-tax Act, 1961 ?'
9. We may at the outset state that we propose to dispose of this reference on the premise that the partnership firm had an insurable interest on the lives of the partners including the minor admitted to the benefits of the firm. In other words, we proceed to dispose of the reference without doubting the legality and validity of the contract of insurance entered into between the partnership firm and the Life Insurance Corporation. It is, however, clear from the agreement dated March 31, 1970, entered into between the partners of the firm prior to the acceptance of the proposal of the insurance company that the underlying object of insuring the lives of the partners including the minor, Manubhai, was to provide for liquid cash to pay off the outgoing partner or in the event of death, the legal heirs of the deceased partner, with a view to enabling the surviving partners to continue the business of the firm without interruption. In other words, the purpose of taking out the insurance policy was to ensure that liquid cash was available to pay off the heirs of the deceased partner with out the need for distress sale of the partnership assets. It may, however, be clarified that under the insurance policies, the payment of the amount can be expected only in two eventualities, namely, maturity or death of the assured. No payment would be forthcoming from the insurance company in the event of retirement of the assured from the firm or his expulsion therefrom or his exit from the partnership or any other eventuality. At the most, what can happen is that the partnership firm would be in a position to surrender the policy and secure the surrender value thereof from the insurance company. However, in the event of death, the full amount would be payable to the assessee-firm by the insurance company which could be utilised by the firm to buy the share of the deceased partner by paying off his legal representatives. In that event, on the legal representatives being paid the amount due to them, the value of the share of the surviving partners would get proportionately augmented. Briefly stated, therefore, the underlying object of covering the lives of the partners including the minor was to ensure the availability of liquid cash in the event of death of a partner for paying off his legal representatives.
10. The question then is, whether the assessee-firm was entitled to deduction of the insurance premium of Rs. 9,839 paid under the aforesaid four policies either under section 36(1)(i) or under section 37(1) of the Act. Section 36(1)(i) in so far as relevant for our purpose may be reproduced for ready reference. It reads as under :
'36,. (1) The deductions provided in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in section 28 -
(i) the amount of any premium paid in respect of insurance against risk of damage or destruction of stocks or stores used for the purposes of the business or profession;'
11. Under section 28, income from the profits and gains of any business carried on by the assessee at any time during the previous year is chargeable to tax. Section 29 indicates that the income shall be computed in accordance with the provisions contained in sections 30 to 43A of the Act. Section 30 permits deduction of premium paid in respect of insurance against risk of damage or destruction of the premises used for the purposes of the assessee's business. Section 31 permits deduction of the amount of any premium paid in respect of insurance against risk of damage or destruction to machinery, plant or furniture used for business. Section 36(1)(i) with which we are concerned is the next provision which permits deduction of and amount paid in respect of insurance against risk of damage or destruction of stocks or stores used for the purposes of the assessee's business. We find from all the three provisions that insurance premium paid to cover risk of damage or destruction of property, machinery, plant and furniture as well as stocks or stores used for the purposes of business is deductible from the income chargeable to tax under section 28 of the Act.
12. The expression 'stocks or stores' has not been defined and must, therefore, be given their ordinary meaning. In the instant case, we are concerned with the expression 'stocks' because it is not the assessee's case that the insurance policies in question were taken out to cover the risk of damage or destruction of stores used for the purposes of the assessee's business. So far as the word 'stocks' is concerned, the assessee's case is that it must be given the widest possible meaning so as to include any sum of money set apart for meeting certain expenses or a capital sum invested by a partner for the partnership business. We do not consider it necessary for the purpose of the disposal of this reference to enter into a discussion as to the exact meaning of the word 'stocks' used in section 36(1)(i) of Act. We think that this reference can be disposed of on the premise the word 'stocks' in the said sub-section is used in the wide$t sense so as to include a sum of money invested as the capital of the firm. The moot question, however, is, whether it can be said that the four insurance policies in question were taken out to cover risk of damage or destruction to stocks. The word 'damage' would mean injury or harm that impairs the value of any property. 'Destruction' of property would take place where the injury caused thereto is beyond repair or reduces the utility of the property to nil or results in complete ruination of the property. Now, can it be said that these insurance policies were taken out to cover any risk of injury to stocks no matter whether the said injury was limited in nature such as would bring about total ruination of the stocks It was urged, on behalf of the assessee, that these insurance policies were taken out to provide for ready cash in the event of the death of one of the partners so that the legal heirs of the partners could be paid off by the surviving partners who are inclined to continue the firm, without the need to enter into distress sale of the partnership assets or deplete the capital of the firm. If the legal representatives of the deceased partner are required to be paid off the share of the deceased partner in the firm, there can be no doubt that the assessee-firm would have to either pay from the existing assets of the partnership or the capital on hand. Instead of disposing of the assets of the partnership or paying from the capital available to the firm, the assessee-firm entered into a contract of insurance covering the lives of the partners including the minor so that in the event of the death of and one of them, the amount assured would be available to the firm for payment to the legal representatives of the deceased partner. Can it then be said that the premium paid on these policies was with a view to avoiding damage or destruction to the stocks used for the purposes of business When a partner dies, the firm would stand dissolved unless the partnership deed provides that the surviving partners may carry on the business. In that event, the surviving partners would be required to pay the value of the share of the deceased partner to his legal representatives. If for paying the value of the share to the legal representatives an insurance policy is taken out, it is difficult to say that it is taken out against the risk of damage or destruction to the stocks, no matter how wide the expression 'stocks' is read. If a partner dies, his share in the assets of the firm have to be paid to his legal representatives by the surviving partners who desire to continue the firm. If for paying the same, property of the firm is required to be disposed of or there is depletion of liquid cash, it is not damage or destruction of stocks used for the purposes of business within the meaning of clause (i) of section 36(1) of the Act. The firm is merely discharging an obligation since the surviving partners desire to carry on the business of the firm by paying off the legal representatives of the deceased partner. It can meet this obligation even by
13. raising a loan from outside or by making a provision in the form of an insurance policy covering the life of the partner, since deceased, so that liquid cash is available in the event the legal representatives of the deceased partner are required to be paid off. If a partner dies, under the ordinary law, the partnership would come to an end but it is difficult to say that on his death there would be damage or destruction of stock unless provision for liquid cash is made in advance. In our opinion, therefore, the insurance policies in question did not cover any risk of damage or destruction of stocks used for the purposes of business within the meaning of clause (i) of section 36(1) of the Act. These policies were taken out to provide for liquid cash as the partners very well knew that on the death of one of the partners, the legal representatives of the deceased partner will have to be paid their share in the partnership assets unless they are admitted as partners. To provide for buying the share of the deceased partner, the partnership firm took out the insurance policies in question. If provision is made for liquid cash, it is undoubtedly foresight on the part of the partners so that they may not have to rush for liquid cash at the last moment but it is difficult to say that the insurance policies cover risk of damage or destruction to the stocks used for the purposes of business. We are, therefore, of the opinion that the case does not fall within the ambit of section 36(1)(i) of the Act.
14. We next proceed to consider whether the assessee-firm is entitled to deduction under section 37(1) of the Act. That sub-section at the relevant date read as under :
'37. (1) Any expenditure (not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head' Profits and gains of business or professions.'
15. It will be seen on a plain reading of this sub-section that the expenditure in question must not be of the nature described in sections 30 to 36 of the Act, must not be in the nature of capital expenditure or personal expenses of the assessee and must be laid out and expended wholly and exclusively for the purposes of the business. Admittedly, the expenditure in question is not of the nature described in sections 30 to 36 of the Act. It was, however, urged on behalf of the Revenue that it was in the nature of Capital expenditure and was, therefore, excluded from the benefit extended by sub-section (1) of section 37 of the Act. It was also submitted that it was not laid out or expended wholly and exclusively for the purposes of business and was, therefore, not deductible from the income chargeable to tax under section 37 of the Act. We think that the contention that the expenditure is in the nature of capital expenditure is well-founded. By taking out these insurance policies, the assessee-firm desires to ensure the availability of liquid cash for payment to the legal representatives of the deceased partner in the event the surviving partners desire to continue the firm. When the share of the deceased partner is paid off, the shares of the surviving partners in the assets of the firm can be augmented. What is, therefore, sought to be acquired is capital, that is, liquid cash needed for buying the share of the deceased partner by paying off his legal representatives. If the amount received from the insurance company on the demise of the partner is a capital asset like any other amount borrowed by the partnership firm from third parties, what the partnership firm expends for acquiring that capital asset can only be said to be capital expenditure within the meaning of section 37(1) of the Act. As pointed out earlier, the sole purpose of taking out these insurance policies was to secure liquid cash at the time it was needed to pay off the legal representatives of the deceased partner. If the amount paid by way of insurance premia is for securing this liquid cash, a capital asset, then the expenditure incurred therefor could only be said to be in the nature o capital expenditure. We are, therefore, of the opinion that the insurance premia was not deductible under section 37(1) either.
16. For the above reasons, we answer the question referred for our opinion in the negative, that is, in favour of the Revenue and against the assessee. The reference is disposed of accordingly with no order as to costs.
17. The assessee seeks a certificate of fitness to appeal to the Supreme Court under section 261 of the Act. We do not consider this to be a fit case for grant of certificate sought. We, therefore, reject the request.