(1) The defendants in a suit, where a preliminary decree for the taking of accounts of a transport concern has been passed, have preferred this appeal against the final decree in the matter. I have just now delivered judgment in S. A. 798 of 1961 confirming the preliminary decree passed by the courts below.
(2) The plaintiff's suit was laid on the basis that he was partner with the first defendant in the transport concern and reliefs for dissolution and accounts were claimed. The defence, inter alia, was that the plaintiff was merely an employee in the business, placed in the management of the business with an obligation to run the concern, and remunerated by a half share in the profits, with no interest in the assets of the business. The original agreement relating to the service was between the plaintiff and the first defendant, evidenced by Ex. B. 1, and later the agreement was renewed in favour of the second defendant, Ex. B.2. Several pleas were raised by the plaintiff in relation to these agreements, and particularly the plea that the second defendant was merely a name-lender for the first defendant. It is unnecessary to refer to these matters in greater detail as they have been the subject of detailed consideration in the appeal against the preliminary decree.
(3) Though the dispute in the taking of accounts related to several items in the courts below, in the second appeal the defendants have confirmed their arguments to two items. The first and more important one is the claim of the defendants that in the calculation of the profits, to a half share in which the plaintiff has been decreed as entitled, deduction should be made for depreciation in the value of the vehicles, buses and lorries. The second one relates to the expenses of the litigation in O. S. 41 of 1952 on the file of the Subordinate Judge's court, Pudukottai, the defendants contending that these expenses, inclusive of the decree amount, should be debited as an out-going of the business before the profits are divided.
(4) Taking up the claim for depreciation in the value of the vehicles, the question is not free from difficulty. The agreement between the parties, Ex. B.2, provides for the division of the net profits derived from the service in two equal halves after deducting the expenses incurred from such service, and the sharing of the profits between the two parties. The question, therefore, has centred round what are the profits of the business Learned counsel for the appellants Sri R. Gopalaswami Aiyangar, contended that the plaintiff being entitled to a half share in the net profits depreciation in the cost of vehicles must be deducted and it is a proper, normal and regular out-going. He referred in this connection to S. 48 of the Partnership Act which provides that in settling accounts of a firm after dissolution, losses including deficiency of capital shall be paid first out of profits. Learned counsel also pointed out that the mere fact that in the course of business, when the business was running, profits were divided in the accounts without reference to the depreciation, is not conclusive of the question and that in the taking of accounts, when the business is finally wound up, depreciation ought to be taken into account. In this connection, the decision in Binney v. Mutrie, (1886) 12 AC 160 was referred to. My attention was also drawn to the passage in Lindley on Partnership, 12th Edn. at page 618, where it is stated that in settling account between partners, after dissolution of the partnership, losses including loss and deficiency of capital shall be paid first out of profits. This, of course, is S. 48 of the Indian Partnership Act, and it may be pointed out that as noticed in the passage and as provided in S. 48 of the Indian Partnership Act, the mode of taking accounts is subject to any agreement between the partners. Learned counsel for the appellants also referred to a passage in Auditing, 17th Edn., by Lawrence R. Dickens, where at page 274 it is stated thus :
"It seems clear that distinction must be made between the case of a company which is formed with the object of acquiring and working a wasting asset and that of a company which may be expected to carry on its business for an indefinite period. In the latter case, when the plant or machinery is worn out, it will in the normal course of events be replaced. It appears that to arrive at profits available for distribution provision should, as a matter of law, be made for depreciation of such fixed assets as much must be replaced."
(5) In my view what would be the profits of a particular concern, when rights of third parties are not involved, can never be a pure question of law. It will be governed by what the parties have contracted for or could be deemed to have agreed upon as profits either by express agreement or as could be implied from the manner in which they have been crediting themselves with the profits. Counsel on both sides referred also to the decision in Spanish Prospecting Co. Ltd, in re, 1911-1 Ch 92. The headnote for this decision in the All England Law Reports Reprint 1908 to 1910 at p. 573 runs thus :
"The fundamental meaning of 'profits' is the amount of gain made by a business during a specified period, generally a year, and ascertained by deducting the value of the total assets of the business at the beginning of the specified period from the value of the total assets at the end of that period. Some of the assets to be valued may be such that there are no market quotations or contemporaneous sales or purchases to afford a guide to their value, and often companies avoid the difficulty thus presented and refer in their accounts to assets of that type without placing any specific value on them, but this does not prevent the need to regard these assets as forming part of the assets of the company which must be included in the calculation by which de facto profits are arrived at. There is a wide field for variation of practice in estimations of profit in the domestic arrangements of a business, but this liberty ceases when the rights of third persons intervene e.g. the revenue who, when assessing income-tax, are not bound by the profit and loss accounts of the business. When the rights of third parties come in, 'profits' means actual profits calculated as closely as possible in the way indicated above".
(6) In Lindley on Partnership, 12th Edn. at page 424, under the heading 'What is divisible as profit', this is how the matter is put :
"Profit is the excess of receipts over expenses; and in winding up a partnership, nothing is properly divisible as profits which does not answer this description. But for the purposes of business, and of facilitating annual division of profits, a distinction is made between ordinary and extraordinary receipts and expenses; and whilst all extraordinary expenses are frequently defrayed out of capital, and out are frequently defrayed out of capital, and out of money raised by borrowing, the ordinary expenses are defrayed out of the returns of the business; and the profits divisible in any year are ascertained by comparing the ordinary receipts with the ordinary expenses of that year. It is obvious that, unless some such principle as this were had recourse to, there could be no division of profits, even of the most flourishing business, whilst any of its debts were unpaid, and any of its capital sunk. What losses and expenses ought to be treated as ordinary, and therefore, payable out of current receipts, and what ought to be treated as extraordinary, and payable legitimately out of capital or money borrowed, is a question on which opinions may often honestly differ, and one which, when open to honest diversity of opinion, a majority of members can lawfully determine."
(7) Learned counsel for the respondent, Mr. K. Rajah Aiyar, drew my attention in this connection to the decision of this court in Commissioner of Income-tax v. Nagi Reddi, (1964) 51 ITR 178 at p. 194 (Mad), where it is observed, with reference to S. 10(2) of the Indian Income-tax Act, 1922 :
"The word 'profit' has to be understood in its natural and proper sense--in a sense which no commercial man would misunderstand (Lord Halsbury in Gresham Life Assurance Society v. Styles, (1892) 3 Tax Cas 185 at p. 188). In Usher's Wiltshire Brewery Ltd. v. Bruce, 1915 AC 433, Lord Parker observes thus, elucidating the expression 'profits and gains':
'..... The receipts appear on the one side and the costs and expenditure necessary for earning these receipts appear on the other side. Indeed, without such account it would be impossible to ascertain whether there were really any profits on which the tax could be assessed.'
(8) Depreciation allowance being thus a charge on the profits or gains which are brought to tax, it is necessary that there should be first the computation of such profits or gains before even the question of making allowance for depreciation can at all arise. In Ambica Silk Mills Co. Ltd. v. Commr. of Income-tax, Bombay City, construing the provisions of S. 10(2)(vi), Chagla C.J. observed thus at page 64 (of ITR): (at p. 484 of AIR):
"...... It is clear that profits or gains in this context means profits or gains without taking into consideration the depreciation deferred to in clause (vi)."
(9) It will be apparent from the above references that there can be no settled principle of ascertaining profits for all purposes and in all concerns. The fact that for revenue purposes depreciation allowance is allowed on profits does not necessarily mean that in the calculation of profits under an agreement between persons engaged in a concern, the profits should necessarily mean profits arrived at after provision had been made for depreciation. What the parties meant and intended by division of profits has to be ascertained from a conspectus of all relevant matters, the nature of the agreement between the parties, the terms of the agreement between the parties, their intention as ascertained from the writing governing their relationship, and the interpretation they had given to their writing by subsequent conduct before disputes arose between them. The purpose and nature of the payment of profits say, whether it is remuneration for services, or in lieu of interest on investment will also have a bearing as to what would constitute profits. In this connection reference may also be made to the treatment of the question by Buckley, for the purpose of dividend, at page 899 in Buckley on the Companies Act, 13th Edn. where it is stated thus:
"The profits of the business are the credit balance of a profit and loss account properly prepared, having regard to the definition of the business in memorandum of association. They are the excess of receipts over expenses or revenue account. As to what expenses are properly chargeable to capital and what to revenue, it is necessarily impossible to lay down any general rule. In many cases it may be for the shareholders to determine this for themselves provided the determination be honest and within legal limits."
(10) The following illustration given at pages 899-900 is illuminating:
"Or suppose that a company has sunk pounds 250,000 in establishing a newspaper which could not be sold for pounds 10,000, or has sunk pounds 900000 in investments, and that they have depreciated by pounds 250000, it has in the like sense in each case sustained a loss. Yet if the company's object is not in these respective cases to traffic in tramways or newspapers or securities, but to own them and to make a profit by their ownership and working as distinguished from their sale, then the loss is a loss on capital account, leaving profit and loss account unaffected, and the credit of profit and loss account may divided in dividend."
(11) Reference may also be made to the decision of the Judicial Committee in Watson v. Haggitt, 56 Mad LJ 91: (AIR 1928 PC 115) where the construction of articles of partnership between two gentlemen of the law arose for consideration. There was a provision in the articles that in the event of one of the partners dying or becoming insane etc. During the term of the partnership, the surviving or remaining partner would pay the representatives of the partner so dying etc., a share of the net annual profits of the partnership business. The question for consideration was whether on the death of one, in the calculation of the net annual profits to be paid by the surviving partner, the salary which he had been receiving during the partnership could be deemed as an outgoing in ascertaining the profits. The Judicial Committee held that the net annual profits by which the amount of the sum to be paid by the surviving partner was to be measured, should be ascertained by deducting from the receipts and earnings of the business such outgoings and ordinary business expenses as were under the partnership articles or by the practice of the partners so deducted during the partnership, the business being for this purpose treated as a continuation of the partnership business. It was, however, held that the salary could not be deducted as the same ceased under the partnership articles. The importance of this judgment is that what were profits and deductions could be ascertained by the use and want of the partners as deducted from the course of dealings in the partnership.
(12) While thus there is no settled basis for arriving at the profits with reference to a particular concern, it is clear that the practice of the concern may be taken into account and each case has to be decided on its own merits with reference to its particular facts. Here, we are not concerned with any incorporated company or partnership. We are dealing with the case of a service agreement between an employer and employee. The employer finds the entire capital of the business and the employee placed in sole charge of the concern is remunerated by a half share in the profits. The document Ex. B-2 which governs the relationship between the parties itself provides how the profits to be. It provides for the ascertainment of the income and expenditure of the service (Service Sambhandhamana Adhaya Kanakkum Parthu) deducting therefrom the expenses incurred in the service. (Servicil Erpatta Silavupoga) and the division of the balance remaining of the income in two halves(Bakki Inikkum adhayathugaii padhiyaga pirithukkolvatha).
(13) The Tamil Word "Adhayam" (Adhayam) can mean both income and profits. Vide Tamil Lexicon. In the context given above, Adhayam obviously means only income. Lower down in the agreement it appears to be used as meaning 'profits'. The relevant sentence reads in the translation thus:
"In the matter of running the aforesaid bus service out of the profits derived therefrom after deducting any Andavar charities at one pie per rupee, the balance income derived from the aforesaid service (shall be divide in two equal halves) and one half will be allotted to you and out of the other half after deducting towards my salary account (debit credit transactions) and the net balance of amount remaining thereafter will be taken by me".
(14) The translation which is a running translation does not convey the correct meaning. What the signatory means is that he runs the service and out of the profits arising therefrom, sets apart one pie to the charity and the half that goes to the proprietor of the service, the remaining half he takes giving credit for his earlier drawings. The word "Adhayam" which is used here (Melpadi bus nadarthi athil erpaoum adhavathil) can refer in the context to profits only. As noticed in 56 Mad LJ 91: (AIR 1928 PC 115), already referred to, in construing the provisions of an agreement, there is no rigid rule that the same meaning ought to be given to an expression in every part of the document in which it appears. The method of ascertainment of profits is set out in the earlier part of the agreement. After ascertaining the income and expenditure, the expenditure that is deducted is only the expenditure incurred in the service. It can only mean the ordinary expenses defrayed from the returns of the business. It does not take into consideration the depreciation in the capital which is a special deduction.
(15) Here, it must be noted that the entire capital is provided by the proprietor of the service. There is a specific clause that all the buses that run in the Vilasam belong only to the proprietor. The employee has no rights whatsoever in the concern. He has to run the service diligently, maintain accounts properly and earn his share of the profits.
(16) It must be noted that it is a service agreement and his services could be terminated at any time. The particular clause in the agreement, Ex. B.2, as providing for the termination of the services at any time has been dealt with by me in extenso in S.A. 798 of 1961. The official translation does not bring out the purport of the last two sentences in the agreement. If the service could be terminated at the pleasure of the proprietor, the argument that, even though provision is not made for depreciation in the annual taking of accounts and the profits, it should be taken when there is a final rendering of accounts, has no force. The concern is not wound up, only the employee walks out. Any day he may be paid his share of the profits as ascertained upto that date and he may be sent out. In this case his services were terminated by the notice Ex. B.3, dated 26-9-1956. There is no dispute about the profits that had been calculated and credited to the plaintiff's share till 31-3-1955. The dispute has arisen in respect of the calculation of profits for the subsequent period. The entries in the account as such are not disputed. The plaintiff does not dispute ascertainment of the profit and loss as per the account books. As per the account books, the book value of buses is given at Rs. 45707-6-9. The second defendant claims that if depreciation as per the Income-tax Act and as shown in the income-tax returns is also taken into consideration, the value of the buses would be only Rs. 8534, and the plaintiff's share of the depreciation would come to Rs. 18586-11-41/2. But as pointed out above, the parties never reckoned the depreciation of the vehicles in computing profits in the past years. It must also be noted that though the vehicles may go down in value by reason of depreciation, with reference to a vehicle the more valuable part is the permit which has been issued for the vehicle. The Motor Vehicles Act permits the holder of a permit, with the permission of the authority, to replace a condemned vehicle or a worn-out vehicle by another vehicle of the same nature and capacity. What is difficult to obtain is a route permit, and when a vehicle becomes unfit, it can always be replaced. The law also permits the transfer of the vehicle with the permit, with the permission of the authorities. It is notorious that even though a vehicle may go down in value, by reason of the permit it carries with it, if the route is really profitable, the vehicle with the permit is a very valuable asset, having no relation whatever to the real value of the vehicle. Now, under the agreement between the parties, the plaintiff (the employee) has absolutely no share in the assets or capital of the business. He cannot share in the goodwill of the business, though he has been working in the service right through, the proprietor providing only the capital for the running of the business. The question is whether in such circumstances profits should mean profits arrived at after providing for depreciation in the vehicles. If that be permitted, the plaintiff (employee) in an indirect way would made to contribute for the capital against the spirit of the specific covenant in the agreement between the parties. In this connection reference may also be made to this fact that there are business concerns which have what are called working partners (Kashta Koottaligal) who contribute no capital, but share only the profits of the firm. often being tried employees of the firm. These "Koottalees" are not really partners in the firm and have no right to claim a share in the goodwill of the firm, vide: In re Abdul Rahim Sahib and Co., ILR 51 Mad 308: (AIR 1928 Mad 890). The position of the present plaintiff is similar to those "working partners". In the circumstances, I see no reason to differ from the view of the courts below that here should be no allowance for depreciation in the calculation of the profits of the concern.
(17) As regards the claim to debit the firm with the expenses and decree amount in O.S. 41 of 1952 on the file of the Subordinate Judge's court, Pudukottai, as noticed, by the courts below, it arose out of the purchase of a bus by the first defendant. He had passed on the bus to the second defendant, in whose name the service was run. There is nothing to link the liability of the first defendant to Varisai Mohammed Rowther, from whom he purchased the bus, with the business as such. Under the agreement governing the relationship between the plaintiff and the second defendant, the entire capital has to be found by the second defendant. The buses acquired for the concern belong only to the second defendant. The entire responsibility is that of the second defendant, the plaintiff being just an employee remunerated from the profits of the business. The second defendant having undertaken to provide the necessary buses, any liability incurred in regard to the acquisition of the buses, which has no direct relationship with the running of the service, cannot be thrown on the business. The suit arose out of a claim for Rs. 5000 as due in respect of the price of a bus. The first defendant was the sole and only defendant in that suit as purchaser of the bus. It was the case of the plaintiff, the first defendant and the second defendant that the amount had been paid off. The plea of the first defendant, as defendant, was not accepted, and a decree followed. An appeal by the first defendant also failed. It is the attempt of the defendants to debit the concern with the expenses of this litigation that, in fact, started off the dispute between the parties. The fact that these expenses find place in the accounts of the business is neither here nor there, the real question for determination being whether these should be debited against the second defendant personally or as a debit or outgoing of the business.
(18) Supposing the first defendant, or for that matter the second defendant, had purchased a new vehicle for the business, he having to find the capital, and for consideration due a suit is instituted, how can the plaintiff be called upon to contribute for the decree amount and costs from his share of the profits, as it were where the responsibility for the capital is that of the defendants. But that will be the result if the concern is debited with the expenses and the decree amount of the litigation. The mere fact that the bus was intended for the service will not make the litigation expenses a liability of the business, it being inconsistent with the agreement between the parties. I see, therefore, no reason to differ from the conclusion of the courts below that this item also is not debitable as an outgoing or expenditure of the business.
(19) In the result, the second appeal fails and is dismissed with costs. Leave granted.
(20) Appeal dismissed with costs.