RAJAMANNAR, C.J. - In accordance with the order of this Court dated 10th January, 1947, in C. M. P. No. 3199 of 1946 the Appellate Tribunal has stated a case and referred the following question for our decision :-
'Whether on the facts and in the circumstances of this case the sum of Rs. 9,831 is expenditure allowable under Section 10 (2) (xii) of the Indian Income-tax Act ?'
By the date of this order, under the provisions of the Amending Act, VIII of 1946, Section 10 (2) (xii) was re-numbered as 10 (2) (xv) and the question will be answered with reference to clause (xv) of the Act as it stands now.
The facts which appear from the statement of the case are that the assessee Karuppan Chettiar and his father was members of an undivided Hindu family carrying on money-lending business in Rangoon and Tantapin. In 1926 there was a partition between them and the money-lending business at Rangoon fell to the share of the father while that at Tantapin fell to the assessees share. In 1932 a person who had made a deposit with the joint family firm at Rangoon before the date of partition filed a suit for recovery of the amount due to him in respect of the deposit against the father as well as against the assessee and his son, apparently on the ground that the debt in question was a pre-partition debt for which the assessee would be liable under the Hindu law. The assessee contested the claim on the ground that there had been a separation in 1926 and the Rangoon business had fallen to the share of the father at the partition. His contention was upheld in the trial Court, but on appeal that decision was reversed by the High Court, and it appears that there is an appeal to the Privy Council pending. The assessee incurred expenses for the defence of the suit which amounted to Rs. 12,933. Out of this, a sum of Rs. 3,102 was claimed for the assessment year 1940-41 and was allowed by the Income-tax department. The balance of Rs. 9,831 was claimed for the succeeding assessment year, the year under reference. The Income-tax Officer did not allow the deduction but on appeal the Appellate Assistant Commissioner and the Appellate Tribunal have allowed the deduction following the decision of the Tribunal in respect of Rs. 3,102 relating to the preceding year.
As the Tribunal in the present instance has merely followed their decision in the prior year, it is necessary to refer to the ground on which the deduction was allowed in the previous order. The reasoning may be stated in their own words :-
'The assets which came to the appellant after the disruption are undoubtedly his stock-in-trade. The whole object of the appellants defence was to prevent depletion of his stock-in-trade. Income from the debtors which came to the share of the appellant has always been returned as his income and assessed to tax. In these circumstances, we are of the opinion that the litigation was undoubtedly connected with the debts which came to the assessee and are his stock-in-trade.'
It is true that the money which a banker or money-lender employs in his business while it is in one sense capital is also his stock-in-trade-Vide Commissioner of Income-tax v. Kameshwar Singh of Darbhanga. Likewise the debts due to the Tantapin firm which fell to the share of the assessee may be deemed to be his stock-in-trade. If the litigation in question had related to any of these debts, then undoubtedly the expenses incurred for carrying on that litigation would be a legitimate deduction because the object of the litigation was to prevent depletion of his stock-in-trade. But the debt which was the subject-matter of the litigation was not a debt due by the Tantapin firm. It was a debt due by the Rangoon firm which fell to the share of the father. The assessees defence was therefore not to prevent depletion of the stock-in-trade of the firm at Tantapin. What apparently the Tribunal overlooked was that the ground on which the assessee was sought to be made liable in the suit on the deposit was his liability under his personal law, i.e, the Hindu law, to discharge the debts incurred by his family before the division. This liability, if it really existed, would not only attach to the Tantapin business which fell to the assessees share at the partition; it would also extend to any other property which belonged to the joint family and which came to the share of the assessee. Further the assets of the business at Tantapin belonging to the assessee after the partition might have been proceeded against also for the enforcement of a liability of the family quite independent of either of the two businesses at Rangoon or Tantapin. It was therefore incorrect to speak of the litigation relating to the deposit in the Rangoon firm as relating to the stock-in-trade of the assessees firm at Tantapin. It follows that the defence of the appellant was not to prevent depletion of such stock-in-trade. As this is the only ground on which the Tribunal came to a conclusion in favour of the assessee, we must hold that they were wrong in allowing the litigation expenses as a deduction under Section 10 (2) (xv).
The answer to the question must be in the negative. The respondent will pay to the Commissioner of Income-tax the costs of this reference, Rs. 250.
Reference in the negative.