1. This case is referred under the Income Tax Act by the Board of Revenue for the opinion of the High Court. The question relates to the assessment for income tax of the firm known as B. Muniswami Chetty and Son, and there are two distinct points referred.
2. B. Muniswami Chetty and Son carry on a business in piece-goods, the partners in the firm B. Damodaram Chetty and P.V. Ramanujam Chetty, Damodaram Chetty baring a much larger share. On the facts as now found it is clear that that firm engaged in business with other partners in two other firms, one called the Carnatic Import Company and the other B. Damodaram Chetty & Co., whose businesses were of an allied character in that they dealt in goods similar to those dealt in by Muniswami Chetty & Son. B. Muniswami Chetty & Son had a much larger share in those other two firms, there being in each case a partner with a small share to encourage him to take a real interest in the management of the business. In the year of assessment B. Muniswami Chetty & Son made a profit and the other two firms made a loss. B. Muniswamy Chetty & Son claim that they are entitled, for the purpose of assessment to set off their share of the loss in the other two firms against the profits made in their own firm. The Crown contends, on the other hand, that they must be treated separately and must pay income-tax on the profits of their firm, and that the only effect of the loss of the other two firms would be that these firms would not have to pay income-tax. In our judgment, the determination of this question depend upon whether it is a fact that the business of B. Muniswamy Chetty & Son is being carried on in part by engaging with partners in the other firms. Where the subsidiary business engaged in, is connected with the main business, and is a proper employment of the assessee's capital or labour, it is in my judgment for the purpose of assessment to be treated as part of the business of the firm. If the firm in one branch makes a loss, that loss may be set off against the profits made in its head office or other branches. Applying that test to this case, I think it is clear that the contention of the assessee is right and that B. Muniswami Chetty & Son are entitled to have their assessment arrived at by taking into account the loss made by them in the other two firms.
3. They claim also in arriving at their profits for the tax year, 1921-1922 to deduct certain expenditure incurred by them (a) in employing accountants and lawyers in the matter of a dispute between them and Government as to the amount of excess profits duty payable by them for the year ending March 1920, the year in which the Excess Profits Duty Act applied and (b) similar expenses incurred by them in arriving at the income on which income-tax assessment was made or was to be made. These expenses are perfectly proper expenditure by the company of the company's money but whether they can be brought into account in arriving at the proper assessment of the income-tax must depend upon the construction of Section 9(2)(IX) of the Income-tax Act of 1918 which runs as follows: 'Such profits shall be computed after making the following allowances in respect of sums paid, namely in respect of any expenditure (not being in the nature of capital expenditure) incurred solely for the purpose of earning such profits.' In my judgment, these monies were expended not for the purpose of earning profits at all but for the purpose of, in one case, protecting profits from Government's claim to income-tax and in the other case of getting back from Government the excess profits duty claimed by or paid to the Government in respect of some past period. The words of this rule are much the tame as the words of the rule in schedule D. of the Income Tax Act of 1918 in England and of the rule in the Income Tax Act current in New Zealand, and there have been cases both in England, and in the Privy Council on appeal from New Zealand, which, indicate the view of the English Courts which is to the effect that these and similar words are to be construed strictly, by ascertaining whether or not the expenditure was for the sole purpose or earning profits. So the amount paid to the Government in the nature of a fine arising out of a matter connected with the business and costs incurred in resisting the imposition of such fine were held in Warl & Co. Ltd., v. Commissioner of Taxes  11 K.B. 444 not to be charges that could be deducted. In Commissioners of Inland Revenue v. Wornes & Co., Ltd.,  A.C. 145. their Lordships of the Privy Council held that no deduction could be made for monies spent by a company in printing and distributing literature directed against prohibition which expenditure was admitted to be in the interest of the, preservation of the assessee's trade. We were referred to the Excess Profits Duty Act X of 1919, Section 20 and it was suggested that because the amount of the excess profits duty is to be allowed as a deduction in respect of the profits of a business for the purpose of income-tax, therefore the costs of arriving at the excess profits duty must also be so allowed. It is clear on an examination of the section that this has got to be for a specified year and does not apply to any later year nor do I think that apart from that limitation the fact that the excess profits duty is by statute allowed to be deducted would make the costs arriving at the excess profits duty also a deduction. If the statute had desired to make it so, it would have been quite simple to have stated that the excess profit duty and any money expended in arriving at the right amount of excess profits duty shall be a deduction for the purpose of income-tax. The section does not say so and I see no reason why it should be implied.
4. I have come to the conclusion that on the first point the contention of the assessee is right and on the second wrong. The first point is the main and the more important point and I think that the assessee must have his costs of this reference' except in so far as they have been increased by adding a claim on the second point. Costs in this case will be taxed on the Original Side scale.
5. I think that it would be desirable at some future time on a suitable occasion with the assistance of the Vakils' Association if they choose to assist in this matter, to consider the question of the taxation of costs, with a view to framing some rule of establishing some definite practice in such matter.
Coutts Trotter, J.
6. Now that we have unambiguous findings, I do not entertain the slightest doubt about the first point which seems to me almost too plain for discussion. Indeed when Mr. Ananthakrishna Iyer came to develop the argument it was clear that the only way in which he could contend for the claim made by Government was by arguing that under Section 9(1) of the Income-tax Act of 1918 the profits of any business carried on by him, that is, the assessee, have to be expanded into profit of any business carried on by him solely so as to exclude any business that he may carry on in conjunction with others. Here we have a company part of whose business is to hold in a share in a separate business. It takes this share in the course of its own business and it receives whatever profits it receives or loses whatever it losses in the course of its own business.
7. With regard to the second point, I feel more doubt. The section occurs in many Acts of many countries and Mr. Justice Rowlatt, a Judge of great experience and learning in Revenue matters, has frankly said that he does not see his way to give a general definition of the true construction of the section, but that he is content to say about each case as it comes along whether in his view it falls within the section. This seems to me a difficult case, more difficult than the one which that learned Judge had to deal with. I do not think that the expenses incurred here can be said, in any sense that a plain man would understand, to be correctly described as expenditure incurred for the purpose of earning profits. It seems to me that the expenditure was incurred after the profits had been earned. That appears to be sufficient to take the case out of the section.
8. I agree to the order as to costs.