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Citation Codes
Equivalent Citations
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Case Number
Judges
  • Hon'ble Mr. Justice Bipinchandra Jivanlal Divan
  • Hon'ble Mr. Justice Prafullachandra Natverlal Bhagwati
Acts
  • section 256(1) of the Income-tax Act, 1961, (hereinafter referred to as the Act).
  • section 28 of the 1961 Act, similar to section 10(1) of the 1922 Act.
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Cites
Cited by
Citation Codes
Equivalent Citations
citation codes
Case Number
Judges
  • Hon'ble Mr. Justice Bipinchandra Jivanlal Divan
  • Hon'ble Mr. Justice Prafullachandra Natverlal Bhagwati
Acts
  • section 256(1) of the Income-tax Act, 1961, (hereinafter referred to as the Act).
  • section 28 of the 1961 Act, similar to section 10(1) of the 1922 Act.
See more information ...
Smart Summary

Judgment Summary — Divan, J. (Reference under section 256(1) of the Income‑tax Act, 1961)

Factual and Procedural Background

This judgment arises from a reference under section 256(1) of the Income‑tax Act, 1961. The assessee is an individual whose assessment year in issue was 1962‑63 (previous year: calendar year ending 31 December 1961). The assessee derived income from several sources, including interest on securities, dividends and shares of profits of two partnership firms: M/s. Dhirajlal Khushaldas & Brothers and Dhirajlal Chunilal & Co. The matter before the court concerns the firm M/s. Dhirajlal Khushaldas & Bros.

The assessee owned a motor‑car and, in his individual assessment, claimed a deduction of Rs. 6,024 (comprising 50% of running expenses and 50% of depreciation) on the basis that the car was used in discharging his duties as a partner of M/s. Dhirajlal Khushaldas & Bros. The Income‑tax Officer disallowed the claim on two grounds: (1) that while section 67(3) allowed deduction of interest from share of profits, there was no provision for other expenses to be deducted by the partner; and (2) that expenses pertaining to the business should be debited to the firm and not to the partners individually.

The Appellate Assistant Commissioner upheld the disallowance, finding no clause in the partnership deed obliging the assessee to keep a car for the firm's business. The Income Tax Appellate Tribunal also upheld the disallowance, holding that the partnership instrument did not impose on the assessee any liability to incur the claimed expenses and that conveyance charges incurred for the business would be allowable against the firm's income but not a partner's personal claim.

The Tribunal referred the following question to the High Court under section 256(1):

"Whether, on the facts and in the circumstances of the case, the expenditure of Rs. 6,024 incurred by the assessee on a car which was used by him for the business of the firm is an allowable deduction against the assessee's share income from the firm of M/s. Dhirajlal Khushaldas & Bros.?"

Legal Issues Presented

  1. Whether the expenditure of Rs. 6,024 incurred by the assessee on a motor‑car, which was used by him for the business of M/s. Dhirajlal Khushaldas & Bros., is an allowable deduction against the assessee's share of income from that partnership firm.

Arguments of the Parties

Assessee's Arguments

  • The expenditure of Rs. 6,024 was incurred by the assessee wholly and exclusively in carrying out his duties as a managing partner of M/s. Dhirajlal Khushaldas & Bros. Clause 7 of the partnership deed made the assessee a managing partner with sole direction and control of the firm's business and management.
  • The motor‑car was used for the business of the firm and therefore the expenditure falls within the scope of deductible business expenses under section 37 of the Act.
  • The fact that the assessee's share of profits from the firm was nil in the relevant year does not prevent the expenditure from being deductible if it was wholly and exclusively for business purposes.

Revenue's (Respondent) Arguments

  • The motor‑car expenses were personal to the assessee and not laid out or expended wholly and exclusively for the purposes of the business.
  • When a deduction is claimed under section 37(1), the burden lies on the assessee to prove that the expenditure was wholly and exclusively for the purposes of the business; reliance was placed on the decision in Swadeshi Cotton Mills Co. Ltd. v. Commissioner of Income‑tax.
  • There was no finding by the authorities that the specific sum of Rs. 6,024 was expended for the business (though Rs. 12,048 was shown as total car expenses), and the assessee had not discharged the burden of proof regarding the Rs. 6,024 itemization.
  • A commercial person would not incur such expenditure personally if it were for the firm's business; typically such amounts would be debited to the firm's accounts and reimbursement sought rather than claimed in the partner's own assessment.

Table of Precedents Cited

Precedent Rule or Principle Cited For Application by the Court
Swadeshi Cotton Mills Co. Ltd. v. Commissioner of Income‑tax Establishes that the burden is on the assessee to show that expenditure claimed under the relevant provision was laid out or expended wholly and exclusively for business purposes. The court acknowledged the principle but observed that neither the Revenue before the lower authorities nor the Commissioner in this reference challenged the Tribunal's factual finding that the expenditure actually represented expenses for the business. Consequently, the court proceeded on the basis that the burden had been satisfied in the facts of this case.
Commissioner of Income‑tax v. New Digvijayasinhji Tin Factory Emphasizes that the inquiry should focus on the "real income" of the partner and adopt a commercial approach rather than technical refinements. The court applied the commercial, fact‑based approach enunciated in this decision when determining whether the partner's expenditure should be treated as deductible against his share of profits, concluding the real commercial position supported allowing the deduction on the facts before it.

Court's Reasoning and Analysis

The court proceeded through a fact‑focused and principle‑based analysis:

  1. Characterisation of the assessee's role: Clause 7 of the partnership deed (dated 15 October 1954) expressly made the assessee (Matubhai Chunilal Patel) one of the managing partners vested with sole direction and control of the firm's business and management. The firm acted as managing agents of a limited company. This establishes the assessee's managerial role in the partnership.
  2. Tribunal's factual finding: The Tribunal had found that the conveyance expenses represented expenses incurred for the business of the firm. The High Court treated that factual finding as operative because it had not been challenged by the Revenue before the Court and no reference challenging that finding was made by the Commissioner under section 256(1).
  3. Burden of proof under section 37(1): While the court accepted the general principle (relying on Swadeshi Cotton Mills) that the assessee bears the onus of proving that claimed expenses were incurred wholly and exclusively for business, it noted that the Revenue had not disputed that the Tribunal had found the expenses were for the firm's business. On the unchallenged factual finding, the court proceeded on the footing that the expenditure of Rs. 6,024 was incurred wholly and exclusively for the business.
  4. Whether the partner must seek reimbursement from the firm: The court observed that internal arrangements between partners as to how expenses are accounted for (whether charged to firm accounts or borne and later reimbursed by individual partners) are matters of inter se arrangement. The pivotal question is whether a partner's expense, incurred for the firm's business, can be claimed as a deduction against his share of profits from that firm.
  5. Commercial approach to real income: Guided by the New Digvijayasinhji decision, the court emphasized assessing the "real income" of the partner and taking a commercial, not finely technical, approach. Given the assessee's position as managing partner of a managing agency firm, and that share of profits are chargeable as "business" under section 28, the court found it appropriate to allow the deduction against the assessee's income under the head "Profits and gains of business or profession."
  6. Effect of nil share in that year: The fact that the assessee's share of profits from the firm was nil in the relevant year did not affect the conclusion — if the expenditure is wholly and exclusively for the business, it remains an allowable deduction against income charged under the business head.

Holding and Implications

Holding: The court answered the referred question in the affirmative: the expenditure of Rs. 6,024 incurred by the assessee on the motor‑car used for the business of M/s. Dhirajlal Khushaldas & Bros. is an allowable deduction against the assessee's share of income from that firm.

Implications and direct effects:

  • The immediate effect is that the assessee may claim the Rs. 6,024 as a deductible business expense against his income from the partnership firm for assessment purposes.
  • The court ordered that the Commissioner pay the costs of the reference to the assessee.
  • The court explicitly stated that the answer is given in the light of the facts and circumstances of this case. Thus the decision was fact‑specific; the court did not purport to lay down a broad new principle beyond applying established law to the unchallenged factual finding. There is no statement in the opinion asserting the creation of a new precedent beyond its factual application.

Disposition: Question answered in the affirmative. Commissioner to pay costs of the reference to the assessee.

Show full summary ...

    Matubai Chunilal Patel v. Commissioner Of Income-Tax, Gujarat

    JUDGMENT Divan, J.

    1. This is a reference under section 256(1) of the Income-tax Act, 1961, (hereinafter referred to as the Act). The assessee is an individual and the relevant assessment year was 1962-63, the "previous year" being the calendar year ending on December 31, 1961. The assessee derived income from various sources, viz., interest on securities, dividends and share of profits of two partnership firms. These two firms were M/s. Dhirajlal Khushaldas & Brothers and Dhirajlal Chunilal & Co. We are concerned in the present reference with the firm of M/s. Dhirajlal Khushaldas & Bros. The assessee owned a car and in his individual assessment he claimed 50% of his running expense and 50% of the depreciation, aggregating to Rs. 6,024, as deductible expenditure contending that the motor-car was used by him for the discharge of his duties as a partner in the partnership concern of M/s. Dhirajlal Khushaldas & Bros. This claim of Rs. 6,024 was disallowed by the Income-tax Officer, firstly, on the ground that though there was a provision for deduction of interest from such income of share of profits in a partnership firm, under section 67(3) of the Act, there was no such provision for other expenses; and the second ground was that, whatever expenditure pertained to the business carried on by the firm, was properly debitable to the account of the firm and not to the assessment of the income of the partners. Against the decision of the Income-tax Officer, there was an appeal by the assessee; and the Appellate Assistant Commissioner upheld the disallowance of these motor-car expenses on the ground that there was no clause in the partnership deed enjoining the assessee to maintain a car for the business of the firm and in the absence of such a clause, commercial expediency of the conveyance expenditure could not be said to have benumbed out. The assessee took the matter in further appeal to the Appellate Tribunal and the Tribunal upheld the orders passed by the authorities below on the ground that the terms of the instrument of partnership did not fasten upon the assessee any liability of incurring expenses claimed so that he should be in a position to earn his share of profit. The Tribunal further observed that if any conveyance charges were incurred for the purpose of the business of the firm in which the assessee was a partner, they would be an admissible charge against the income of the firm; and that it was not open to a partner in a firm to claim any deduction which would have been claimed by the firm.

    2. Thereafter, at the instance of the assessee, the following question has been referred by the Tribunal to this court under section 256(1) of the Act, viz. :

    "Whether, on the facts and in the circumstances of the case, the expenditure of Rs. 6,024 incurred by the assessee on a car which was used by him for the business of the firm is an allowable deduction against the assessee's share income from the firm of M/s. Dhirajlal Khushaldas & Bros. ?"

    3. Under clause 7 of the partnership deed, dated October 15, 1954, of the partnership firm of M/s. Dhirajlal Khushaldas & Bros., it has been provided that the firm was to be conducted under the sole supervision and guidance of M/s. Chunilal Khushaldas Patel and/or Matubhai Chunilal Patel (the assessee) and/or their nominess; and the said clause further provides that the said Chunilal Khushaldas Patel and/or Matubhai Chunilal Patel and/or their nominees shall have the sole direction and control of the partnership business and management thereof and all the matters connected therewith and no other partner shall be entitled to interfere with the management and conduct of the business and his or their decision and directions shall be final and binding on all the parties. It is, therefore, clear that under clause 7 of the partnership deed, the assessee was the managing partner of the firm and the firm was acting as the secretaries, treasurers and agents and thus were managing agents of a limited company known as Himabhai Mfg., Co. Ltd. it is the contention of the assessee that the amount of Rs. 6,024 was spent by him in carrying out his duties as the managing partner of the firm of M/s. Dhirajlal Khushaldas & Bros. It is true that during the relevant year of income which was the previous year for the purposes of assessment year 1962-63, the share of income from the firm of M/s. Dhirajlal Khushaldas & Bros. coming to the assessee was nil in that particular year; but it is clear that, if the expenditure was incurred by the assessee wholly and exclusively for the purpose of the business, then it can be deducted from the total income of the assessee as an expenditure incurred by him for the business of the partnership firm.

    4. Under section 37 of the Act any expenditure not being expenditure of the nature described in section 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 profession". This provision in the Act of 1961 is the same as the provision set out in section 10(2)(xv) of the Act of 1922, and the decisions on section 10(2)(xv) of the 1922 Act have a direct bearing on the interpretation of section 37(1) of the Act.

    5. It was contended before us on behalf of the revenue that the expenses in connection with the motor-car amounting to Rs. 6,024 were the personal expenses of the assessee and not expenses in curred by the assessee wholly and exclusively for the purposes of the business. In this connection, it may be pointed out that the Tribunal has found in paragraph 3 of its order as follows :

    "Since, on the facts, it was found that the conveyance expenses were not incurred by the assessee in order that he may be able to earn his share of profit, but they actually represented expenses incurred for the business of the firm, the revenue authorities were justified in holding that the expenses claimed could not be set off against the assessee's share of profit from the firm."

    This portion from the order of the Tribunal clearly shows that on facts it was found that the expenses aggregating to Rs. 6,024 actually represented expenses incurred by the assessee for the business of the firm. Under these circumstances, it is not possible for us to accept the contention that the sum of Rs. 6,024 represented personal expenses of the assessee.

    6. It was further contended on behalf of the revenue before us that whenever an assessee claims a deduction under section 37(1) of the Act, the burden is on the assessee to show that the expenses were laid out or expended wholly and exclusively for the purposes of the business. In support of that proposition reliance was placed on the decision of the Supreme Court in Swadeshi Cotton Mills Co. Ltd. v. Commissioner of Income-tax. Since the assessee claims a particular deduction as against his total income, the burden must be discouraged by him leading appropriate evidence in each case and he must show that the amount which he has claimed as deduction against his business income has been expended by him wholly and exclusively for the purposes of the business.

    7. It was contended before us on behalf of the revenue that there was no finding of fact by any of the authorities that Rs. 6,024 were expended for the purpose of the business. It is true, according to this contention on behalf of the revenue, that the amount of Rs. 12,048 represented the expenses incurred by the assessee in connection with the car inclusive of depreciation and it was also found that the case had been used by the assessee for the purposes of the business of the firm. But it was contended that the assessee had not discharged the burden of showing that this amount of Rs. 6,024 had been expended by him in this particular manner. With reference to this contention, it must be borne in mind that before the Income-tax Officer as also before the Appellate Assistant Commissioner and the Tribunal it was nowhere contended on behalf of the department that the burden of showing that the amount was expended wholly and exclusively for the purpose of the business had not been discharged by the assessee. On the contrary, the order of the Tribunal goes to show that it has found as a fact that the amount actually represented the expenses incurred for the business of the firm. This finding of fact of the Tribunal has not been challenged before us and no reference challenging this finding of fact was asked for by the Commissioner under section 256(1) of the Act. Under these circumstances, we must proceed on the footing that the assessee had actually incurred the expenditure of Rs. 6,024 for the business of the firm and that this amount had been expended by him wholly and exclusively for the business of the firm.

    8. The question then arises whether the assessee was bound to recover this amount expended by him from the firm so as to reimburse himself the amount spent by him in connection with the car or whether he can claim this amount in his or assessment of his total income. It was contended on behalf of the revenue before us that a commercial man would not incur the expenditure himself if it is for the business of the firm and he would rather have the amounts debited in the accounts of the firm rather than going on spending the money himself. The question whether in a particular firm the amounts of expenses incurred by the partner for the business of the firm are debited to the accounts of the firm or are ultimately claimed by the partner in his own assessment is a question of arrangement between the partners inter se; but the question that has to be decided is whether the amount expended by a partner for the business of the firm can be claimed as a deduction against his share of profits from that particular partnership firm.

    9. In Commissioner of Income-tax v. New Digvijayasinhji Tin Factory it was observed by S. T. Desai J. (as he then was) as follows :

    "The question here is not of wire-drawn technicalities or any refined distinction but what is the real income of the partner. The matter has to be approached bearing in mind the commercial aspect of the same."

    10. It is from that point of view that we have to approach the question that has been referred to us in the instant case. Under clause 7 of the deed of partnership, the assessee was one of the two managing partners of the firm of M/s. Dhirajlal Khushaldas & Bros. That partnership firm was the managing agency firm of limited company and was managing the affairs of that company. The amount which has been claimed by the assessee is found to have been incurred by the assessee in connection with the business of the firm and it is further clear that the income which the assessee gets by way of share in the profits of the partnership firm is chargeable under the head "business" under section 28 of the 1961 Act, similar to section 10(1) of the 1922 Act. Thus, it is against his income under the head "business" that the assessee claims deduction by way of expenses in connection with the motor-car, the having been used for the purpose of business of the partnership firm in question. It is clear to our mind that in the light of the facts and circumstances, which we have just now set out, the assessee had incurred this particular expenditure wholly and exclusively for the business. The fact that in this particular year his share of income from the firm of M/s. Dhirajlal Khushaldas & Bros. was nil makes no difference whatsoever to the conclusion that it is an allowable deduction against the assessee's income from that firm.

    11. Under these circumstances, it is clear that the question referred to us must be answered in affirmative. We must make it clear that it is in the light of the facts and circumstances of this case that we have answered the question in favour of the assessee.

    12. In the result, we answer the question in the affirmative. The Commissioner will pay the costs of this reference to the assessee.

    13. Question answered in the affirmative.

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    Matubai Chunilal Patel v. Commissioner Of Income-Tax, Gujarat
    (Jul 11, 1967)