Manohar Lall, J.:— This is a reference on behalf of the assessee by the Income-tax Appellate Tribunal asking for the opinion of the Court on the following question of law:—

“Under the circumstances of the case whether the litigation expense of Rs. 9,606 incurred during the accounting year for recovery of previous dues from Sardar Kartar Singh is an allowable deduction in law in computing the profits of the accounting year?”

I desire to observe that the statement of the case by the Appellate Tribunal is extremely unsatisfactory. We had considerable difficulty in finding out the true facts relevant to the question which requires an answer. The only paper which have been printed in the paper-book is the statement of the case by the Tribunal. Neither the assessment order nor the appellate order has been printed. Accordingly we adjourned the hearing of the case to enable the learned Standing Counsel for the Income-tax Department to produce these two papers. He has produced extracts from the appellate order and the order of the Income-tax Tribunal by which they refused to give him substantial relief. He was unable to produce the order of assessment. It is desirable that the paper-book which is prepared for our use must contain the following papers otherwise an adjournment of the hearing in order to get those papers would necessarily result in harassment to the parties:—

(1) The assessment order.

(2) The appellate order.

(3) The order of the Tribunal under section 33.

(4) The application of the assessee or of the Commissioner as the case may be requiring the Tribunal to state a case to the High Court under section 66, sub-clause (1).

(5) The statement of the case by the Tribunal.

(6) The order of the High Court in case the Tribunal is directed to state

(7) Any other relevant papers which the Tribunal or the Commissioner or the assessee may consider relevant for the use of the Court.

I also desire to take this opportunity of stating for the guidance of the Income-tax Tribunal in future that it is their first duty to state clearly and fully the material facts admitted or proved in evidence before them. To adopt another course must in most cases result in embarrassment and uncertainty when the matter comes before the Court for its decision, the Court being bound by the findings of the fact arrived at.

In the case of Lysaght v. Commissioners of Inland Revenue, Viscount Sumner in delivering his speech in the House of Lords made these important observations at page 527 “It is certainly much to be wished that the Commissioners should be scrupulously careful to say that they ‘find’ a conclusion of fact arrived at from other facts found or if they only mean to apply the law as we understand it to be and not to draw any conclusion of fact, should say that they hold so and so in accordance with what they conceive to be the law, for a debate on the meaning of a Case Stated is an unsatisfactory prelude to a debate on the general law applicable—It is well settled that when the Commissioners have thus ascertained the facts of the case and then have found the conclusion of fact which the facts prove, their decision is not open to review provided (a) that they had before them evidence from which such a conclusion could properly be drawn and (b) that they did not misdirect themselves in law in any of the forms of legal error which amount to misdirection…..”

Lord Sterndale (Master of the Rolls) in New Zealand Shipping Co. v. Thew made these observations “I wish just to say a word as to what in my opinion is the position of the Commissioner in a case of this kind. I cannot say it has been directly argued but it has been certainly suggested not only in this case but in other cases, that the duty of the Commissioner is to set out the circumstances which they find to exist and to leave the Court to come to its own conclusion as to what those circumstances prove. In my opinion that is not a correct view of the functions of the Commissioner. I do not know in this case, but from remarks that have been made from other cases it seems to have been founded on what I think is a misapprehension of what was said by Lord Justice Farwell in the case of the New Zealand Shipping Company v. Stephens. It is read sometimes as if the Lord Justice had said that the Commissioners must not state one side or the other out of Court. I am quite sure that nothing of that kind could have been said and for this reason, that there are numbers of authorities which show that the findings of fact are for the Commissioners; and if the decision depends upon a fact, if they find in the way or the other they must inevitably state one side or the other out of Court and to say that they must not do so is to say that they must not perform their duty. But as a, matter of fact that is not what the Lord Justice said at all. What he said was this: ‘I only wish to add that I also agree with the passage read from Lord Justice Vaughan Williams' judgment that the Commissioners ought not to state either side out of Court’—he does not stop there; he goes on—‘by stating under the guise of fact that which really is law’.— It seems to me the true proposition is this. The Commissioners are bound to find the facts. In finding the facts they are bound to act upon legal principles and upon evidence which in law can support their finding and they should state their findings of fact but if they are requested to do so and if it is possible—sometimes it might not be—then I think they should upon the face of the case state the circumstances upon which they have come to that conclusion in order that the Court may judge whether in law those circumstances afford any evidence for the conclusion of fact to which the Commissioners' have come. That seems to me to be the proper conclusion and it is exactly to my mind what was said by Lord Sumner, then Mr. Justice Hamilton, in the American Thread Company v. Joyce.

I do not wish to burden this judgment with any more reference to the high authorities but I would like to draw attention to what was said by Rankin, Chief Justice, in Gangasagar Ananda Mohan Saha v. Commissioner of Income-tax, Bengal “I desire to point out that in these cases it is the duty of the Commissioners of Income-tax to find all the relevant facts. When a case stated comes before the Court, the Court expects to find all such facts stated in the letter of reference as would enable the Court to decide the question referred to it. It is quite true that the Commissioner of Income-tax is required also to give his opinion. He is not merely required to state the questions of law and give his opinion; he is required above all things to state the facts upon which the questions of law must be decided. I trust, therefore, that when this matter comes before the Court again there will be such findings of fact as will enable the Court to apply the law.

Sir Dawson Miller, C.J, in Sri Sri Raja Shiva Prasad Singh v. The Crown made similar observations.

The facts which I extract from the documents produced before us by the Standing Counsel are as follows. The assessee became a financing partner with Sardar Kartar Singh in respect of a contract which the Sardar and obtained from the Tata Company. That partnership was dissolved and as a result of some accounting the assessee was entitled to receive a certain sum from Sardar Kartar Singh. It was arranged that Puranmal Dulichand, the new financing partner of Sardar Kartar Singh would pay over the agreed dues of the assessee. Some payments were made from time to time but as a considerable balance still remained due to the assessee, he had to institute a suit against Puranmal Dulichand to recover the amount remaining due. The assessee claims that he incurred expenses amounting to Rs. 9,606 in the accounting year to recover these dues. The judgment of the Subordinate Judge has not been produced in this case but it is found that the litigation expenses were incurred in the year of accounting.

The appellate order states that

“The Income-tax Officer disallowed the expenditure incurred on the ground that this was in connection with the assessee's capital invested in the said business. The learned pleader for the appellant points out that the suit was brought against Puranmal Dulichand not only for the realisation of the large amount of capital advanced to Sardar Kartar Singh but also for a certain amount of profits due from him. At the outset I should like to observe that the assessee has at no time rendered any account of this partnership business nor has he returned any profit or loss arising thereby. If the business done with Sardar Kartar Singh was a partnership one this litigation costs must be attributed as an expenditure in the said business. He has produced no paper showing how much money was advanced by him from time to time to the said person. He merely refers to the case instituted by him against Puranmal Dulichand—this expenditure to be deductible must, in the first instance, not be of capital nature. But it appears from the judgment delivered by the Subordinate Judge in the said case that the litigation concerned was more to recover a capital that the assessee advanced to Sardar Kartar Singh than for any of the profits arising therefrom. This was clearly mostly a non-recurring outlay required to recover capital—I was inclined to allow a sum for the amount to be recovered included also some profits. But the assessee did never give any account of them and he has not been assessed at any time for them and hence he is not entitled to the deduction of any sum in it.”

The Appellate Tribunal in their order under section 33 made these observations:—

“The business in respect of which this claim arose has been discontinued and the firm has been dissolved. The claim for the money attempted to be recovered has not arisen in the business carried on by the appellant during the previous year. It is foreign to such a business. What was due from the dissolved firm is only capital invested and in attempting to recover it any expenditure incurred is only of a capital nature—Further this is not one of the many transactions of the same sort and thus the money spent in realising this investment cannot be said to have been spent to protect the stock-in-trade of the business carried on by the appellant.”

In the statement of the case the appellate Tribunal has observed that the following facts must be taken as final:—

“(1) the litigation expenses were incurred for the recovery of the balance due in respect of the partnership account from one partner to the other. The partnership had been dissolved not in the previous year but earlier;

(2) this claim is not in respect of any business carried on by the appellant during the previous year;

(3) this is not one of the many transactions of the same sort and thus the money spent in realising this investment cannot be said to have been spent to protect the stock-in-trade of the business carried on by the appellant.”

In my opinion upon the facts which I have stated above, the assessee is entitled to succeed. It is not disputed that this amount was incurred as a litigation expense in the previous year. That it was spent to realise the capital invested in the business of the assessee as a money-lender and to realise some profits also which had accrued to the assessee in that money lending business and which were agreed to be paid to him by his successor Puranmal Dulichand. If the assessee has not shown any profits from that business to the Income-tax Department in the year in which the profits were earned, he may have escaped from taxation but that is no ground whatsoever for disallowing him this business expenditure—the case of Commissioner of Income-tax, Bihar and Orissa v. Maharajadhiraja Sir Kameshwar Singh of Darbhanga applies to the facts of this case.

It is argued on behalf of the Commissioner that this expenditure must be taken to be an expenditure attributable to the partnership between the assessee and Sardar Kartar Singh and would be allowable as a deduction only if the partnership came to be assessed. I do not agree with this view because, in the first place, the Income-tax Tribunal has not made any such suggestion and secondly because the assessee himself has been found to have invested this sum in order to earn profits when he agreed to finance Sardar Kartar Singh. Upon the termination of the business connection with Sardar Kartar Singh a certain sum of money fell due to him which was composed principally of the capital invested but also contained some profits which had accrued to him either by way of interest or otherwise. The assessee is a money-lender and is entitled to set off against the profits of the previous year any expenses which he incurred in that business in the previous year. It is not correct to say that he is entitled to litigation expenses only if the partnership had been dissolved in the previous year as is faintly implied in the first finding of the facts given by the Appellate Tribunal. The second finding of fact that the claim is not in respect of any business carried on by the assessee during the previous year is erroneous in law because it is admitted that the assessee was carrying on money lending business in the previous year. Now if he was carrying on money lending business the fact that the expenditure incurred in the previous year refers to that portion of that money lending business which was carried on in some earlier years makes no difference at all. Nor is the Appellate Tribunal right when they say that this is not one of the many transactions of the same sort and that the money spent in realising the investment cannot be said to have been spent to protect his stock-in-trade because it is clear to me that the money spent was necessary in order to recover an investment attended with some profits which had been made by the assessee in some earlier years.

For these reasons I would answer the question in the affirmative and hold that in the circumstances of this case the litigation expenses of Rs. 9,600 are an allowable deduction in computing the profits of the assessee in the accounting year.

The assessee is entitled to the cost of this reference. I would fix the hearing fee at Rs. 350. The assessee is entitled to the refund of his fees deposited with the Appellate Tribunal.

Fazl Ali, C.J:— I agree.

H.R.K

Reference answered.