Matubai Chunilal Patel vs Commissioner of Income Tax, Gujarat

Divan, J.—This is a reference u/s 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, u/s 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.

Thereafter, at the instance of the assessee, the following question has been referred by the Tribunal to this court u/s 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. ?

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.

u/s 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.

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.

It was further contended on behalf of the revenue before us that whenever an assessee claims a deduction u/s 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.

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 u/s 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.

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.

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.

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"" u/s 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.

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.

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

Question answered in the affirmative.