1980 (3) TMI 8 - HC - Income Tax

Summary

Issues Involved:
1. Entitlement to deduction of Rs. 25,655 in computing total income.
2. Nature of expenditure: Revenue or Capital.
3. Personal liability vs. Business liability.
4. Timing of deduction.

Detailed Analysis:

1. Entitlement to Deduction of Rs. 25,655:

The primary issue was whether the assessee-firm was entitled to the deduction of Rs. 25,655 in computing its total income. The assessee-firm consisted of two partners who inherited the assets and liabilities of their father, Somasundaram Chettiar. Somasundaram was involved in a money-lending business in Ipoh, Malaya, along with his brother, Chockalingam. The firm was dissolved in 1937, but the assets were collected until 1946. A suit was filed by the grandson of Vaduganathan, a sub-partner, claiming a share in the partnership assets and profits. The final decree directed the payment of Rs. 35,645-5-9, of which Rs. 25,655 was due on accounting to the plaintiff. The Tribunal allowed the deduction, but the Commissioner challenged this decision.

2. Nature of Expenditure: Revenue or Capital:

The court analyzed whether the expenditure was of a capital or revenue nature. It referred to previous decisions, such as V. N. V. Devarajulu Chetty & Co. v. CIT [1950] 18 ITR 357 (Mad), which held that payments related to stock-in-trade were revenue expenditures. Similarly, in M.S. Kandappa Mudaliar v. CIT [1957] 32 ITR 313 (Mad), payments made to a retiring partner were considered revenue expenditures as they related to stock-in-trade. The court concluded that the money-lending business's outstandings were the stock-in-trade, and the payment of Rs. 25,655 was an outgoing with reference to the stock-in-trade, making it a revenue expenditure.

3. Personal Liability vs. Business Liability:

The Commissioner contended that the expenditure was personal as the suit was against Somasundaram and his sons, not the firm. The court rejected this argument, stating that the liability arose from the firm's use of the stock-in-trade in its business. Though the firm was not a party to the suit, the assets and liabilities were traced to the assessee-firm, and the firm had to discharge the liabilities. Thus, the expenditure was not personal but related to the business.

4. Timing of Deduction:

The court examined the timing of the deduction. The final decree amount was deposited in parts, with the last payment made on July 31, 1963. The court noted that the date of entry of satisfaction of the decree was not material. The significant factor was when the payment was made in satisfaction of the decree. Since the balance of Rs. 7,437.86 was paid during the relevant accounting year, the court allowed the deduction of this amount for the assessment year 1964-65.

Conclusion:

The court concluded that the assessee was entitled to a deduction of Rs. 7,437.86, not the entire amount of Rs. 25,655. The expenditure was considered a revenue expenditure related to the business, and the liability was not personal. The timing of the deduction was based on the actual payment made during the relevant accounting year. As neither party wholly succeeded, there was no order as to costs in the reference.