1969 (7) TMI 25 - HC - Income Tax

Litigation expenses spent by retired partners against the remaining partners for determining assets of partnership and for recovering the share from the firm - allowability - expenditure cannot be said to be wholly and exclusively for the purpose of carrying on the firm s business

Summary

Issues:
Disallowance of a sum claimed as deductible under section 10(2)(xv) of the Income-tax Act.

Analysis:
The judgment pertains to a reference arising from the assessment made upon the assessee for the assessment year 1958-59, regarding the disallowance of a sum claimed as deductible under section 10(2)(xv) of the Income-tax Act. The assessee, a registered firm of five partners, had a complex history of partnerships and disputes among partners. The disputes culminated in arbitration awards in 1957, determining the valuation of assets and liabilities upon the retirement of certain partners. The expenses incurred, totaling Rs. 1,65,500, were claimed as a deduction in the assessment for the year in question. However, the Income-tax Officer disallowed the claim, considering the expenses as capital expenditure not related to the carrying on of the business. The Appellate Assistant Commissioner and the Tribunal upheld this view.

The core issue revolved around whether the expenditure incurred by the assessee was for the purpose of carrying on its business, as required under section 10(2)(xv) of the Income-tax Act. The assessee argued that the expenses were necessary to fight litigation initiated by former partners, which threatened the business's assets and continuity. The litigation included claims for dissolution of the firm and winding up of its business. The assessee contended that the expenses were essential to protect its assets and business operations.

The court, however, disagreed with the assessee's argument. It held that the litigation primarily aimed at settling rights among partners concerning the partnership's past affairs, not the ongoing business operations. The retired partners had no stake in the business post-retirement, and the litigation focused on their rights and claims up to their retirement dates. The court emphasized that expenses must be wholly and exclusively laid out for the business's purpose to qualify as deductions under section 10(2)(xv). In this case, the expenses were incurred to resolve disputes, not for the direct operation of the business.

Ultimately, the court ruled against the assessee, stating that the litigation expenses did not meet the criteria for revenue expenditure and were more in the nature of capital expenditure. The court concluded that the expenses were not incurred wholly and exclusively for the purpose of carrying on the business. Therefore, the claim for deduction was disallowed, affirming the decisions of the departmental authorities and dismissing the assessee's appeal. The court answered the referred questions in the negative and affirmative, respectively, and directed the assessee to pay the costs of the Commissioner.