1973 (3) TMI 36 - HC - Income Tax

Assessee, a partner in a managing agency firm - loss to managed company in transaction on its behalf - assessee agreed to bear part of the loss. It was also found that the payment was for preserving managing agency - whether the payment should first appear in the firm s account and be processed for assessment - true effect of the payments made by the assessee-company seems to be that these payments are directly debited to the assessee s account and to no other account and, hence, they cannot but be shown in the individual assessment of the assessee-company. Once it is found, as it has been found that the amounts have been expended for business purposes and wholly and exclusively laid out for purposes of business, the payments become allowable deductions in the trading account of the assessee-company - In view of this conclusion it must be held that the payment of Rs. 9,500 by the assessee-company is an allowable deduction subject to verification regarding the correctness of the quantum of loss claimed, etc., as directed by the Tribunal.

Summary

Issues Involved:
1. Legality of the payment made by the assessee.
2. Nature of the loss and its deductibility.
3. Assessment of the loss in the context of partnership and individual partners.
4. Commercial expediency and business purpose of the payment.

Detailed Analysis:

1. Legality of the Payment Made by the Assessee:
The primary issue was whether the payment of Rs. 9,500 made by the assessee towards the loss incurred by the managed company was legally obligatory and could be considered a business expense. The Income-tax Officer disallowed the deduction on the grounds that the assessee was not legally bound to make this payment and that it was not a business expense. The Appellate Assistant Commissioner concurred, stating that the payment was based on personal considerations and was not a loss to the partners personally.

The Tribunal, however, overturned this view, stating that the assessee, being a public limited company, could not act on personal considerations and that the payment was made to preserve its business interests. It held that the loss could be claimed by the partner even if it was not claimed by the partnership firm.

2. Nature of the Loss and Its Deductibility:
The Tribunal held that the loss was a business loss and that the assessee was entitled to claim it. The Tribunal reasoned that the payment was made to maintain the assessee's business relationship and to avoid losing remuneration from the managing agency firm. The Tribunal concluded that the payment was an act of a prudent businessman aimed at promoting commercial activities and earning profits.

3. Assessment of the Loss in the Context of Partnership and Individual Partners:
The Tribunal addressed the issue of whether the loss should have been first determined in the assessment of the partnership firm. The Tribunal held that a partner could claim their share of the loss directly in their own assessment, even if the loss was not claimed by the partnership firm. The Tribunal cited that the share of profit or loss of a partner could be determined and assessed directly in the hands of the partner without determining the same in the hands of the firm.

The High Court examined the relevant provisions of the Income-tax Act, 1961, particularly sections 182 and 67, which relate to the assessment of registered firms and the computation of a partner's share in the income of the firm. The Court concluded that the loss could be directly debited to the assessee's account and did not necessarily have to be first determined in the firm's assessment.

4. Commercial Expediency and Business Purpose of the Payment:
The Tribunal found that the payment was made for business purposes and was commercially expedient. The High Court supported this view, citing several precedents where payments made for commercial expediency were allowed as deductions. The Court referred to cases such as Commissioner of Income-tax v. Chandulal Keshavlal & Co., where the Supreme Court held that waiving a portion of commission for commercial expediency was an admissible deduction.

The Court also cited Commissioner of Income-tax v. Ramniklal Kothari, which supported the view that a partner could deduct expenses incurred in relation to a partnership firm even if those expenses were incurred from their personal account. The Court concluded that the payment was made to preserve the managing agency and to earn profits, thus qualifying as a business expense.

Conclusion:
The High Court concluded that the payment of Rs. 9,500 by the assessee was an allowable deduction, subject to verification regarding the correctness of the quantum of loss claimed. The Court answered the question in the affirmative, in favor of the assessee and against the department. The assessee was entitled to costs, with counsel's fee set at Rs. 250.