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TMI Blog1991 (10) TMI 116X X X X Extracts X X X X X X X X Extracts X X X X ..... re being Rs. 25,000. P. Venkata Subba Rao was to be the production In-charge and he was to be paid a monthly salary of Rs. 1,500 and house rent allowance of Rs. 300. The profit or loss of the partnership was to be shared in proportion to the capital contributed by the partners. 3. On 1-10-1972 three new partners were admitted. Suffice it to note that the capital to be contributed by P. Venkata Subba Rao remained at Rs. 25,000 and that there was no change in the salary and house rent allowance payable to him in his capacity as production in-charge. 4. It would appear that on 1-4-1976 certain changes were effected in the terms and conditions of the partnership deed. The biscuit factory was shifted from Kathirvedu to Sholinganallur. Capital contributions by all the partners (except P. Venkata Subba Rao's which remained constant at Rs. 25,000) under-went a change. Of course, consequent on the change in the pattern of capital contributed by the other four partners the profit sharing ratio underwent corresponding change. Further, the salary of P. Venkata Subba Rao was raised to Rs. 2,000 PM and the house rent allowance payable to him to Rs. 400 pm. 5. On 1-4-1978 a new partnership ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... accept his above proposal and resolves that Shri P.V. Subba Rao retires from today the 11th August, 1979 before business hours. The partners also appreciate the services rendered by Shri P.V. Subba Rao to the firm and extend their hearty thanks and best wishes to him accepting the quantum of Rs. 35,000 (Rupees thirty-five thousand only) demanded by him in full and final settlements of all his accounts as on date. " 8. The said minutes were followed by a formal release deed which the said P. Venkata Subba Rao executed on 12-8-1979. 9. On the exit of P. Venkata Subba Rao from the firm, the remaining four partners continued the business in partnership. 10. In the course of the assessment proceedings for the assessment year 1980-81 (relevant previous year being the year ending on 31-3-1980) the assessee firm filed a return of income disclosing an income of Rs. 37,650. The assessee had arrived at the said figure of Rs. 37,650 by debiting to the Profit Loss A/c, inter alia, a sum of Rs. 1,39,900 as and by way of "trade loss". The said sum was computed in the manner detailed below :-- Current Account of partner Shri P.V. Subba Rao Rs. 1-4-1973 Opening debit balance 4,560.8 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 900 represented capital expenditure. He, therefore, approved the addition of Rs. 1,39,900 proposed by the ITO. 13. The assessment came to be made on the aforesaid basis. The assessee was unsuccessful before the CIT (Appeals), who took the line that Venkata Subba Rao being a partner, the payment was hit by the provisions of section 40(b) of the Act. One of the points urged on behalf of the assessee firm before the CIT (Appeals) was that the said Venkata Subba Rao was essentially a workman and hence the compensation paid to him was retrenchment compensation paid to a worker, which is not hit by the provisions of section 40(b). The CIT (Appeals) repelled this argument by observing that even if it was assumed that Venkata Subba Rao was a workman, the compensation paid to him at the time of his retirement was in reality salary paid to him and under section 40(b) of the Act salary paid to a partner is not revenue deductible. The CIT (Appeals) also took the line that the case before him was one of writing off the amounts drawn by the partner and as such, it was one of capital outgo. He, therefore, dismissed the appeal. It is in these circumstances that the assessee is now before us. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ross. Under the Income-tax Act, it is well settled, any expenditure incurred wholly and exclusively for the purpose of business is revenue deductible. Here, commercial expediency is one of the grounds on which the particular item of expenditure could be regarded as being revenue deductible. But the matter does not rest there. It will also have to be seen whether the expenditure in question was incurred on capital account. If the expenditure was incurred on that account, then it is not revenue deductible. 18. To turn now to the Indian Partnership Act, 1932, it is well settled that, unlike the Scottish Law, which invests a firm with a personality of its own, the Indian and the English Laws do not recognise a firm as an entity apart from the persons constituting it. As pointed out by the Privy Council in the case of Bhagwanji Morarji Goculdas v. Alembic Chemical Works Co. Ltd. AIR 1948 PC 100 the Indian Partnership Act, 1932 goes further than the English Partnership Act, 1890 in recognising that a firm may possess a personality distinct from the persons constituting it. The Indian Law in that respect is more in accord with the Scottish Law than with the English Law. Yet the Indian ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has no legal recognition. The law, ignoring the firm, looks to the partners composing it; any change amongst them destroys the identity of the firm; what is called the property of the firm is their property, and what are called the debts and liabilities of the firm are their debts and their liabilities. In point of law, a partner may be the debtor or the creditor of his co-partners, but he cannot be either debtor or creditor of the firm of which he is himself a member, nor can he be employed by his firm, for a man cannot be his own employer." [Emphasis supplied] (at page 28 Lindley on Partnership, Tenth Edition). As has been pointed out by the Madras High Court in the case of R.M. Chidambaram Pillai v. CIT [1970] 77 ITR 494 (FB) that precisely is the legal position of a firm under the Indian Partnership Act as well. 23. In the case before us the assessee claims revenue deduction in respect of a sum of Rs. 1,39,900, a sum which consists of the excess of the aggregate of (i) the sums drawn by Venkata Subba Rao and (ii) his share in the loss of the firm over the aggregate of (a) salary credited to his account and (b) capital contributed by him. The sum of Rs. 35,000 paid by the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be rejected. We may now notice certain cases having a direct bearing on the issue involved in this case. 29A. Earliest in chronology is the Bombay case of Amarchand Madhavji Co. v. CIT [1935] 3 ITR 462. There, initially there were six partners in a firm. Four of them retired and the debts due to the firm by the retiring partners were treated as debts due to the firm constituted by the remaining partners. Subsequently, the balance of debts remaining due was written off in the books of account of the firm as irrecoverable and a revenue deduction in respect thereof claimed. Deciding the issue against the assessee-firm, the Bombay High Court observed : " These debts due from previous partners were never revenue of the continuing firm and they were never brought into the income-tax accounts as revenue. They were capital sums and all that had happened in the Samwat year 1987 was that the firm lost part of its capital assets. There is no ground on which that loss can be written off against revenue of the year in which the loss finally occurred. " We then have the Allahabad case of Girdhari Lal Gian Chand v. CIT [1971] 79 ITR 561. There the assessee firm was carrying on busines ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... who, it is well settled, is not a servant of the firm. In G. Scammell Nephew Ltd.'s case it was found that the company had to pay a sum of pound 7,500 to one of its directors and the sum so paid was held to be revenue deductible because, otherwise the company would not have been able to realise a treading debt of pound 10,562. Clearly the decision turned on the fact that what was in jeopardy was a trading debt. In this regard the following observations of Sir Wilfrid Greene, M.R. are noteworthy :-- " Of course, if the facts had been, and there had been a competent finding of fact showing that part of that indebtedness was indebtedness in respect of a loan transaction of a capital nature or something of that kind, different considerations might well have emerged, and it is to be understood that my judgment in this case is founded upon the approach to that account which I have described. " The Bombay case of F.E. Dinshaw Ltd. also avail the assessee. Besides being a case of a company having a corporate personality of its own, it was a case where compensation was paid by the company for terminating the employment of the managing director. We have before us, on the contrary, a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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