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TMI Blog1980 (3) TMI 8X X X X Extracts X X X X X X X X Extracts X X X X ..... s of an instrument of partnership dated May 9, 1921. The two brothers had an uncle by name Vaduganathan Chettiar who became a sub-partner with Somasundaram with 1/8th share. In other words, Somasundaram gave 1/8th share in the profits of the partnership to his uncle and retained the balance of 2/8ths share. The firm was known as R.M.S.M. Firm, Ipoh, and carried on business in money-lending in Malaya. On the same day, on which the partnership deed of the main firm was entered into (i.e., May 9, 1921), Somasundaram entered into a sub-partnership with Vaduganathan, by writing a letter in which the contribution of $ 1,312.50 by Vaduganathan was acknowledged as a receipt on capital account and a further sum of $ 1,312.50 as mempanam. It is in lieu of the sum of $ 2,625 that Vaduganathan received 1/3rd share of 3/8ths share of Somasundaram in the partnership. This business in Ipoh was carried on in partnership for quite some time until it was dissolved on May 1, 1937. During the currency of the partnership, the capital contribution by both the partners, i.e., Somasundaram and Chockalingam totalled $ 10,500 and they contributed an equal amount as mempanam. It is only in line with this c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Commissioner, to be appointed for final decree, to call for accounts, papers, vouchers, etc., not only from the defendant but also from the newly added legal representatives of Chockalingam as well as from the plaintiff, if he is in possession of any of them, and finding out the actual assets of the partnership firm from all those accounts so produced, without drawing any presumption for or against the plaintiff or the defendant or Chockalingam for their failure to produce any accounts, because of their not being with them. After the Commissioner finds out the actual assets, after going through those accounts, he will, of course, if there is anything remaining to be divided, give 5/8ths to Chockalingam, 2/8ths to Somasundaram and 1/8th to the plaintiff after adjusting the amounts, if any, drawn out by Chockalingam and Somasundaram, towards their shares..." In pursuance of this judgment, a Commissioner was appointed by the trial court, and taking into account the Commissioner's report and after considering the objections of the rival parties, the subordinate judge passed a final decree. It may be mentioned here that though the legal representatives of Chockalingam did not, in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e profits of the firm were assessed. He, therefore, confirmed the disallowance. The assessee appealed to the Tribunal which held that since the assessee-firm had taken over the assets and liabilities of Somasundaram as its stock-in-trade, and since, in pursuance of the decree of the High Court such assets and liabilities were traced to the hands of the assessee-firm and the assessee-firm was bound to discharge the liabilities of Somasundaram Chettiar from such assets, the liability discharged would be an additional deduction in the hands of the assessee who has succeeded to such assets. It was, therefore, held that the sum of Rs. 25,655 was admissible as deduction. As regards the balance of Rs. 13,310 it was found from the schedule of expenses furnished that the amounts represented expenditure and costs in the litigation, incurred in every instance prior to the accounting year under consideration, and that, therefore, there was no liability which was discharged by the assessee in the relevant year and which could be allowed as deduction. The result was that the assessee lost the claim for deduction of Rs. 13,310. The assessee has left the matter there, while the Commissioner has co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w arises for consideration is whether the sum of Rs. 25,655 paid to the grandson of Vaduganathan was an admissible deduction for the assessment year 1964-65. There are two decisions of this court which appear to support the assessee's claim, but which were sought to be distinguished by the learned counsel for the Revenue. The first of the decisions was in V. N. V. Devarajulu Chetty Co. v. CIT [1950] 18 ITR 357 (Mad). There was a firm of five partners which came into existence in September, 1940. In October, 1942, two of the partners retired from the firm. At the time of their retirement, there was a forward contract for importing 336 bales of cloth from the United Kingdom. At the time of the retirement of the two partners, these bales had not been received. By about March, 1944, all these bales were disposed of. There was an arbitration with reference to the dispute between the continuing partners and the two retired partners. The arbitrators awarded a sum of Rs. 18,911-12-0 being paid to the two partners who had left the firm in October, 1942. This amount was paid during the financial year 1943-44 and was claimed as deduction by the continuing firm of three partners. This claim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he new firm acquired the entire quantity of the goods by paying the retiring partners the sum of Rs. 18,911 which, according to the award of the arbitrators, represented the percentage of the profits payable to the old partners for their having parted with the goods or their right in the goods in favour of the new firm. The sum, though paid as representing the old partners' share of the profits, was really the price paid by the new firm for the acquisition of an exclusive right to the goods which formed the stock-in-trade and is, therefore, a revenue expenditure laid out solely and exclusively for the business of the new firm." The contention that the expenditure was of a capital nature was rejected, because it was not paid as consideration for the acquisition of any interest to the old partners in the firm, including its goodwill and other assets, but was paid only as consideration for the acquisition of any exclusive right of the stock-in-trade of the new firm. In M.S. Kandappa Mudaliar v. CIT [1957] 32 ITR 313 (Mad), there was a firm of four partners trading in cotton, yarn and piece-goods. Part of the trade consisted in making exports to Ceylon, where there was system of qu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . All the partners of the respective firms entered into contract of partnership to deal with those 720 bales. Rayalu Ayyar and Co., one of the firms, was to manage the business. A large profit of Rs. 1,56,000 was made out of the part of the bales that were imported. As, by the time the rest of the bales were to arrive, there was a fall in the prices consequent on the termination of the first world war, three of the firms, to describe them compendiously, entered into an arrangement with Walker and Company, terminating the contract for the supply of the balance of the bales on payment of the profit they had made in the first consignment. They thereafter entered into a fresh contract with Messrs. Walker and Company to repurchase the second lot at smaller price and made a profit of Rs. 72,000. One of the four firms which entered into the original arrangement was known as K. M. Subbier and Sons. This firm filed a suit for recovery of its share of the profits. It was held that it was entitled to the profits and in accordance with the decree, Rayalu Ayyar Co. paid Rs. 12,348, being the share of profit due to K.M. Subbier and Sons. In the assessment, the assessee had accounted for a prof ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... taken before us was that the present case would fall within the principle of the decision of the Allahabad High Court in Raghunath Prasad v. CIT [1955] 28 ITR 45. In that case, the assessee was a partner in a firm and he filed a suit against the other partners for rendition of accounts. The question was whether the amount spent in the litigation was an expenditure wholly and exclusively laid out for the purpose of the business. It was held that the amount was not allowable as deduction. This decision would have scope for application in case the grandson of Vaduganathan sought to obtain deduction of the amounts spent in the litigation as an allowable expenditure. Further, in the present case, we are not dealing with any deduction in respect of Rs. 13,310 incurred as and by way of litigation expenditure and costs and, therefore, we do not find any scope for applying the principle laid down in this decision. It was then contended that Vaduganathan was not actually a partner in the Ipoh firm and that his claim could only be against Somasundaram. The well-known principle that a person coming in as a sub-partner could not affect the relationship between the partners of the main firm wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ttlement of accounts between the partners and that having regard to the nature of the litigation and the purpose for which it was contested, the expenditure incurred by the firm could not be allowed as an expenditure incurred wholly and exclusively for the purpose of carrying on its business. It is enough to mention that in the present case, as we have seen earlier, we are not dealing with any litigation expenses with reference to the suit between Vaduganathan's grandson and the legal representatives of the partners of the Ipoh firm. We are here concerned with the payment of the outstandings taken over by the firm, and, therefore, the position here is not at all governed by the principle of the decision cited above. The other decision referred to was CIT v. Deccan Sugar Abkhari Co. Ltd. [1976] 104 ITR 458 (Mad) to which one of us (Ramanujam J.) was party. In that case, the assessee-company had a managing agent who was remunerated by an office allowance, a share in profits and also selling commission. The office allowance and share in the profits were shown as the managing agency expenses, while the commission paid on sales was deducted in the sales account, and not shown as par ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... satisfaction of the decree that the liability to pay the sum of Rs. 25,655 could be said to have been discharged and that, therefore, the assessee was eligible for deduction in this year. In order to consider this aspect of the dispute, it is necessary to state a few more facts. In C.M.P. No. 914 of 1957 in A.S. No. 47 of 1957 this court passed an order on February 5, 1957, directing stay of execution of the final decree dated December 15, 1956, in O.S. No. 41 of 1946, that on the judgment-debtors depositing into the court of the subordinate judge one-half of the decree amount and furnishing security for the balance of the decree amount, it would be open to Karuppan Chettiar, the grandson of Vaduganathan, to withdraw one-half thereof without furnishing security and to withdraw the other half on furnishing security to the satisfaction of the subordinate judge of Pudukottai. Accordingly, one-half of the decree amount was deposited in the accounting period 1956-57. After the judgment of the High Court and the decree following therefrom, there was a balance of Rs. 7,437.86 out of Rs. 25,655 to be paid. It was this amount which was paid on July 31, 1963, and satisfaction of the decre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fund had no application. Applying the principle of this decision here, it would follow that there could be a part satisfaction of the decree as soon as the appeal was disposed of. The appeal, as mentioned earlier, was disposed of on September, 7, 1962, which is prior to the accounting year under consideration. The balance that was due under the decree was paid during the year and irrespective of the question of entry of satisfaction of the decree, the amount could be allowed as deduction in this year to the extent of Rs. 7,437.86. If the judgment of the appellate court had been rendered daring the accounting year under consideration, then the position would be different. As by reason of the judgment in the appeal the amount has gone in satisfaction of the decree in the earlier year, to that event, there could be no allowance in this year. The assessee would thus be entitled to a deduction of only Rs.7,437.86. We, therefore, answer the question by stating that the assessee would be entitled to the deduction of Rs. 7,437.86 only and not to the entire amount of Rs. 25,655. As neither party has wholly succeeded, there will be no order as to costs in this reference. - - TaxTMI - TMIT ..... X X X X Extracts X X X X X X X X Extracts X X X X
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