Case: Commissioner of Income Tax, Delhi Vs. Delhi Safe Deposit Company Limited

The assessee (the respondent herein) is a public limited company. The assessee was a partner of a firm of managing agents known as M/s. Morari Lal Batra &Co. (hereinafter referred to as the managing agency firm) which was managing another public limited company called M/s. Bharat Carbon &Ribbon Manufacturing Co. Ltd. (hereinafter referred to as the managed company). There were in all three partners in the managing agency firm, the two other partners being V.K. Batra and Lal Balwant Roy who held 50% s hare and 25% share respectively in that firm. The assessee held the remaining 25% share. At the instance of V.K. Batra who held the major share in the managing agency firm, a large sum was advanced by the managed company to a firm known as M/s. H. K. Sinha &Sons at Calcutta. When a demand for repayment was made, M/s. H.K. Sinha &Sons repudiated the claim except to the extent of Rs. 11, 409 and ultimately the managed company suffered a loss to the extent of Rs. 1, 90, 092 on account of the said transaction. Consequently it became necessary for the managing agency firm to make good the said loss. Thereupon the assessee and Lal Balwant Roy together undertook to pay to the managed company Rs. 95, 092 out of which the share of the assessee was Rs. 47, 500. The balance of the amount was undertaken to be paid by R.K. Batra, brother of V.K. Batra. The managing agency firm was also reconstituted with the assessee, Lal Balwant Roy and R.K. Batra as partners, R.K. Batra takin g the place of V.K. Batra. During the previous year corresponding to the assessment year 1962-63, the assessee paid a sum of Rs. 9, 500 to the managed company in partial discharge of its liability of Rs. 47, 500 referred to above and claime d it by way of deduction in the assessment year in question in the assessment proceedings under the Act before the Income-tax Officer. The Income-tax Officer disallowed the said claim on the ground that the assessee was not legally bound to make the payment and hence it was not a business expense that could be allowed under the Act. The Appellate Assistant Commissioner of Income-tax before whom the order of assessment was questioned by the assessee affirmed the order of assessment on the above question on three grounds:(a) the amount in question was actually the loss of a firm which was no more in existence;(b) the loss in question had been borne by the assessee on personal considerations, and(c) the loss was the loss of the managing agency firm and not of the partners concerned and since the managing agency firm had not claimed that loss in its return, none of its partners could claim it.When the matter was taken up in appeal before the Income-t ax Appellate Tribunal, the claim of the assessee was accepted. The Tribunal held inter alia that even if there was a change in the constitution of the managing agency firm, the liability of the assessee as a partner had not ceased, the assessee being a company, the payment could not be treated as one made on personal considerations and that the assessee had made the payment in question purely on business considerations with the sole object of maintaining its business connec tion which was yielding profit. The Tribunal was also of the view that there was no bar to the assessee claiming the loss in question in its own assessment even though it could have been first claimed by the firm and then in the hands of the partn er. An application under section 256(1) of the Act having been rejected by the Tribunal, the appellant moved the High Court under section 256(2) of the Act. The High Court thereupon passed an order directing the Tribunal to refer the following question for itson the facts and in the circumstances of the case, the assessee was entitled to any allowance on account of the share of loss made good by it to the managed companythe reference was made to it, the High Court answered the question in the affirmative and in favour of the assessee. Dissatisfied with the judgment of the High Court, the appellant has come up in appeal to this Court by special leave, as state d above.

Reasoning: It is no doubt true that the solution to a question of this nature sometimes is difficult to arrive at. But, however difficult the task may be, a decision on that question should be given having regard to the decisions bearing on the question and ordinary principles of commercial trading and of commercial expediency. The facts found in the present case are that the assessee was carrying on business as a partner of the managing agency firm and it also had other businesses. The managing agency agreement with the managed company was a profitable source of income and that the assessee had continuously earned income from that source. But on account of the negligence on the part of one o f its partners, there arose a serious dispute which could have ordinarily resulted in a long drawn out litigation between the managing agency firm and the managed company affecting seriously the reputation of the assessee in addition to any pecuniary loss which the assessee as a partner was liable to bear on account of the joint and several liability arising under the law of partnership. The settlement arrived at between the parties prevented effectively the hazards involved in any litigation and also helped the assessee in continuing to enjoy the benefit of the managing agency which was a sound business proposition. It also assisted the assessee in retaining the business reputation unsullied which it had built up over a number of years. It is also material to notice here that it was not shown that the settlement was a gratuitous arrangement entered into by the assessee to benefit the defaulting partner exclusively even though he might have been bene fitted to some extent. It is no doubt true that it was voluntary in character but on the facts and in the circumstances of the case whether it would make any difference at all is the point forthe instant case, the assessee incurred the expenditure in question to avoid any adverse effect on its reputation, to protect the managing agency which was an income earning apparatus and for retaining it with the reconstituted firm in which the interest of the assessee was the same as before. It was likely that but for the expenditure, the fair name of the assessee would have been tarnished or rendered suspicious and the managing agency would have been terminated. The expenditure incurred on the preservation of a profit earning asset of a business has al ways been held to be a deductible expenditure by courts. In the circumstances, it is difficult to hold that the expenditure incurred by the assessee was either gratuitous or one incurred outside the trading activities of the assessee. The expenditure was, therefore, rightly held to be deductible under section 37. We, therefore, reject the contention of the Revenue that the amount in question could not be claimed as a deduction under section 37 of the Act.The next contention of the Department is that the payment in question should have been first assessed as a loss in the assessment proceedings of the firm and in the absence of any claim made in the course of such proceedings by the firm, it was not possible to al low its deduction in the assessment of the assessee. Reliance is placed on sections 187 and 67 of the Act in support of this submission. It is seen that the expenditure in question had not been incurred by the firm. Even if the amount had been paid through the firm by the assessee, it would not be payment of the firms funds. In the accounts of the firm, there would be a credit and debit entry cancelling each other showing a receipt from the assessee and a payment to the managed company, not in any way affecting the capital structure of the firm. If the amount had been paid by the assessee directly to the managed company which appears to be more probable then the expenditure is obviously one incurred by the assessee itself though on account of the firm. In any view of the matter, the fact that the firm has not claimed the expenditure as its own does not affect the right of the assessee to claim deduction in respect of the amount in question in its a ssessment proceedings which it is legitimately entitled to do. It is not shown how in the peculiar circumstances of the case there is any statutory bar to the claim made by theare satisfied that in the circumstances of the case the decision of the High Court does not call for interfere