COMMISSIONER OF INCOME TAX Vs. HARJIVANDAS VITHALDAS

JUDGEMENT

(1.) THE short question that arises in this reference is whether certain payments made by the assessee to his wife and minor sons constituted revenue expenditure allowable under S. 10(2)(xv) as an expenditure wholly and exclusively laid out for the purpose of business. The assessee and his father, Vithaldas Dhanji, carried on business in partnership in the firm name and style of New Digvijaysinhji Tin Factory. The business commenced sometime in 1931 and was carried on through the years without any written instrument of partnership. On 28th July, 1949, however, a deed of partnership was drawn up between the assessee and his father regarding the terms and conditions on which the partnership was carried on by them. This deed of partnership was amended subsequently on two or three occasions and was ultimately superseded by a new deed of partnership dated 6th August, 1953. That is the deed of partnership with which we are concerned in the present reference. Clause 16 of the deed of partnership according to its English translation provided as followsand we are setting out here the whole clause since considerable argument before us turned on the true meaning of the clause : "(16). After the death of the first partner in respect of his share in the assets, goodwill and in case the business is continued, profits and losses, Shrimati Lilavati is to be given a share of two annas in a rupee, Chiranjivi Mansukhlal Harjivandas aged 14 years a share of one anna six pies, Chiranjivi Narendrakumar Harjivandas aged about 9 years a share of one anna six pies, Chiranjivi Chandulal Harjivandas aged about 6 years a share of one anna six pies and Chiranjivi Rameshchandra Harjivandas aged about five years a share of one anna six pies making in all share of eight annas in a rupee and in that manner having considered their shares the assets of the first partner are to be divided amongst them and they are to be introduced as partners in the business but so long as Chiranjivi Mansukhlal, Narendrakumar, Chandulal and Rameschandra are minors they are to be admitted to the benefits of the partnership with shares in profits only and if in any year the partnership sustains a loss the loss coming to the share of minors shall be borne by Bai Lilavati Harjivandas from her assets. In case of death of any of the parties named herein the other partners are at liberty to divide his share amongst the other parties as they think fit."

(2.) THE firm thereafter carried on business on the terms and conditions recorded in the deed of partnership until the death of Vithaldas Dhanji which occurred on or about 29th December, 1954. As a result of the death of Vithaldas Dhanji, the firm was dissolved but the assessee continued to carry on the business as sole proprietor after the death of Vithaldas Dhanji. Now under cl. (16) of the deed of partnership the assessee's wife and minor sons were entitled to the amount standing to the credit of the capital account of Vithaldas Dhanji in the properties set out in the clause and the amount of Rs. 6,568 -5 -0 standing to the credit of the capital account of Vithaldas Dhanji at the time of his death was accordingly divided between the assessee's wife and minor sons in those proportions and the amount coming to the share of each of them was credited to his or her account, as the case may be, in the books of account of the business on the basis that such amount belonged to him or her, as the case may be, and this was agreed to between the parties. The assessee's wife and minor sons were also entitled under cl. (16) of the deed of partnership to the share of Vithaldas Dhanji in the goodwill of the business in the same proportions and the wife was entitled to be admitted as a partner and the minor sons were entitled to be admitted to the benefits of the partnership in the share of Vithaldas Dhanji, the share of Vithaldas Dhanji to be divided between them again in the same proportions with this qualification that, in case of loss, the share otherwise going to the minor sons should be borne by the wife. An agreement in writing dated 24th March, 1955, was however made between the assessee on the one hand and the assessee's wife and minor sons on the other under which the assessee's wife and minor sons stated they would not join the business as partners or be admitted to the benefits of the partnership and agreed that the assessee should be entitled to continue to carry on the business as sole proprietor or by taking others in partnership with him and that so far as the share of Vithaldas Dhanji in the goodwill was concerned -to which the wife and minor sons were entitled in the proportions set out in cl. (16) of the deed of partnership - the assessee should be entitled to use and enjoy the same and in consideration thereof the assessee should pay to the wife and minor sons w.e.f. 29th December, 1954, the following amounts per year by way of guaranteed profits : . Rs. Lilavati Harjivandas 7,500 Mansukhlal Harjivandas 5,625 Narendrakumar Harjivandas 5,625

(3.) IT was provided by the agreement that, if the assessee made any breach of the terms and conditions of the agreement, the assessee's wife and minor sons would be entitled to insist on their original rights under cl. (16) of the deed of partnership. The agreement was initially for the period up to Aso Vad Amas, 2013, but it was provided that after the expiration of such period the agreement shall continue in force unless either party to the agreement gave one month's notice terminating the agreement. Pursuant to the agreement the assessee paid the aforesaid amounts to his wife and minor sons every year w.e.f. 29th December, 1954. In the course of the assessment for the asst. yrs. 1956 -57, 1957 -58 and 1958 -59, it was claimed that the aforesaid amounts aggregating to Rs. 30,000 paid by the assessee to his wife and minor sons were allowable deductions under S. 10(2)(xv) since they represented rent or fee for the use of Vithaldas Dhanji's share of the goodwill which belonged to the wife and minor sons under cl. (16) of the deed of partnership. The firm having come to an end and the assessee having started carrying on business as sole proprietor from December 29, 1954, during the currency of Samvat Year 2011, being the year of account relevant to the asst. year 1956 -57, the ITO for the sake of convenience proceeded to determine the income of the business for the whole year in the case of the firm and then to apportion the income between the firm and the assessee on proportionate time basis and the claim for allowance of the aforesaid amounts for the asst. year 1956 -57 was, therefore, made in the assessment of the firm. In respect of the subsequent two assessment years, however, the claim for allowance was made by the assessee himself in the course of his assessment for those assessment years. The claim for all the three assessment years was negatived by the ITO and on appeal by the AAC but on further appeal the Tribunal took the view that the amounts paid by the assessee to his wife and minor sons under the agreement were by way of rent or fee for use of Vithaldas Dhanji's share of the goodwill and, therefore, constituted revenue expenditure laid out wholly and exclusively for the purpose of the business of the assessee and were accordingly allowable as deductions under S. 10(2)(xv). This decision of the Tribunal is now challenged before us on the present reference made at the instance of the CIT. It is a consolidated reference made on three reference applications, one in respect of each assessment year and since the claim for deduction in respect of the first assessment year was made on behalf of the firm, the firm is the respondent in the reference application for that assessment year and the claim for deduction in respect of the subsequent two assessment years being made by the assessee, the assessee is the respondent in the reference applications for those assessment years. The question referred to us for our opinion is, however, common to all the reference applications and it is : Whether the amounts paid by the assessee to his wife and minor sons are allowable deductions in computing the profits of the business under S. 10(2)(xv) ? Sec. 10 lays down the rules for computation of profits and gains of business, profession or vocation. Sub -s. (1) of S. 10 provides that the tax shall be payable by an assessee under the head "Profits and gains of business, profession or vocation" in respect of the profits or gains of any business, profession or vocation carried on by him. Sub -s. (2) of S. 10 says what allowances shall be taken into account in computing such profits or gains and one of the allowances is that set out in S. 10(2)(xv), which runs in the following terms :