GHANSHAM SINGH Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) THIS reference from the Income-tax appellate Tribunal raises the perennial question of capital versus revenue expenditure. We may clear the ground first by excluding from our consideration lines of inquiry on which the indications are that they are unnecessary for the purposes of the present case. We are not, for instance, asked to examine whether the expenditure in question of the expenditure going into the purchase by the assessee of a fixed capital asset. THIS is also not a case of an outlay for the acquisition of business as a whole nor even of the extension or substantial improvement of an existing business. The deduction claimed is in respect of a payment made by the assessee under the terms of a compromise decree. The compromise came about this way. The assessee was a partner in a partnership concern carrying on commission business and engaged in other sundry activities. With the death of one of the assessee's co-partners the firm dissolved. The dissolution was by agreement between the surviving partners and the heirs of the deceased partner. Under the agreed scheme of dissolution the assessee took over the partnership business, lock stock and barrel, as a going concern, paying a certain sum of money to the deceased's heirs, by way of purchase of their interest in the partnership assets. After the take over, the assessee carried on business for a time as its sole proprietor. He then converted the business into a partnership, taking his son as a partner. THIS happened after an interval of five years. At this stage, the assessee was faced with a suit instituted by some of the minor sons of the deceased partner of the erstwhile partnership. The plaintiffs in the suit made all kinds of allegations against the assessee including an allegation of fraud in the settlement of the accounts. They accordingly prayed for the reopening of the earlier dissolution, as a primary relief in the suit. They also asked for an injunction restraining the assessee and his son from carrying on the business as present partners. As might only be expected, the assessee resisted the suit, denying the allegation of fraud leveled against him. There was, however no occasion to know on which side the truth lay, for the suit ended in a compromise and a decree was passed by consent of parties. Under its terms the plaintiff withdraw all their allegations, and the assessee agreed to pay them Rs. 40,000 in full quit The assessee paid the money in due time. In this assessment for the relevant account year, the assessee claimed the payment of Rs. 40,000 as an admissible deduction.

(2.) THE ITO, however, disallowed the expenditure. THE officer's view was that the deduction was asked for in the father-and-son partnership, whereas its subject-matter related to an earlier, but now defunct, partnership. A different view, however, was taken by the AAC on appeal. He held that since the assessee was being taxed in respect of his son, he was was entitled to set off the payment of Rs. 40,000 as against that share income. THE Department, however, appealed against this determination of the AAC. THE Tribunal allowed the Department's appeal. THE Tribunal took the view that the payment made by the assessee to the heirs of the deceased partner in the erstwhile partnership was capital expenditure. On this single ground, the Tribunal disallowed the expenditure.

(3.) THE best known enunciation of the principle that a payment made by a taxpayer to protect his trade is a revenue item of expenditure is that of Lawrence J. in Southern v. Borax Consolidated Ltd. [1940] 23 TC 597; [1942] 10 ITR (Supp) 1 (KB). In the case before Lawrence J., the payment, briefly stated, was made under a compromise of an action concerning taxpayer to the property. With the payment under the compromise, the suit was apparently not pressed. THE learned judge pointed out that the payment of money to the plaintiff in the action and other legal expenses did not create any new asset, but were expenses incurred in the ordinary course of business to maintain the taxpayer's title to the property. In the course of his judgment, the learned judge drew a clear distinction between expenditure laid out for the acquisition or improvement of a fixed capital equipment, on the one hand, and expenditure incurred for maintaining that asset, on the other. THE former, he said, must be attributed to capital; and the latter, being a mere matter of maintenance, must be attributed, according to him only to revenue.