PHIROZE H KUDIANAVALA Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) IN this reference we are concerned with the three assessment years 1961 -62, 1962 -63 and 1963 -64. Accordingly, for the first assessment year the reference is under section 66(1) of the Indian Income -tax Act, 1922, whereas for the two later years the reference is under section 256(1) of the Income -tax Act, 1961.

(2.) THE assessee was at the relevant time a partner in a firm of architects known as Messrs. Gregson, Batley and King, with its head office at Chartered Bank Building, Fort Bombay. He claimed deduction of various items of expenditure against his share of the income from the partnership for the three material years. We are not concerned with the details of these expenses, but they pertain to expenses for the running of a motor car, depreciation on the car, entertainment of clients and other expenses. As far as the last mentioned item is concerned, it is indicated in the order of the Income -tax Appellate Tribunal in the appeal that they pertain to purchase of several purchases of several books, periodicals and magazines in connection with his profession as an architect which the assessee studies at home and other expenses pertaining to the studio at him for drawing, designing and planning of jobs. The assessee's claims as to these deductions were disallowed by the Income -tax Officer who observed that an item of expenditure which should have figured in the accounts of the firm itself could not be said to be expenditure incurred by a partner for earning his share of the income. The Income -tax Officer referred to the decision of the Supreme Court in Jitmal Bhuramal v. Commissioner of Income -tax : [1962]44ITR887(SC) in support of his action. For the two assessment years governed by the 1961 Act, the Income -tax Officer also relied upon section 67 and observed that the only permissible deduction was in respect of interest paid on borrowed capital. From the decision of the Income -tax Officer the assessee preferred appeals to the Appellate Assistant Commissioner. The Appellate Assistant Commissioner held that for the assessment year 1961 -62 (governed by the Indian Income -tax Act, 1922), the assessee was entitled in principle to the expenditure claimed by him subject to the disallowance of 1/4th of the car expenses which were held by the Appellate Assistant Commissioner as attributable to the personal use of the car by the assessee. For the subsequent two years the Appellate Assistant Commissioner held that the assessments in question were governed entirely by the provisions of the Income -tax Act, 1961, and in view of the express provision made by section 67(3), the assessee was not entitled to any other or further deduction. From the above orders of the Appellate Assistant Commissioner, the department came in appeal to the Tribunal for the assessment year 1961 -62 and for the two remaining years the assessee came in appeal. The Tribunal agreed with the assessee that the allowances enumerated in sections 30 to 37 of the Income -tax Act, 1961, were not exhaustive and an item which was not deductible under section 67(3) of the Act may still be allowed as a deduction in the hands of the assessee. The Tribunal further found that the partners of Messrs. Gregson, Bately and King had agreed amongst themselves to incur certain expenditure and these items of expenditure (indicated in paragraph 15 of the consolidated order of the Tribunal dated November 22, 1967, in the three appeals) pertain to the various items in respect of which deductions had been claimed by the assessee. According the Tribunal, further, the assessee could not be regarded as having incurred the expenditure for the purpose of earning his share of the profits of the firm and the expenditure had been incurred for the purpose of the business of the firm and, therefore, was not allowable. The question referred to us reads as follows :

(3.) HELD , accordingly, that the respondent, who was a partner in four firms but did not carry on any independent business, was entitled to deduct from his share of the profits from the firms amounts paid as salary and bonus to staff, expenses for maintenance and depreciation of motor cars and travelling expenses by him in earning the income from the firms.'