1983 F T D 83 (PLP)

"Whether, on 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 company?" After the 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 stated above. The first question which needs to be examines is whether the amount in question can be treated as an expenditure laid out or expended wholly and exclusively for the purposes of the business of the assessee which is admissible as a deduction under section 37 of the Act. 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 to 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 of 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 arisi ng 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 number of years. It is also material to notice here that it was not show that the settlement was a gratuitous arrangement entered into by the assessee to benefit the defaulting partner exclusively even though he might have been benefited 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 for consideration. Dealing with the question whether an expenditure incurred by a bre wery in aid of their tenants of tied houses as a necessary incident of the profitable working of the brewery business was an admissible expenditure in the computation of the income-tax liability of the brewery, Lord Sumner upholding the above claim observed in Usher's Wiltshire Brewery Ltd. v. Bruce ( 1915 A C 433, 469 (H L)) thus "Where the whole and exclusive purpose of the expenditure is the purpose of the expender's trade, and the object which the expendi ture serves is the same, the mere fact that to some extent the expenditure enures to a third party's benefit, say that of the publican, or that the brewer incidentally obtains some , advantage, say in his character of landlord, cannot in law defeat the effect of the finding as to the whole and exclusive purpose." In British Insulated and Helsby Cables Ltd. v. Athertan (1926 A C 205 - 1925 10 T C 155, 193 (H L)) Lord Cave observed "It was made clear in the above-cited cases of Usher's Wiltshire Brewery v. Bruce (1915) A C 433 (H L) and Smith v. Incorporated Council of Law Reporting for England and Wales (1914) 3 K B 674 (IC B), that a sum of money expended, not of necessity and with a view to a direct and immediate benefit to the trade, but voluntarily and on the grounds of commercial expediency, and in order indirectly to facilitate the carrying on of the business, may yet be expended wholly and exclusively for the purposes of the trade;..." Rowlatt, J., in Mitchell v. B. W. Noble Ltd. ((1927)1 KB 719=11 TC 372), held that the money spent on getting rid of a director dud saving the company from scandal was deductible. Arming the above view, the Court of Appeal (whose judgment appears at p. 731) held that as the payment was not made to secure an actual asset so as effectually to increase the capital of the company but was made in order to enable the directors to carry on the business of the company as they had done in the past unfetterred by the presence of the retiring director, which might have had a bad effect on the credit of the company, it must be treated as revenue and not as capital expenditure and was deductible as such for income-tax purposes. The true test of an expenditure laid out wholly and exclusively for the purposes of trade or business is that it is incurred by the assessee as incidental to his trade for the purpose of keeping the trade going and of mak ing it pay and not in any other capacity than that of a trader. In C. I. T. v. Malayalam Plantations Ltd. ((1964) 7 S C R 693 = 53 I T R 140, 150) Subba Rao J, (as he then was) summarised the legal position, at p. 705, thus "The aforesaid discussion leads to the following result : The expression for the purpose of the business' is wider in scope than the expression for the purpose of earning profits'. Its range is wide; it may take in not only the day to day running of a business but also the rationalization of its administration and modernization of its machinery ; it may include measures for the preservation of the business and for the protection of its assets and property from ex propriation, coercive process or assertion of hostile title; it may also comprehend payment of statutory dues and taxes imposed as a pre-condition to commence or for carrying on of a business; it may comprehend many other acts incidental to the carrying on of a business. However wide the meaning of the expression may be, its limits are implicit in it. The purpose shall be for the purpose of the business, that is to say, the expenditure incurred shall be for the carrying on of the business and the assessee shall incur it in his capacity as a person carrying on the business." In the 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 told 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 always 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 is 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 allow 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 firm's 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 effecting the capital structure of the firth. If the amount had been paid by the assessee directly to the managed company which appears to be more probable than 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 assessment 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 the assessor. We are satisfied that, in the circumstances of the case, the decision of High Court does not call for interference. For the foregoing reasons, the appeal is dismissed with costs.