1984 PLP 21 (PTD)

"It is well‑established that where money is paid to perfect a title or as consideration for getting rid of a defect in the title or a threat of litigation, the payment would be a capital payment and not a r venue payment." Although the proposition, which had been given expression to in the above passage, is found described, with confidence, as "well‑settled", the judgment of the Supreme Court does not refer to any authorities, English or Indian, in which that proposition was either enunciated or reiterated. We would give anything to know what were the decided cases which, according to the Supreme Court, had settled the doctrine that an expenditure to protect the title to a capital asset is capital expenditure. For, as we have curlier shown, in addition to the authority of our own Supreme Court in Dalmia case, there are as many as four direct decisions of the English Courts, is an unbroken span of four decades, which have laid down quite the opposite principle as governing the allowance of the expenditure to protect the title to a business or other fixed capital asset of a businessman. The Supreme Court's observation in the case of jaganmohan Rao would thus seem to be a stray observation and a mere obiter dictum. This aspect of the decision needs to be elaborated upon. The issue before the Supreme Court in this case was concerned with question of allowance of expenditure which was incurred, not for the protection or maintenance of the title of an assessee to a business or a fixed: capital asst of his, but for the very acquisition of the fixed capital asset. Tile facts relied on by the Supreme Court showed that the assessee in that case had purchased an item of land from the father of two minor sons, while there was a suit for partition which was even then pending between the father and the sons. In that suit, the ownership of that property was contested and was a fact in issue. The claim of the father was that the property was his self‑acquisition. It was the case of the sons that it belonged to the joint family and hence they too were entitled to their shares in the property. The Court of first instance held that the property was the self‑acquisition of the assessee's vendor and not joint family property in which the vendor's sons had any right by birth. On appeal, the High Court disagreed with that finding. The assessee was a party defendant to the proceedings. That being so he preferred an appeal to the Privy Council. Pending the appeal, however, he took counsel and entered into a compromise with the two minor sons. Under the terms of the compromise, the assessee pant, them. Rs, 1,15,000 and obtained a release of their claims against the property. Meanwhile the assessee was himself appointed by the Court as a receiver of the property. As receiver, the assessee was collecting the rents and profits from the pro perty. Ultimately, the Privy Council decided the appeal in the assessee's favour. They held that the assessee's vendor had absolute and exclusive title to the property. In his assessments to income‑tax for the relevant years, the assessee offered the rents and profits which he received from the property as a receiver. He, however, set against those receipts the amount of Rs. 1,15,000 which he paid to the sons of his vendor by way of compromise of their claims. On a reference, the Supreme Court posed the question for their consideration as follows. "What is essential to be seen is whether the amount of Rs. 1,15,000 was paid for bringing into existence a right or asset of an enduring nature. In other words, if the asset which is acquired is in its character a capital asset, then any sum paid to acquire it must truly be capital outlay." They then gave answer to the question posed, in the following terms (p. 382): "It was a lump sum payment for acquisition of a capital asset and the claim of the plaintiff's for the lease money from the property was merely ancillary or incidental to the claim to the capital asset." The Dalmia's case was decided by a Bench of two Judges of the Supreme Court, whereas the Bench which decided the case of Jaganmohan Rao consisted of three Judges. We have seen now that there is a conflict between these two cases. What are we to do in a situation of this kind? Normally, the rule is that where the law is laid down differently in two different decisions of the Supreme Court by Benches of different strength, the decision of the larger Bench shall be followed as the binding decision on the subject. A further rule of practice is that even the Supreme Court biter dicta are binding on this Court. Although these are the normal rules of stare decisis as applied to the Supreme Court's decisions, we thin we would be justified in regarding the Dalmia's case as authoritative an binding as the ruling decision for purpose of our present case. We believe that the doctrine that a larger Bench of the Supreme Court has mot authoritative force than a smaller Bench is only relevant as between case which yield different rationes decidendi, and not where the one hands down a decision and the rather merely lays down a dictum. In this case, the dictum in Jaganmohan Rao's case is not only obiter, but it has been rendered, with respect, per incuriam. This Bench of three Judges, apparently, had not been duly appraised of the trend of decisions in the Borax case in Associated Portland Cement's case in Quick Shoe Repair case and in Carron's case (4). If they bad known about these cases, and bad considered the principle laid down in unbroken uniformity in all of them, we dare say the Court would have given expression to the same proposition which the Court happened to Jay down only two years later in the Dalmia's care. As between a decision which is per curiam and a decision which is per Incuriam there can be little or no doubt as to where our duty lies as a Court bound by the doctrine of stare decisia and the decisions of the Supreme Court. We are accordingly satisfied that the Tribunal'‑s decision in this case, although based on a dictum of the Supreme Court in Jaganmohan Rao's case must be held to be erroneous since it is opposed to the law down directly on the point by the subsequent Supreme Court decision in Dalmia's cash. We may, however, observe in passing that the distinction laid down by Lawrence J., in Borax case had not been accepted, without question, in Australian Courts administering more or less similar legislation on income tax; vide Sun Newspapers Ltd. v. Federal Commissioner of Taxation (1938) 61 C L R

337. In this case Dixon J., in the High Court of Australia, expressed the notion that money paid by a tax payer with a view to preserve his existing business organization from immediate impairment and dislocation is an outgoing of capital and hence not deductible in the computation of taxable business income. For a similar view see also Broken Hill Theatres Proprietary Ltd. v. Federal Commissioner of Taxation (1952) 85 C L R 423 a decision of the Full Court, in which Lawrence J.'s decision in the Borax case was doubted. The views of Australian Judges, however, do not seem to be uniform. And more recent trends in judicial pronouncement in that country show a change in empha sis. See, for instance, the observations of Latham, C. J., in Hallstroms Proprietary: Ltd, v. Federal Commissioner of Taxation (1946) 72 C L R 634 and of Taylor, J. in Federal Commissioner of 'Taxation v. Duro Travel Goods Proprietary Ltd (1953) 87 C L R

524. It might well be that Southern v. Borax does not carry the unques tioned authority it once had. The mark of distinction laid down in that case between expenditure to purchase a fixed capital assets on the one hand, and expenditure to protect the same asset on the other, might be thought 'to require reconsideration in the light, at any rate, of the trend of Australian judicial opinion. But till that time arrives, we believe we would be ; justified in following Dalmia's case as the ruling decision on the subject. The Tribunal in their order have found all the material facts to which we have referred in the beginning of this judgment. They have adverted to the original partnership; its subsequent dissolution on the death of the assessee's co‑partner, the take‑over of the business anal the purchase of the deceased's share by the assessee by payment to his heirs; the subsequent running of the business as the assessee's sole proprietary concern; the assessee's conversion of the business, after a five years lapse of time, as a father‑and‑son partnership; the suit filed by the minor children of the de ceased partner of the erstwhile partnership, the compromise of the suit and the payment of the amount to the deceased's heirs and the withdrawn; of the suit. The Tribunal, after referring to all these facts, asserted that the assessee had not acquired full title to the business at the time of the dis solution of the old partnership, but acquired it only when it paid Rs. 4,000 under the compromise. The Tribunal relied on the plaint allegations in the suit to reach the conclusion that prior to the compromise decree the asses see's title to the business, although paid for under the scheme of dissolution, was imperfect. There is, in our judgment, no warrant for this conclusion. The plaint in a suit could, by no means, be relied on as a record of facts. It is but a pleading. The plaint allegations have stood denied in this case by the assessee's written statement. What is more, both parties to the litigation had given the go‑by to their respective pleadings when they entered into a mutual compromise. There is nothing express or implied in the terms of the compromise to suggest that the payment of Rs. 40,000 to the heir's of the deceased partner was towards payment of the balance of the purchase price of the deceased partner's share in the business. In these events, it would bed safe and reasonable to hold that so far as the assessee was con cerned, the suit was an attack on the title to his business, and so far as his payment of Rs. 40,000 was concerned, the payment warded off that attack. The Tribunal was not justified in assuming that the payment under the compromise decree was the means by which the assessee had acquired a full title to the business. The situation presented by this case is quite different from that which obtained in Jaganmohan Rao's case, but is almost parallel to the fact‑situations found in the Borax's ease and the Dalmia case. One aspect of the case which the Tribunal had overlooked while dispos ing of the appeal before them needs to be briefly touched upon. As earlier mentioned, the I. T. O: had disallowing the allowance claimed by the assessee for Rs. 40,000 in the year of payment. The officer's reason, as already mentioned, was that the liability related back to the business at a time when it was run as the sole proprietary concern of the assessee, and not at the material time when it had become a father‑and‑son partnership. The A. A. C. had rejected this approach of the I. T. O. to the question of allowability of business expenditure. He held that since the assessee's share in come from the father‑and‑son partnership was to be charged to tax as business income, it was permissible to set against it any outgoing properly debatable to revenue. It was precisely this aspect of the decision of the A.A.C. which was questioned by the Department in their appeal before the Tribunal. But the Tribunal did not deal with the question. They proceeded instead to dispose of the Departmental appeal on the other issue as to whether the payment of Rs. 40,000 was capital or revenue expenditure. It is, there fore, no wander that the question of law referred to us also pinpoints only the capital versus revenue feature of the controversy. Yet, for the sake of completeness of the discussion, we would face the controversy whether the payment of Rs. 40,000 could at all be considered in the context of the assessment of the assessee's share income from the present firm, when in terms of its history the payment relates to a previous period of proprietary ownership of the business. When a partnership carries on a business, every partner thereof must be regarded as carrying it on, although he does so only in ca‑partnership with the other partners. See the observations of Raghava Rao, .J., in C. I. T. v. Palaniappa Chettiar ((1951) 20 I T R 170 (Mad)). It is on the basis of this fundamental conception of partnership that we have a long line of cases in which it‑ has been decided that the share of income of a partner from a partnership firm must be brought 'to charge as profits under the head "business". The Courts have further held that as against that share income the partner would be entitled to set off all legitimate items of expenditure which may be regarded as admissible by the application of principles of commercial accounting In the present case, the assessee had all along been carrying on business, first as a partner alongwith three other individuals, next on the dissolution of the partnership by the death of one of the other partners, as sole proprietor for five years, and thereafter, in partnership with his son. All throughout, the business was the same. There were differences only in the persons carrying, on the business at different periods of time. In the year of account relevant to the assessment year under reference, the assessee was but a partner and his income from the business was but a share income from that firm, the other share being that of his son. The assessee, however, is not thereby disentitled to claim a set‑off of legitimate expendi ture which appertains to that share income. The Department's case had always been that the payment of Rs. 40,000 made by the assessee did relate to the business because it was that business which the assessee had taken over from the partnership business and it was tat business which was the subject‑matter' of the law suit by the heirs of the deceased partner. If so much is granted, we see no reason why the deduction in question cannot be attributed to that business. The A. A. C. dealt with this point when he decided that the payment of Rs. 40,000 by the assessee would be a proper set‑off as against the share income of the assessee from the firm. We are in entire agreement with this view. It was pointed out in argument by the Department's learned counsel that the sum of Rs. 40,000 as an outgoing was found debited, not in the partnership accounts, but in the books separately kept for certain money lending transaction of the assessee. One reason for not recording the expenditure in the account books of the father‑and‑son partnership might be that, historically, the entire liability was that of the assessee alone. What ever might be the reason for not setting off the outgoing against the profits, or the assessee's share of profits, in the firm s books, it is understandable that the expenditure has a nexus only to the business which was being carried on by the assessee both as proprietor and as a partner at various stages. The question for consideration is not where, and in which accounts, the expendi ture is found debited, but whether the expenditure is relatable to the business. To this latter question, the facts found provide a complete answer in the assessee's favour. The result is that we must decide the question of law in this reference in the negative and against the revenue. We hold, in short that the sum of Rs. 40,000 paid by the assessee to the sons of the deceased partner, is not capi tal expenditure, but is a revenue item of outgoing liable to be allowed wile determining the assessee's income under the head "Business" for the concerned assessment year. The assessee will have the costs of this reference from the Department. Counsel s fee Rs.

500. SETHUBRAMAN, J. Before going through the judgment prepared by my learned brother I had prepared my own after going through the detailed discussion of the legal principles. I would now content myself with expressing my concurrence with the answer proposed to the question for the reasons indicated below. Just to make my judgment clear, I would state the facts first. The Madras, Electric Tramway Company Ltd. was brought into liquidation under the supervision of this Court. It had land, tramway tracks and overhead wires, which were advertised for sale. Kuppuswami Naicker made a tender to the official liquidator for purchasing these assets for a sum of Rs. 5,51,

111. The tender was accepted on 19th August, 1955. Kuppuswami Naicker was unable to pay the money. An assignment of the contract in favour of Sri Bhagwan Motor Company came into existence under a docu ment dated 16th March, 1955. The firm consisted of Kuppuswami Naicker, his son, P. K. Ramadoss, Mohanlal Lekhrajmal and the assessee, Ghansham Singh, who died on January 12, 1971. The firm deposited the amount under the contract. There were disputes between the firm on the one hand and the Corporation of Madras on the other with regard to the removal of tramway rails, overhead materials, etc., and to the restoration of the roads to their original condition. It appears Kuppuswami Naicker himself had expressed a desire that the firm should be dissolved and the business should be carried on by the assessee solely, as he had contributed the necessary finances. Before anything cold be done in this behalf, Kuppuswami Naicker died on November 15,'1955. The result was that the partnership became dissolved. On November 25, 1955, the remain ing partners entered into a deed of dissolution under which the widows of Kuppuswami Naicker were paid Rs. 37,000 and his two minor sons, Rs. 26,

000. Thereafter, the business was carried on by the assessee as the sole proprietor till October 18, 1960. With effect from October 19, 1960, be took his son as the working partner with an 1/3rd share. ‑ Four of the sons of Kuppuswami Naicker, of whom three were minors instituted C. S. No. 3 of 1960, in the original side of this Court, praying for setting aside the deed of dissolution and directing the assessee to render a full and completed account of the partnership and its assets. The suit was contested by the assessee. Ultimately, it ended in a compromise. A memo of compromise was entered into on 7th September, 1962, under which the assessee had to deposit into Court a sum of Rs. 40,000 to be paid to the plaintiffs in the suit in full quit of their claim. As some of the plaintiffs were minors, the High Court accorded sanction to the said compromise being entered into. This sum of Rs. 40,000 paid to the sons of Kuppuswami Naicker was claimed as an expenditure allowable under the Act. The assessee continued to be a partner in the firm, which came into existence on October 19, 1960. The assessment year under consideration is 1964‑65, the relevant previous year ending on October 17, 1963. The

1. T. O. rejected the claim, but it was allow ed by the A. A. C. At the instance of the Department, there was an appeal to the Tribunal, which reversed the order of the A. A. C. and restored that of the I. T. O. The consequence was that the sum of Rs. 40,0;)0 stood allow ed in the assessment. The following question has been referred: Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the sum of Rs. 40,000 paid t6the sons of Kuppuswami Naicker was a capital expenditure and not deduc tible in determining the income of the assessee?" The Tribunal has mainly based its judgment on a decision of the Supreme Court in V. Jaganmohan Rao v. C. I. T. (1965) 56 ITR 29 (Mad.). In that case, there was already a pending litigation between the father and the sons. While the father claim ed that a spinning mill and other properties were his individual properties, the sons contended that they were joint family properties. They filed a suit for partition. The trial Court dismissed the suit. When the appeal was pending, the mill was sold by the father to the assessee. In the appeal, against dismissal of the suit, it was hold that the properties were not the self‑acquired properties, but were joint family properties in which the plaintiffs had a 2/3rd &bare. The father filed an appeal before the Privy Council. When the matter was pending there, there was a compromise under which the assessee, the pur chaser of the mill, paid a sum of Rs. 1,15,000.to the two sons and got a release of their interest in the mills. This amount was claimed as deduction in the assessment of the assessee. The High Court held that the amount had been paid for acquisition of the capital assets and that the payment had been made in order to perfect title to the capital asset. The claim for deduction was, therefore, rejected. In the course of the judgment, at p. 383, it was observed. "It is well‑established that where money is paid to perfect a title or as consideration for getting rid of a defect in the title or a threat of litigation the payment would be capital payment and not revenue payment." This is not a case where the assessee is trying to perfect his title to the property, as it happened in the case before the Supreme Court. This is a case where the assessee had acquired title to the assets even at the time when be originally entered into partnership with Kuppuswami Naicker. Under the deed of dissolution, he became the sole owner of the assets of the part nership. Whatever consideration was payable for the assets had already been paid and the amount now under consideration is not part of the said amount. If the suit had not been filed by the sons of Kuppuswami Naicker, there was no necessity for the assessee to go to the Court to perfect his title. In the case before the Supreme Court, the assessee had to make a payment for getting rid of a defect in title. In fact, he purchased the assets at a time when the title to the property purchased was under challenge. The same is not the position here. Courts in India have accepted the principles of the decision of King's Bench Division in Southern (H. M. Inspector of Taxes) .v Borax Consolidated Ltd. The principle laid down in that case has been stated in the following words at p. 5: "On the other question as to whether this is a payment properly attri butable to capital or to revenue, in my opinion, the principle which is to be deduced from the cases is that where a such of money is laid out for the acquisition or the improvement of a fixed capital asset it is attributable to capital, but that if no alteration is made in the fixed capital asset by the payment, then it is properly attribut able to revenue, being in substance a matter of maintenance, the maintenance of the capital structure or the capital assets of the company." In that case, a British company had taken over an Island in California. The City of Los Angeles commenced an action in the United Sates claiming that the British company's title to the land and building was invalid and that such land and buildings were in fact the property the City of Los Angeles. This action was defended by' the British company, and in so doing it incurred expenditure, which was claimed as deduction in the income tax assessment. It was held that the amount was allowable as a deduc tion. It was pointed out that the only way in which it can be said that there was any alteration in the capital assets of Borax Consolidated Ltd. was that the City of Los Angeles had been removed from the category of possible litigants who might challenge the company's title and that it did not make the payment as capital payment. The title of the company, which must be assumed to have been a good title, remained the same; there was nothing added to the title or taken away from it and the title had, simply been main tained by this payment. The decision was distinguished in Selvarajulu Chetty & Co. v. C. I. T.((1995) 56 I T R 29 ( Mad)). That was a case where the dispute related to the title to the business in its entirety and the question was whether on the death of the previous owner it had vested in his daughter or in certain other relations. The expenses in such a litigation were considered to be outside the scope of allowance and the case, Southern (H. M. Inspector of Taxes) v. Borax Consolidated Ltd.((1967) 63 I T R 207 (S C) was found to be hardly in point. It was pointed out at p. 31: "If a sum of money is expended for the acquisition or the improvement of a fixed capital asset, it is undoubtedly attributed to capital. But if there is no change in the fixed capital asset, then the expenditure is properly attributable to revenue." The Supreme Court has considered the principle applicable to cases of this kind in two later decisions. The first of them is Sree Meenakshi Mills Ltd. v. C. I. T. In that case, a spinning mill distributed the yarn produced by it to the weavers outside the factory. The Textile Commissioner issued an order directing that the company should not sell or deliver yarn manufactured by it, except to such person or persons as he may specify. The mid challenged the validity of this order in this Court, and ultimately took the dispute to the Privy Council. It failed in the litigation. The expenditure incurred by it was claimed as deduction: Shah J., as he then was, delivering the judgment of the Supreme Court, pointed out at p. 213: "Expenditure on civil litigation commenced or carried on by an assessee for protecting the business is admissible as expenditure under sec tion 10(2)(xv) (of the Act 1922), provided other conditions are fulfilled even though the expenditure does not directly relate to the earning of Income." Earlier at p. 212, it was pointed out that the expenditure incurred in prosecuting a civil proceeding relating to the business of an assessee is admis sible as expenditure laid out wholly and exclusively for the purpose of the business even if the proceeding is decided against the assessee. In the second case, C. J. T. v. Birla Brothers & P. Ltd. ((1971) 82 I T R 166 (SC)), the assessee claimed deduction of the expenditure incurred in contesting certain proceed ings before the Investigation Commission and also in Courts, where the vices of the statute under which the Commission was constituted were challenged. It was held that the expenses were liable to be allowed as deduction and at p. 171, it was observed: "The essential test which has to be applied is whether the expenses were incurred for the preservation and protection of the assessee's business from any such process or proceedings which might have resulted in the reduction of its income and profits and whether the same were actually and honestly incurred. It is possible to understand the expenditure on the proceedings in respect of the Investigation Com mission by the assessee will not fall within the above rule." In Dalmia Jain & Co. Ltd. v. C. I. T. ((1971) 81 I T R 754), the principle laid down by the Supreme Court was that if the expenses were incurred for the purpose of creating, curing or completing any title to any property, then, it would be capital expenditure but if they were incurred to protect the business then it must be considered as revenue expenditure. Thus, the authorities uniformly lay down the principle that where the expenditure is incurred for protecting the assets from an attack then it would be revenue expenditure. It would, however, be capital expenditure if it was incurred for perfecting title or for getting rid of a defect in title. Applying this principle it would be clear that in the present case the assessee had already become the owner of the assets in 1955 and he had to defend the attack on the assets. This is thus clearly a case where the expenditure has not brought: into existence any capital asset or enduring benefit. The fact that the expenditure has been incurred at a time when the assesses was only a partner and not sole owner of the assets cannot make a difference, at it is well‑settled that a person carrying on a business in partner ship with another is nonetheless carrying on a business. Another contention urged for the Revenue was that the expenditure related to the very framework of the tax‑payer's business and was, therefore, capital. It is not possible to accept this submission. The said principle has been evolved in cases where there was a pooling agreement between com panies for sharing profits and losses or where money was paid for the cancel lation of an agreement which affected the whole structure of the trader's profit making apparatus. This is a case where after having acquired the assets and carried on business with them, the asscssee finds himself involved in a litigation brought out by a third party. In considering the nature of the expenditure, it would not be proper to proceed on the basis of the correctness of the pleadings in the suit, as the matter was not adjudi cated upon by the Court. The pleadings represent mere allegations and unless the statements were proved they would merely remain as allegations. So long as there was no adjudication on the conduct of the assesses, the allega tions made should not colour the determination of the issue. The principle applicable to cases where a person purchases assets with the knowledge of a defect in title and where he subsequently incurs expenditure for perfect ing his title cannot be applied to Cases where the assessee had acquired assets and had been carrying on business with them when an attack by some inte rested, person was made. The expenditure had a protective element or a defensive character. Such expenditure would have to be allowed as deduction. Otherwise the assessee would not have been able to keep the assets and earn the profits on which he was taxed. The result is that the question is ans wered in the negative and in favour of the assessee. The assessee would be entitled to his costs. Counsel's fee Rs.

500. When the judgments were pronounced, the learned standing counsel for the Commissioner, Mr. J. Jayaraman, made an oral application for leave to appeal to the Supreme Court in accordance with Art. 134‑A of the Cons titution of India read with section 261 of the I. T. Act. The question that has been discussed in the present case, is no doubt a routine one of the capital or revenue character of the expenditure. But the judgment of Balasubrahmanyan J. has brought out some apparent conflict between the decision of the Supreme Court in V. Juganmohan Rao v. C.I.T. and Dalmia Jain & Co. Ltd. v. C. I. T. In view of the matter having to be authori tatively decided by the Supreme Court, we think it fit to grant leave to appeal to the Supreme Court in the present case. Accordingly, leave is granted. M. Z.M. Question answered in the negative.