Delhi High Court
Commissioner Of Income-Tax vs Ganpat Rai Jaggi And Co. on 20 August, 1971
Author: H.R. Khanna
Bench: H.R. Khanna
JUDGMENT H.R. Khanna, C.J.
1. The following question has been referred to this court at the instance of the Commissioner of Income-tax under Section 256(1) of the Income-tax Act, 1961 (hereinafter referred to as "the Act of 1961"):
"Whether, on the facts and in the circumstances of the case, the assessed was entitled to the deduction of the amount of commission paid to S. R. Dhodi against his share of profit from the Shalimar Cinema ?"
2. The matter relates to the assessment years 1962-63 and 1963-64. The assessed, Ganpat Rai Jaggi, is a partner in the firm carrying on business under the name and style of Shalimar Cinema. The other partner in the firm is Razi-ud-din, who owns the cinema hall in which the firm exhibits cinema films. S. R. Dhodi is the son-in-law of the assessed. With effect from May 19, 1955, the assessed, in partnership with Dhodi, carried on the business of exhibiting cinema films in the aforesaid cinema hall. The profits of the business were shared by the assessed and Dhodi in the ratio of 75 : 25. The partnership between the assessed and Dhodi continued till 1957. On December 31, 1957, a deed of partnership was executed by the assessed and Dhodi. According to the partnership deed, the capital of the partnership was to be Rs. 10,000 out of which Rs. 6,000 were to be contributed by the assessed and Rs. 4,000 by Dhodi. The share of the assessed and Dhodi in the profit was to be 60% and 40%. The partnership deed recited that Rs. 750 per mensem were payable as monthly rent of cinema building, furniture and projector, by the assessed to the landlord. The license, which the assessed had obtained from Razi-ud-din for running the cinema, expired on December 31, 1958. Razi-ud-din then expressed his unwillingness to renew the lease in favor of the assessed except on the condition that the assessed should run the cinema hall in partnership with Razi-ud-din and that no one else should be a partner. On December 31, 1958, the assessed addressed a letter to Dhodi in the course of which it was stated :
"As you are aware the agreement of lease of cinema with the landlord Sheik Razi-ud-din expires on December 31, 1958. I have been trying to negotiate for renewal of the lease, but he is not agreeable to do so at any cost. He is, however, prepared to run the cinema in partnership and that also with me only and none else as partner. I have tried my best to impress on him that you are my old partner and have full experience in this trade. Moreover, it may also be very difficult to run the cinema without your help. He is not acceptable to any such suggestion and is not at all prepared to agree to any other proposition except partnership amongst me and him.
3. I have given a careful consideration to the whole problem and have come to the following-conclusions :
"1. That you will act as manager of the firm, your remuneration will be as decided by the firm from time to time. To this Sheikh Razi-ud-din is agreeable.
2. That you will be in charge for all the management and control of running the Shalimar Cinema.
3. That since I have agreed to advance to Sheikh Razi-ud-din a sum of Rs. 80,000 for the running of the cinema, you will allow your capital lying in the firm, M/s. Ganpat Rai Jaggi & Co., totally with me and will also assist me in raising further loans for making a total of Rs. 80,000 required by me.
4. That till the cinema is renovated and starts functioning again after renovation, I will allow you only interest at the rate of 6% per annum on your deposit, but thereafter you will become entitled to 5% of the gross booking every year as commission and your share of income for looking after my interest and interest of the firm.
5. That the liability for payment of this interest and commission is my personal liability and not that of the firm. Therefore, the firm, M/s. Shalimar Cinema, will neither be responsible nor liable for this amount.
6. It is understood that you will give your whole-hearted attention to the work and will do your best for the efficient working of the firm so that the receipts are maximum.
In confirmation to the above, arrangement please sign the duplicate copy of this letter and send it back to me for my records."
4. Dhodi accepted the above arrangement. A deed of partnership was thereafter executed by the assessed and Razi-ud-din on January 9, 1959. According to that deed, Razi-ud-din was the owner of the Shalimar Cinema building and the machinery and fittings therein and had also the requisite license to exhibit pictures in that hall. It was stated that Razi-ud-din did not know English and was not conversant with the cinema business. He, therefore, entered into partnership with the assessed for a period of five years to commence the said cinema business with effect from January, 1, 1959. The partnership deed recited that the assessed had advanced a loan of Rs. 80,000 to Razi-ud-din. The amount was to be utilised in part for making necessary additions and alterations in the cinema hall, and for having essential amenities therein. Razi-ud-din was to nominate the assessed, or any other person that the assessed might like to be nominated, to perform all the duties of the licensee. The share of Razi-ud-din and the assessed in profit and loss were to be equal. The responsibility of running the cinema strictly in accordance with the terms and conditions of the license and the rules in force was that of the assessed and he was to be in sole charge and management of the partnership business. A bond for an amount of Rs. 80,000 was also executed by Razi-ud-din in favor of the assessed.
5. The cinema hall was renovated and it started functioning thereafter with effect from August 11, 1961. On March 9, 1962, the assessed and Dhodi executed an agreement, the material part of which is as under :
"WHEREAS party of the first part (the assessed) is partner of the firm M/s. Shalimar Cinema and party of the second part (Dhodi) is Manager of the said Cinema.
AND WHEREAS by an arrangement between the two parties it was agreed vide letter dated December 31, 1958, of Shri Ganpat Rai Jaggi that he will be given 5% of the gross booking of the Cinema as commission to Shri S. R. Dhodi only after restarting of the Cinema after renovation.
AND WHEREAS the Cinema after renovation restarted functioning on 11th August, 1961. Now this agreement witnesseth what was agreed upon in letter dated December 31, 1958, to make it a documentary evidence :
(i) That party of the first part has agreed to give party of the second part 5% of gross booking of M/s. Shalimar Cinema as commission for looking after the management of the Cinema and its efficient working. The commission becomes due and payable with effect from August 11, 1961.
(ii) That the payment of the said commission is the personal liability of Shri Ganpat Rai Jaggi and the firm M/s. Shalimar Cinema will have no liability thereof for payment of this amount.
(iii) That this agreement will be in force till the firm M/s. Shalimar Cinema consisting of Shri Ganpat Rai Jaggi and Sheikh Razi-ud-din continue to exist."
6. The assessed's share of profit from the Shalimar Cinema was worked out to be Rs. 18,094 and Rs. 45,738 for the assessment years 1962-63 and 1963-64 respectively. The assessed claimed a deduction of Rs. 6,132 and Rs. 14,961 for the above-mentioned two years on account of the amounts paid by him to Dhodi in pursuance of the agreement with Dhodi. The Income-tax Officer held that the payment made to Dhodi was only an application of the assessed's income. He accordingly disallowed the claim made by the assessed for deduction. The above order was affirmed on appeal by the Appellate Assistant Commissioner. It was held that the payment made to Dhodi was ex gratia. Dhodi, it was found, was getting a salary of Rs. 250 per mensem as the manager of the cinema, and there was no justification for further payment to him by the assessed.
7. On further appeal the Income-tax Appellate Tribunal held that Section 67(3) of the Act of 1961 gave statutory recognition to the well-settled principle that a partner was entitled to a deduction in computing his share of the firm's profits in respect of interest paid by him on capital borrowed for the purpose of investment in the firm, but that sub-section was not exhaustive of the deductions permissible to a partner in computing his share of the firm's profits. It was urged before the Tribunal that the assessed on account of his age, being not in a position to manage the cinema business all by himself, had, in order to discharge the duty cast upon him under the terms of the partnership deed, to arrive at an understanding with Dhodi. It was also pointed out that the only alternative left to the assessed, if he did not agree to the terms of Razi-ud-Din, was that he would have to give up the business completely. The compelling requirements of the business, according to the assessed, forced him to take Dhodi as his nominee for actually running the cinema. The Tribunal found force in the above contentions and observed :
"The facts as mentioned above go conclusively to show that it was the compelling circumstances of the business that necessitated the assessed in arriving at the arrangements referred to above with S. R. Dhodi. The commission paid by the assessed to S. R. Dhodi was not an application of income but the expense of payment of commission was incurred wholly and exclusively for the purposes of the assessed's business. We must, therefore, uphold the assessed's contention that the payment of commission to Dhodi is an admissible deduction."
8. The question reproduced above was thereafter referred to this court.
9. Mr. Sharma, on behalf of the revenue, has urged that the amount paid to Dhodi, by the assessed was an application of the assessed's income and was not an expenditure incurred for the earning of that income. The amount paid to Dhodi as such could not be deducted. Sub-section (3) of Section 67 of the Act of 1961, according to Mr. Sharma, specifies the deduction which can be allowed to a partner from his share of income of a firm, and no other deduction apart from that can be permitted. Argument is also advanced that the amount paid by the assessed to Dhodi was in connection with the business of the firm and as such only the firm and not the assessed could claim deduction on that account. The above contentions have been controverter by Mr. Karkhanig, on behalf of the assessed, and, in our opinion, are not well-founded.
10. It would appear from the resume of facts given above that when the assessed entered, into partnership with Razi-ud-din he undertook the responsibility of running the cinema strictly in accordance with the terms and conditions of the license or rules which were in force. The assessed also undertook the responsibility of managing the partnership business. The assessed then realised that because of his age he was not by himself in a position to discharge the duty imposed upon him by the deed of partnership. The assessed then entered into an arrangement with Dhodi, who had already been looking after the above cinema business in the past, and agreed to pay him commission on gross booking. The above facts, in our opinion, show that it was on account of the compelling circumstances of the business that the assessed had to arrive at an arrangement with Dhodi. The amount paid by the assessed in this connection to Dhodi was a matter of commercial expediency. The assessed, it is manifest, incurred the above expenditure in order to earn the profits from the partnership business. Such an expenditure cannot be considered to be an application of the income but a permissible deduction under Section 37 of the Act of 1961. According to that Section, any expenditure laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head "profits and gains of business or profession".
11. We are not impressed by the argument that the only deduction, which can be permitted from a partner's share in the income of a firm, is that given in Sub-section (3) of Section 67 of the Act of 1961. The said subsection reads as under:
"Any interest paid by a partner on capital borrowed by him for the purposes of investment in the firm shall, in computing his income chargeable under the head 'profits and gains of business or profession' in respect of his share in the income of the firm, be deducted from the share."
12. The above Sub-section gives statutory recognition to the principle accepted by the courts that a partner is entitled to a deduction in computing his share of the firm's profits in respect of the interest paid by him on capital borrowed for the purposes of investment in the firm. There is, however, nothing in the sub-section as may indicate that the said subsection is exhaustive and that deduction other than that mentioned in the sub-section cannot be allowed to a partner. If a deduction is admissible in respect of a partner's share in the income of the firm under Section 37 of the Act of 1961, it would, in our opinion, have to be allowed even though it may not fall within the ambit of Sub-section (3) of Section 67. The said sub-section would have to be read in harmony with Section 37 and in the absence of any words which may show either expressly or by necessary implication an intention on the part of the legislature to do away with the deductions which can be claimed by a partner under Section 37, the deductions admissible under that Section cannot be disallowed to a partner. We are fortified in the above conclusion by a decision of the Patna High Court in the case of Commissioner of Income-tax v. Atma Ram Modi, [1969] 71 I.T.R. 199, 203 (Pat.).. The learned judges in that case observed :
"The intention of the legislature is thus very clear. It did not want to make Sub-section (3) of Section 67 exhaustive. If deduction could be claimed according to law under any other provision of the Act, that right would not be taken away merely by the provisions of Sub-section (3) of Section 67. Hence, the natural rule of harmonious construction which requires full effect to be given both to Section 37(1) and Section 67(3) of the Act will prevail and the assessed would be entitled to claim the deduction permitted by Sub-section (1) of Section 37, provided the facts necessary for such claim have been stated and found in his favor."
13. The matter, in our opinion, is concluded by a decision of the Supreme Court in the case of Commissioner of Income-tax v. Ramniklal Kothari, [1969] 74 I.T.R. 57; [1969] 3 S.C.R. 860 (S.C.). The assessed in that case was a partner in four different firms. He claimed an allowance on account of payment of salary and bonus to his staff, expenses for maintaining and depreciation of motor car, traveling expenses and interest. It was held that the assessed was entitled to the deductions claimed by him.
14. Mr. Sharma has referred to the fact that the decision of the Supreme Court in Ramniklal Kothari's case, was given in the context of the Indian Income-tax Act of 1922. It is urged that the provisions of Section 67 in the Act of 1961 show that the dictum laid down by the Supreme Court in Ramniklal Kothari's case would not hold good under the Act of 1961. We find, however, nothing in Section 67 which may indicate a departure from the rule laid down by their Lordships in Ramniklal Kothari's case.
15. There is also no force in the contention that the amount paid by the assessed as commission to Dhodi was for the benefit of the firm and not for that of the assessed. As stated above, the assessed had undertaken the responsibility of running the cinema strictly in accordance with the terms and conditions of the license and the rules in force. It was to discharge that personal responsibility that the assessed entered into an arrangement with Dhodi. The amount paid to Dhodi was thus for the benefit of the assessed and with a view to enable him to earn his share of the income of the partnership.
16. We, therefore, answer the question, referred to this court, in the affirmative. Looking to all the facts we leave the parties to bear their own costs.
Question answered in the affirmative.