PANIGRAHI, J. -
(1.) THE petitioners, Messrs. The Orient Fast Colour Dye Works, are a firm carrying on business in dyeing yarn. In assessing the net profits of the firm for the assessment year 1947 -48 deduction of a sum of Rs.
5686/ -/ -was claimed on the ground that it represented the remuneration paid to Messrs. Nikunjakishore Das and Dhananjoy Lenka, two of the partners of the firm, for carrying on the business of partnership.
The Income -tax Officer disallowed the claim, included the sum in the net profits and assessed the same to
(2.) THE case for the petitioners is that the management of the firm's business was entrusted to another firm known as Friends United Agency, said to have been constituted the managing agents of the Orient Past
Colour Works. It was also alleged that Messrs Nikunjakishore Das and Dhanan -joy Lenka are partners in
the firm of Friends United Agency. The Appellate Assistant Commissioner found that M/s. Friends United
Agency did not in fact conduct the business of the assessee firm and that no legal contract had been
proved to have existed between the assessee and the Friends United Agency. He accordingly held that the
payments made to M/s. Nikunjakishore Das and Dhananjoy Lenka were payments made to the partners of
the assessee -firm as such. On appeal, the Income -tax Appellate Tribunal, while upholding the order of the
Appellate Assistant Commissioner, also held that the three persons appointed by the assessee -firm were
so appointed in their individual capacity and not as members of any other firm. The Tribunal's finding
was that the partnership known as Friends United Agency was, in fact, not in existence at any date prior to
the date on which the partnership agreement was executed. The Tribunal accordingly came to the
conclusion that the amount claimed as remuneration was chargeable to tax and was not liable to be
excluded under Section 10 (4) (b), Income Tax Act. An application was thereafter made to this Court,
under Section 66 (2) of the Act praying for the issue of a writ of mandamus on the Tribunal asking them
to state a case for the decision of this Court. This Court accepted the finding of fact arrived at by the
income -tax authorities, namely, that the payment of Rs. 5686/ - was made to Sri Nikunjakishore Das and
Sri Dhananjoy Lenka in their individual capacity and not as members of any subsidiary firm, namely,
Friends United Agency of which they were also partners. The Court held, relying on the decision of the
Bombay High Court reported in - - 'Jesingbhai v. Commr. of Income -Tax, Bombay', A. I. R. 1950 Bom.
198 (A) that it is possible for common partners to constitute two separate firms in respect of different business carried on by these partners and that, therefore, the mere fact that some of the partners of the
assessee firm constituted a different firm would not disentitle them to claim deduction. There may be a
distinction between remuneration paid to a partner, as partner of the assessee firm, and a payment made to
a partner in his individual capacity. In this view of the law, the Court directed the Appellate Tribunal to
state a case under Section 66 of the Income Tax Act.
The question of law that has therefore been referred to us by the Tribunal is :
'Whether on the facts and in the circumstances of this case the Tribunal was right in relying on the provisions of Clause (b) of Sub -section (4) of Section 10 of the Indian Income -Tax Act and refusing to deduct from the profits of the firm the sum of Rs. 5866/ -/ - paid to Shri Nikunjakishore Das and Shri Dhananjoy Lenka as remuneration for managing the business of the firm, The Orient Fast Colour Dye Works, during the year 1946.'
The Tribunal points out that in the face of the finding that the Friends United Agency was not at all in
existence at the date on which the resolution appointing them as managing agents was passed, the
question whether the remuneration paid to Messrs. Nikunjakishore Das & Dhananjoya Lenka is hit by the
provisions of Clause (b) of Section 10 (4) does not arise. The Tribunal however held the view that there
was no distinction between payments made to a partner as a partner, and those made to him in a different
(3.) SECTION 10 of the Income -Tax Act deals with profits and gains of a business, profession or vocation and the tax payable thereon. Sub -section (2), Section 10 enumerates what allowances may be made in
calculating the profits or gains. Clause 15, Sub -section (2), Section 10 permits the deduction of any
expenditure not being an allowance of the nature described in any of the Clauses (i) to (xiv) and not being
in the nature of capital expenditure or personal expenses of the assessee allowed or expended wholly ....
or exclusively for the business of such business, profession or vocation. This is clearly a residuary clause
and takes in all such allowable deductions as have not been specifically enumerated In Clauses (i) to
(xiv). In order that a claim for deduction may be brought under theresiduary clause it must satisfy the
three conditions laid down therein : (1) the expenditure musthave been incurred for the purpose of the
business, or profession or vocation which is taxed; (2) it must have been incurred wholly & exclusively
for the purposes and (3) it should not be in the nature of a capital expenditure or personal expenses or
'the assessee. For instance, expenditure incurred for the maintenance of the assessee, or his family, or his establishment, cannot be exempted from assessment - - 'Bowers v. Harding', (1891) 1. Q. B. 560 (B). Similarly any capital expenditure incurred for the purpose of the business, though not personally, is not deductible. Sub -section (4) of Section 10 is in the nature of an exception to some of the clauses of subjection (2) and says : 'Nothing in Clause IX of Sub -section (2) shall be deemed to authorise the allowance of any sum paid on account of any cess, rate or tax levied on the profits or gains of any business, profession or vocation .....; and nothing in Clause(XIV) of Sub -section (2) shall be deemed to authorise (a) ..... (b) any allowance in respect of any payment by way of interest, salary, commission, or remuneration made by a firm to any partner of the firm.'
On a plain reading of Clause (b) of Sub -section (4) of Section 10 it appears that any amount paid by way
of interest, salary, commission, or remuneration, made by a firm to a partner, is not deductible from the
profits of the firm.;