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Petitioner: GHANSHAM SINGH VS Respondent: COMMISSIONER OF INCOME-TAX
Court Name: Madras High Court Judge(s): M. V. Balasubramanian, V. Sethuraman Title: GHANSHAM SINGH vs COMMISSIONER OF INCOME-TAX Case No.: Case No. 620 of 1975 Date of Judgment:1981-07-09 Reported As: 1984 PTD 21 Result: Question answered in the negative
JUDGMENT
JUDGMENT BAALASUBRAAHMAANYAN, J --This referencefrom the Income-tax Appellate Tribunal raises the perennial question of capital versus revenue expenditure. We may clear the ground first by excluding from our consideration lines of inquiry on which the indications are that they are unnecessary for the purposes of the present case. We are not, for instance, asked to examine whether the expenditure in question was incurred for the en--during benefit of the assessee's trade. Nor is there any question of the expenditure going into the purchase by the assesses of a fixed capital asset. This is also not a case o? An outlay for the acquisition of a busi--ness as a whole, nor even of the extension or substantial improvement of an existing business. The deduction claimed is in respect of a payment made by the assesses under the terms of a compromise decree. The compromise came about this way. The assesses was a partner in a partnership con-- cern carrying on commissions business and engaged in other sundry acti--vities. While the death of one of the assessee's co-partners, the firm dissolved. The dissolution was say agreement between the surviving part--ners and the heirs of the deceased partner. Under the agreed scheme of dissolution, the assesses took over the partnership business, lock stock and barrels as a going concern, paying a certain sum of money to the deceased's heirs, by way a purchase of their interest irk the partnership assets. After the take over, the assesses carried on business for a time as its sole proprietor. He then converted the busi--ness into a partnership, taking his son as a partner. This happened after an interval of fine years. At this stage, the assessee was faced with a suit instituted by some of the minor sons of the deceased partner of the erstwhile partnership. The plaintiffs in the suit made all kinds of alleg--ations against the assessee, including an allegation of fraud in the settle--ment of the accounts. They accordingly prayed for the reopening of the earlier
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dissolution as a primary relief in the suit. They also asked for an injunction restraining the assesses and his, son from carrying on the business as present partners. As right only be expected, the assesses resisted the suit, denying the allegations of fraud levelled against him. There was however, no occasion to know on which side the truth lay, for the suit ended in a compromise and a decree was passed by consent of parties. Under its terms, the plaintiff withdrew all their allegations and the assessee agreed to pay then: 16, 40,000 in full quit. The assessee wee paid she money in due time. In this assessme nt for the relevant account year, the assessee claimed the payment of Rs. 40,000 as an admissible deduction. The I. T. O., however, disallowed the expenditure. The officer's view was that the deduction was asked for in the father-and-son partnership, whereas its subject-matter related to an earlier, but now defunct, partnership. A different view, however, was taken by the A.A.C. On appeal. He held that since the assessee was being taxed in respect of his share income from the business in which he was a partner alongwith his son he was entitled to set of the payment of Rs. 40,000 as against that share income. The Department, however, appealed against this determination of the A.A.C. The Tribunal allowed the Departments appeal. The Tribunal took the view that the payment made by the assesses to the heirs of the deceased partner in the erstwhile partnership was capital expenditure. On this single ground, the Tribunal disallowed the expenditure. The assessee then asked for a reference to this Court, The Tribunal obliged, and stated a case on the following question: "Whether, on the facts and in the circumstances of the case, the Tri--bunal was right in law bolding that a sum of Rs. 40,(100 paid to the sons of Sri Kuppuswami Naicker was a capital expenditure and not deductible in determining the income of the assesses To answer this question, it would be necessary to find out on what basis the Tribunal had rejected the assessee's claim that the payment in question was an item of revenue expenditure. The assessee bad urged before the Tribunal shah the payment was made only to preserve and pro-- tect the business which was being run by the assessee in partnership with his son from the onslaught of the plaintiffs who were intent on raking up a settlement made five years earlier under which the assesses had obtained full title to the business. The Tribunal rejected the basic idea behind this contention by holding that, under the lain, expenditure incurred by an assesses to protect his business would be capital expenditure and not revenue expenditure. The Tribunal's view of the law is, in our judgment, incorrect. The Supreme Court have laid down that expenditure to protect an assessee's trade or to maintain his business is not capital expenditure, but allowable as an item of revenue expenditure. This enunciation of the law is to be found in the following passage in the Supreme Court's judgment in Dalmia Jain & Co. Ltd. v. C.I. T. (1971) 81 I T R 754,757(SC). "The principle which has to be deduced from decided cases is that, where the expenditure laid out for the acquisition or improvement of a fixed capital asset is attributable to capital, it is a capital expenditure but if it is incurred to protect the trade or business of the assessee then it is a revenue expenditure. In deciding whether a particular expenditure is capital or revenue in nature, what the Courts have to see is whether the expenditure in question ova s incurred to create any new asset or was incurred for maintaining the business of the company. If it is the former it is the capital expenditure; if it is the latter it is the revenue expenditure." Although the Supreme Court deduced the above principle from "decided cases---, they did rot proceed to refer to any of them. Apparently, the Court thought they did riot have to give the citations, as the law was well-settled. We may, however, observe, with respect, that the Supreme Court's reference to "decided cases" is borne out by a study of the case-law on the subject, especially that which obtains in England.
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The best known enunciation of the principle that a payment made by a tax-payer to protect his trade is a revenue item of expenditure is that of Lawrence, J. In Southern v. Borax Consolidated Ltd. (1940) 23 T C 597 ; (1942) 10 I T R (Supp.) 1 (K B). In the case before Lawrence, J., the payment, briefly stated, was made under a compromise of an action concerning a piece of land. The action had been filed, challenging title of the tax-payer to the property. With the payment under the compromise, the suit was apparently not pressed. The learned Judge pointed out that the payment of money to the plaintiff in the action and other legal expenses did not create any new asset, but were expenses incurred in the ordinary course of business to maintain the tax-payer's title to the property. In the course of his judgment, the learned Judge drew a clear distinction between expen--diture laid out for the acquisition or improvement of a fixed capital equip--ment, on the one hand, and expenditure incurred for maintaining that asset, on the other. The former, he said, must be attributed to capital; and the latter, being a mere matter of maintenance, must be attributed, according to him, only to revenue. The validity of Lawrence, J's. Distinction has never been doubted in later English decisions, but has been affirmed, time and again. In the case of Associated Portland Cement Manufacturers Ltd. Kerr (1945) 27 T C 103, 111 (KB), for instance, Macnaghten, J., brought out the crux of the decision of Lawrence, J., in the Borax's case in the following passage(p.112): "The Borax company owned some real property abroad and it had to incur legal expenses' in defending its title to the property, and the question was whether those expenses should be treated as income or as capital expenses on that question there could,. I think, be little doubt that they were to be regarded as expenses properly chargeable to income." A similar view was expressed by Lord Greene M. R. In the same case of Associated Portland Cement Manufacturers Ltd. When it came up before the Court of Appeal. The learned Master of the Rules summarised the point of distinction laid down in Borax's case (1942) 10 I T R (Supp.); 23 T C 598 (K B) thus. "The money that you spend in defending your title to a capital asset, which is assailed unjustly, is obviously a revenue expenditure. There, again, there is all the difference in the world between defending your assets against the claim of somebody who has no claim against them, and acquiring a new asset of adding to an existing asset." In a later case, Cooke v. Quirk Shoe Repair Service (1949) 30 T C 460 (K B); a similar question arose. A shoe repair business was purchased by the tax-payer from another person. Under the purchase, it was the responsibility of the vendor to dis--charge all outstanding liabilities of the business, as on the date of the sale. The vendor, however, failed to do so. In the end, the tax-payer as purchaser of the business, bad to pay certain sums in discharge of the vendor's liabilities. This was done solely with a view to preserve the goodwill of the shoe-repair business and to ensure to the tax-payer continuity of supplies of raw materials and the like. Having discharged these liabilities, the tax- payer company claim--ed the outgoings as revenue expenditure. It was held that the expenditure was allowable as having been made on revenue account. Groom-Johnson, J., who decided this case, referred to the Borax's case and other earlier cases, and culled out their principle in the following terms : "The cases show that, if money is expended with a view to preserving an asset, the result of it is, once the Commissioners are satisfied of that circumstance, it may be deductible expenditure." In I. R. C. v Carron Company (1968) 45 T C 18 (H L) which is a case from Scotland, the tax-payer company was carrying on the business of iron founders under a Royal Chapter of 1973. By the 1950 many of the company's features had become archaic and unsuitable to modern industrial conditions. In conse--quence, the company's production was suffering from a progressive decline. They then applied for a revision of the charter and incurred expenditure in that connection. Subsequently, the company claimed the expenditure as revenue expenditure in the computation of
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the company's annual profits and gains chargeable to income-tax. In the case stated, the Commissioners for the Special Purposes of Income-tax specifically stated: "We could not see any new capital asset." On that basis, they concluded that the expenditure was revenue expenditure and allowable. On the case stated, the Court of Session of Scotland held that the object of the new charter was to remove obstacles to profitable trading and hence the expenditure was on income account. Lord Cameron, one of the members of the Court of Session. Put it on the ground that the expenditure was for maintenance of the tax-payer's business. He expanded the concept of maintenance expendi--ture with the following picturesque observations "The advantages to be gained were directed specifically to the existing business activities of the company, and the payments to settle the pending litigation were the price for removing grit which caused, and could cause, unacceptable failure in the company's machinery. The trading machinery required repair and modernising this was the purpose of the expenditure." The House of Lords agreed with the decision of the Court of Session and held that the expenditure was on revenue account. Lord Guest, in the House of Lords adopted the imagery of Lord Cameron that the expenditure incurred in obtaining the supplementary charter was to repair the business machinery and to remove the grit which could cause failure to that machinery. Lord Wilberforce in the same appeal particularly referred to the finding of the Special Commissioners that they "could not see any new capital asset", and regarded this finding as significant. The Borax ease was decided by Lawrence, J. In 1940. The Carron Company's case was decided by the House of Lords in 1968. In between arose the other cases we have mentioned. English text-book writers have referred to the payments which have figured in these cases, as "protection money payments". Throughout the period of three decades or four, after the Borax case was rendered, there has not been one case in which any Court had held that protection money laid out to protect or maintain a tax-payer's business is capital expenditure. In case after case the position was reiterated that it was revenue expenditure. In case after case, it was pointed out that only expenditure for acquisition of, and improvement to, the business would be capital expenditure. Our Supreme Court, with respect, was accordingly quite correct in observing in Dalmia Jain case that the distinction between the two types of expenditure with two different objectives, must be regarded as quite well-settled. We may now briefly refer to the facts in the Dalmia case. We do so for a better understanding of the principle laid down therein. In the case before the Supreme Court also, as in the instant case, the payment made by the assessee was in the nature of protection expenditure for protecting or maintaining the assessee's business. In that case a lease of government lands for quarrying limestone for a period of twenty years was promised by the State of Bihar to a mining company. Owing to some previously instituted litigation by a third party, the State Government did not deliver possession to the mining company. After the lands came under the government's possession, they directly appointed the assessee as their agent for working the quarry. The mining company then filed a suit for specific performance of the agreement for lease. They impleaded both the State Government and the assessee as party defendants. After the suit was disposed of but by the time a final decision could be rendered in appeal, the period of twenty years itself had expired, with the result that instead of a decree for specific performance in its favour, the mining company was awarded damages. The assessee was liable under the appellate decree to pay a portion of the damages. The assessee paid the amount. In its assessment to income-tax, the assessee claimed the payment as an item of revenue outgoing. The Supreme Court upheld the assessee's claim. The Court pointed out that at the time of the litigation, the assessee was carrying on the quarry business. The Court observed that the assessee did not get into the litigation of its own accord, but was dragged into it by the mining company. In these events, the Supreme Court held that the payment was made only to protect the assessee's business. It only remained for the Supreme
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Court thereafter to apply the principle, which, as they rightly observed, could be "deduced from the decided cases, and render their decision in that case to the effect that expenditure incurred to protect the trade or business of the assessee was a revenue expenditure. The Tribunal, however, were apparently unaware of this ruling of the Supreme Court in Dalmia case. There is no knowing whether they knew about the catena of English decisions on expenditure of this kind in which the distinction had been clearly marked. They relied, instead, on an observa--tion to be found in an earlier Supreme Court case in Jagamohan Rao v. C. I. T. (1970) 75 I T R 373 (SC), to support quite the opposite conclusion, namely, that an expenditure on protecting the title to one's business was only a capital expenditure. The passage on which the Tribunal placed reliance was as follows. "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
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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 Jagamohan 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 Jagamohan 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 Jagamohan 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.
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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…
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