SALEEM AKHTAR, J.- 1. The applicant is a private limited Company. It is a partner in a registered firm styled as M/s. Bridge Stock & Co. During the assessment years 1971-72 and 1972-73 the applicant claimed expenses under the head salaries, general charges and professional charges etc. Against its share income received from the firm. It was pleaded that the applicant being a juristic person carries on its business through its employees find therefore, any amount spent on that account was a permissible deduction under section 10 of the Income Tax Act. This contention was not accepted by the Assessing Officer and even the Tribunal repelled the same. The Tribunal was of the view that the applicant is a partner in a firm which carries on business and its profits are determined after deducting all expenses incurred for earning profits from the business and the partners have not to do anything or to incur any expenses for earning that profit. It was further observed that expenses incurred after the profit has been struck cannot be said to have been incurred for the purposes of business. On application made by the applicant the following question has been referred to the High Court:- "Whether on the facts and in the circumstances of the case the Tribunal was right in holding that expenditure incurred by the partner in a Firm was not deductible from the shares of profits received from the firm?"
2. To correctly appreciate this question it has to be seen what is the demand of the applicant. It is claiming expenditure in running its own business. Its business is to be a partner in the firm or be a share holder in other companies. According to the applicant it carries its own business independent of being a partner or a share holder in any Firm or company, and therefore, it is entitled to deduct all such expenses which are incurred necessarily for the purposes of running this business. The approach of the Department and the Tribunal has been somewhat different.
According to them applicant being a partner has earned profit from the firm, and therefore, the question of any further expense incurred in obtaining or earning that profit which it has received from the firm does not arise.
3. The applicant is not claiming deduction merely because it is a partner, but on the plea that being an independent company it is running its own business independently by becoming partner or share holder in the firm or company. Therefore, it should .First be ascertained whether the applicant is engaged in conducting any business and its income is chargeable under the head business. The applicant is a partner in a firm actively engaged in business. It derives income from such business by reason of its partnership and earns profit. Being a partner it has to submit return for its total income. By virtue of sections 23 and 24 it is entitled to set off any loss sustained in the business. Therefore, any income earned by the applicant by reason of its being a partner is an income derived from business. The assessee cannot challenge the figure of profits arrived at on the assessm ent of the firm nor can it claim any deduction which could have been claimed by the firm. But a partner can claim in his individual assessment such deductions which are permissible to an assessee under section 10.
4. Mr. Virjee has referred to Shantikumar Narottam Mooiajee v. CIT Bombay City (1955) 27ITR 69. In this case the assessee was a partner of registered firm and he had borrowed two loans. One of the loans was taken from the assessee's relations and he had pledged his rights in the firm to secure the loan. The other loan was obtained for paying off some of his father's creditors who had threatened to attach the father's share in the firm. The assessee's father was partner in the firm before his death and he had left a large number of debts. The assessee claimed that interest' paid on money borrowed was permissible deduction from the profit shown by him in respect of the share in the firm. As there was no evidence to justify that the loans were borrowed in order to enable the assessee to earn profit in the firm the interest paid on the loan was not a justifiable deduction. While considering whether a partner in a registered firm is entitled to claim any deduction against the share of the profits included in his total income it was observed as follows:-- "It is well settled that the profits and gains contemplated by the Legislature under section 10 are the true profits and gains and ordinarily the true profits and gains must be ascertained from the point of view of commercial accounting. In a well known case the Privy Council in Income-tax Commissioner v. Chitnavis considered whether a bad debt was an admissible deduction at a time when there was no provision in section 10 (2) with regard to bad debts, and the Privy Council stated that "although the Act nowhere in terms authorises the deduction of bad debts of a business, such a deduction is necessarily allowable. What are chargeable to income-tax in respect of a business are the profits and gains of a year; and in assessing the amount of the profits and gains of a year account must necessarily be taken of all losses incurred, otherwise you would not arrive at the true profits and gains". These observations would equally apply to the share of a partner in a registered firm which is being assessed to tax. It is not the share as ascertained on the assessment of the firm what is liable to tax, but the share as representing the true profit of the partner". "The deduction which would ordinarily be allowed to him would be a deduction which was necessary in order that the assessee was enabled to earn the income which represented the share in the profits. If it was incumbent upon the assessee to spend an amount in order that he should be in a position to remain a partner and to earn the profit, it may be argued that that was a permissible deduction because without allowing that deduction the share of the profits would not represent the true income of the assessee. Therefore, as far as this reference is concerned, the view we take is that it is not correct as a general legal proposition that a partner in a registered firm is not entitled to claim any deduction against the share of the profits included in his total income, the share having been arrived at on the assessm ent of the firm with regard to its profits. It would be open to the assessee to claim a deduction provided he satisfies the taxing authority that such deduction represents a necessary expenditure, the expenditure being incurred in order to enable him to earn the profits which were being subjected to tax".
5. We have noticed that this judgment was considered and approved by the Supreme Court of India in Commissioner of Income Tax v. Ramnikal Kothari (1969) 74ITR 57. In this case the question was "whether the expenses incurred by the assessee (who was not carrying on any independent business) in earning income from various firms in which he was a partner, are allowable in law as deduction". While upholding the judgment of the High Court which had answered in the affirmative it was observed:- "Business carried on by a firm is business carried on by the partners. Profits of the firm are profits earned by all the partners in carrying on the business. In the individual assessment of the partner, his share from the firm's business is liable to be taken into account under section 10 (1). Being income from business, allowances appropriate under section 10 (2) are admissible before the taxable income is determined".......................................................................................
"Section 23(5) (a) (ii) provides that the share of the partner in the profits and gains of a registered firm shall be included in the total income of the partner; and section 16(1) (b) requires that salary, interest, commission or other remuneration payable by the firm besides the share in the balance of profit is to be taken into account in determining the total income. But it is not thereby implied that expenditure properly allowable in earning the profits, salary, interest, commission or other remuneration is not to be allowed in determining the taxable total income of the partner. The receipt by the partner is business income for the purpose of section 10 (1), and being business income, expenditure necessary for the purpose of earning that income and appropriate allowances are deductible therefrom in determining the taxable income of the partner".
6. The learned counsel relied upon Commissioner of Income Tax Bombay City v. K R. Irani (1963) 48 ITR 525. In this case the assessee was an Architect and Civil Engineer. He was partner in two registered firms. During assessm ent year 1956-57 the assessee claimed Rs. 15,337 as deduction representing payment made by him towards bonus to the employees of the firm. The payment and benefits to the firm were not disputed. The Assessing Officer refused the deduction which was maintained in Reference. The facts of this case are completely different, but establish the rule that once the share of a partner in the profit of the firm is ascertained, deduction therefrom can be claimed by the partner. In order to claim such deduction the assessee should establish that he is carrying on business and the deduction claimed has been incurred exclusively for the purposes of his business.
7. In Feroz H. Kundianawala v. Commissioner of Income Tax (1978) 113 ITR 873 relied by Mr. Virji, it was held that respondent who was a partner in four firms but did not carry on any independent business was entitled to deduct from his share of the profits from the firms, expenses incurred to enhance the profits of the firm.
8. From the aforestated authorities it is clear that where a partner in a firm earns profits out of the business of the firm and in his individual assessment claims any expenditure incurred in earning that profit he is entitled to such deduction in respect of his own business. If a partner is able to establish that expenditure claimed by him was incurred wholly and exclusively for the purposes of his business and was spent in view of commercial expediency to earn the share of his profit from the firm he would be entitled to claim deduction of such expenses under section 10(2)(xvi) of the Income Tax Act. It is the total income of a partner and not the profits of the firm which is under consideration as income from business under section 10 earned by him. In order to arrive at the true profits and gains of the assessee permissible deductions have to be allowed. Unless such allowances are made true profits can not be calculated.
9. Applying the aforestated principles on the facts of the present case we find that the applicant is claiming deduction of expenses which it has incurred for the purposes of arranging, realising and earning the share of profits in a registered firm. The Assessing Officer or the Tribunal have not found at any stage that these expenses were not incurred for this purpose. Therefore we answer the question in the negative.