Judgment:
1. This appeal is directed against the order of the CIT(A)-XII, Calcutta.
2. The assessee is a partnership firm consisting of four partners. Sri P. Raichowdhury is the managing partner of the firm having 60 per cent share, whereas his son has 30% share and two brothers have 5% each.
Assessee deals in manufacturing as well as trading of engineering goods. The managing partner Sri P. Raichowdhury is said to be the founder and the live-wire of the business. During the accounting year relevant to the assessment year 1991-92, assessee-firm claimed deduction of a sum of Rs. 30,438 referable to the medical expenses incurred in connection with treatment of the managing partner. The aforesaid expenditure was incurred for purchase of Pace Maker.
Assessing Officer was of the opinion that the expenditure is exclusively personal in nature and not related to the business. He thus disallowed the claim.
3. Aggrieved, assessee contended before the first appellate authority that there is no bar in allowing such expenditure either under section 40(b) or under section 37 of the Act. He further submitted that the managing partner, being the founder partner, protection of his life was necessary in order to protect and preserve the business of the assessee-firm. It was further explained that the earning capacity of the firm very much depended upon the activities of the managing partner and, therefore, the expenses incurred by the assessee on the treatment of Mr. P. Raichowdhury was attributable to the business interest of the assessee-firm. He has relied upon several case laws in this regard.
However, the Commissioner (Appeals) observed that the concept of business necessity could not be stretched so far as to cover health and well-being of the partner/proprietor of a business. He thus confirmed the disallowance.
4. Further aggrieved, assessee is in appeal before us. Ld. counsel for the assessee contended that any expenditure incurred on a partner or payment made to a partner has to be decided with reference to the provisions of section 40(b)/37 of the IT Act. Explaining further on this aspect, ld. counsel for the assessee submitted that under section 40(b), items of payment which are not deductible were specified, such as salary, bonus, commission, etc. and any other expenditure which is not hit by the provisions of section 40(b) cannot be disallowed by invoking the said provision. In this regard he relied upon the following two decisions wherein the analogous provision under the 1922 Act [sec. 10(4)(b) of the Act] was considered : Explaining further he contended that the expenditure on medical treatment of the managing partner was necessary in the interests of business as he was the live-wire of the business and hence the expenditure can be said to be wholly and exclusively spent for the purpose of business of the assessee-firm and allowable u/s. 37 of the Act. Ld. counsel supplied figures of total income in respect of the subsequent assessment years to show that the turnover and the profit increased from year to year due to the efforts of the managing partner, who is well-conversant in the business.
5. On the other hand, ld. departmental representative submitted that the expenditure is primarily a personal expenditure of a partner which is not allowable under section 37 of the Act. He further submitted that the expenditure cannot be said to be wholly and exclusively for the purpose of business and the so called consensus of the partners for incurring such expenditure on behalf of the firm cannot be accepted on the face of it particularly because the managing partner has major share and the other three partners were son and brothers of the managing partner.
6. We have carefully considered the rival submissions and also perused the records. The case law cited by the ld. counsel for the assessee, in our opinion, do not help the stand taken before us. In the case Heastie (supra) at page 462, Lord Justice Romer gave an illustration of a wine merchant, who is also partner in the firm and in that context observed that if wine is supplied in the hotel run by the partnership firm, the amount paid to the partner for supply of wine cannot be disallowed. We fail to understand how the aforesaid illustration given by the Court helps the assessee's case herein. On the other hand, his Lordship Justice Romer had observed that where two persons agreed together to carry on a business or profession in partnership, it is no more possible, in ascertaining the profits of the firm, to deduct the salary paid to one or both of them for the work they have done for carrying on that business. The other decision cited by the ld. counsel, R.A.Goodsir & Co.'s case (supra), is a case of commission payment by the firm to the partner and their Lordships held that it is hit by section 10(4)(b) of the IIT Act, 1922. In our opinion, this case also does not directly apply to the facts of the instant case. No doubt, certain observations of the Court in the aforesaid two cases were pointed out by the ld. counsel to show that payment made to the partner, for letting out the immovable property owned by him in individual capacity, is not hit by the provisions of section 10(4) of the old Act, section 40(b) of the 1961 Act, but as could be seen from the assessment order, in the instant case, the tax authorities have not invoked the provisions of section 40(b). Thus, the argument advanced by the ld.counsel for the assessee that the payment made by the firm for purchase of Pace Maker is not hit by section 40(b) is not in dispute. However, in order to allow a deduction, in respect of any payment made by the firm, it has to be seen as to whether the payment satisfies the test laid down under section 37 of the IT Act, 1961. Section 37 states that a payment is allowable if the same is incurred wholly and exclusively for the purpose of the business. It is the case of the assessee that the aforesaid expenditure is wholly and exclusively incurred for the purpose of business, inasmuch as, but for the active involvement of the managing partner, the business of the firm may cripple. For the purpose of earning income from business, it is necessary to keep the health of managing partner in suitable condition. However, we are not convinced with the aforesaid contention of the ld. counsel for the assessee. The words 'wholly and exclusively' used in section 37(1) of the Act, in our opinion, mean totally, completely and wholly to the exclusion of other things. In the instant case, the expenditure primarily benefits the partner as he wishes to live longer. In the case reported in Shanti Bhushan v. ITO [1992] 41 ITD 562, the Delhi Bench of the Tribunal had an occasion to consider a similar issue wherein it was observed that expenditure incurred on medical treatment is not allowable as deduction as the primary purpose in incurring such expenditure was to live longer and all other considerations including that of earning or augmenting professional income were secondary. The Bench further held that such expenditure could not be said to be incurred wholly and exclusively for the purpose of profession. Similar view was taken by the Bombay Bench of the Tribunal in the case reported in Dhimant Thakkar v. Fifth ITO [1994] 51 ITD 578 wherein it was observed that if the expenditure can be attributed to both the purposes, i.e., professional as well as personal, then it cannot be allowed under section 37. It was further observed therein that expenditure on medical treatment of eyes had an element of personal expenditure and hence could not be allowed as business expenditure under section 37(1) of the Act. In our opinion, the aforesaid two decisions of the Tribunal directly cover the issue.
It may not be out of place to observe that Sri P. Raichowdhury, managing partner, has 60% share in the business and another 30% share is held by his son, whereas, only for the rest of 10%, his brothers were partners. In such an event of the matter, it cannot be said that the so called agreement, between the partners orally, to spend the amount of Rs. 30,438, in the better interest of the partnership firm, is really in the interests of business. The assessee also contended that the profits of the firm have gone up from year to year and this is attributable to the efforts of the managing partner. We are concerned herein with the assessment year 1991-92 where the assessee firm returned an income of Rs. 79,000 only and compared to the total income, the medical expenditure consists a larger percentage of the total profits which cannot be said to have been spent in the interest of the business. Looking to the facts and circumstances of the case, we are of the opinion that the expenditure on purchase of Pace Maker is a personal expenditure of the managing partner and the same cannot be allowed in the hands of the firm under section 37 of the Act. We, therefore, confirm the disallowance.
7. Ground No. 2 relates to the disallowance of expenditure of a sum of Rs. 2,358 incurred by the assessee in connection with the payment of subscription to the Rotary Club. Assessing Officer as well as the CIT(A) have rejected the claim of the assessee without assigning any reasons. Before us, ld. counsel for the assessee contended that in the present day of socio business environment, membership in the club is necessary and it is allowable as expenditure incurred wholly and exclusively for the purpose of business. Ld. counsel relied on the decision of the Hon'ble Gujarat High Court in the case of Gujarat State Export Corpn. Ltd. v. CIT [1994] 209 ITR 649. On the other hand, ld.Departmental representative supported the order of the Commissioner (Appeals).
8. On a careful consideration of the rival submissions and on perusal of the case law cited by the ld. counsel for the assessee, we are of the opinion that the assessee is entitled to claim deduction of a sum of Rs. 2,358, inasmuch as, the payment of subscription to the Rotary Club is revenue expenditure incurred for the purpose of business.
Assessing Officer is directed accordingly.
9. Ground No. 3 is not pressed by the ld. counsel for the assessee. Ld.
departmental representative has no objection in this regard. We, therefore, dismiss ground No. 3 as not pressed.