1987 (2) TMI 14 - HC - Income Tax

Summary

Issues Involved:
1. Whether the sum of Rs. 80,000 paid by the assessee to the outgoing partners is a revenue expenditure for the assessment year 1974-75.
2. Interpretation of clauses in the deed of dissolution to determine the nature of the payment.
3. Applicability of relevant case laws and legal principles to the facts of the case.

Issue-wise Detailed Analysis:

1. Whether the sum of Rs. 80,000 paid by the assessee to the outgoing partners is a revenue expenditure for the assessment year 1974-75:

The assessee, M/s. Purandas Ranchoddas & Sons, claimed Rs. 80,000 paid to the outgoing partners as revenue expenditure under section 37(1) of the Income-tax Act, 1961. The Income-tax Officer and the Appellate Assistant Commissioner disallowed the claim, treating it as capital expenditure. However, the Income-tax Appellate Tribunal allowed the claim, considering it business expenditure. The High Court needed to determine whether this amount was indeed a revenue expenditure.

2. Interpretation of clauses in the deed of dissolution to determine the nature of the payment:

The court examined the clauses of the deed of dissolution dated January 6, 1973. Clauses (3), (4), (5), (7), (11), (12), and (13) were particularly relevant. These clauses indicated that the outgoing partners relinquished all their rights and interest in the firm, including goodwill, stock-in-trade, trademarks, and other assets, in consideration of Rs. 80,000. The court noted that the old partnership was completely dissolved, and a new partnership was formed with the remaining partners continuing the business under the same firm's name. The clauses specified the trades each party could carry on post-dissolution, indicating a total cessation of the relationship between the outgoing and remaining partners.

3. Applicability of relevant case laws and legal principles to the facts of the case:

The assessee relied on the case of Devidas Vithaldas & Co. v. CIT [1972] 84 ITR 277 (SC), where the Supreme Court held that the legal character of the transaction must be determined by the terms of the contract. The court distinguished this case, noting that there was no express contract authorizing the use of goodwill in the present case. Instead, the dissolution deed indicated a complete relinquishment of rights by the outgoing partners. The court also considered the case of General Auto Parts v. CIT [1981] 128 ITR 519 (Delhi), where payments made on the distribution of assets of a dissolved partnership were held to be capital in nature.

The court concluded that the payment of Rs. 80,000 was for the acquisition of a capital asset, i.e., the goodwill of the firm, and thus constituted capital expenditure. The court emphasized that the expenditure was incidental to the reconstitution of the business and not to the carrying on of the business. Consequently, the Tribunal erred in treating the expenditure as revenue in nature.

Conclusion:

The High Court held that the sum of Rs. 80,000 paid to the outgoing partners was capital expenditure and not revenue expenditure. The question was answered in favor of the Revenue and against the assessee. The Tribunal's decision to treat the expenditure as revenue was found to be an error of law.