2023 (11) TMI 330 - AT - Income Tax

Nature of expenditure - amount paid on retirement of partner - Allowable revenue expenditure or capital expenditure - as per AO cannot be allowed as deduction and, accordingly, added to the closing work-in-progress by disallowing the same as deduction u/s 37(1) - CIT(A) held that the provisions of section 45(4) has no application and, therefore, disallowance of payment by holding to be capital expenditure is not justified, it should be allowed as revenue expenditure - AR submits that the amount was paid to the retiring partner on account of settlement arrived at between two partners towards the expenditure incurred at that time and, therefore, it is not the amount paid to the retiring partner. HELD THAT - As carefully gone through the registered settlement deed, wherein, it clearly shows that the amount was paid to the retiring partner in terms of settlement arrived at between two partners for giving up his interest in the partnership firm, there cannot be any dispute that the amount paid to a retiring partner for giving up his interest in the partnership firm is a capital expenditure. See Sangam Enterprises 1999 (6) TMI 16 - ANDHRA PRADESH HIGH COURT and Standard Makings Allied Products Corpn 1997 (1) TMI 49 - GUJARAT HIGH COURT CIT(A) without appreciating proper facts of the case went on to hold that the payment of money to the retiring partner is revenue expenditure. In the circumstances, the findings of the ld. CIT(A) cannot be accepted in the eyes of law. Therefore, the decision of the ld. CIT(A) is reversed. Thus, the grounds of appeal filed by the Revenue stand allowed.

Summary

Issues involved:
The judgment involves the issue of whether the amount paid to a retiring partner by a partnership firm for giving up their interest should be treated as a revenue expenditure or a capital expenditure.

Summary:

Issue 1: Nature of expenditure paid to retiring partner

The case involved a partnership firm engaged in land development that paid an amount to a retiring partner, Kumar Housing Corporation Limited. The Assessing Officer disallowed this amount as a deduction under section 37(1) of the Income Tax Act. On appeal, the CIT(A) held that the payment should be treated as a revenue expenditure and not a capital expenditure. The Revenue challenged this decision, arguing that the payment was of a capital nature. The Tribunal examined the settlement deed and relevant case law, concluding that the amount paid to the retiring partner was indeed a capital expenditure. Citing precedents, the Tribunal held that the CIT(A)'s decision was incorrect, and the payment should be treated as a capital expenditure. Therefore, the appeal by the Revenue was allowed.

This judgment clarifies the distinction between revenue and capital expenditures in the context of payments made to retiring partners by partnership firms involved in land development. The Tribunal's analysis of the settlement deed and relevant legal precedents provides guidance on how such payments should be treated for tax purposes, ensuring consistency and adherence to established principles in determining the nature of such expenditures.