1995 (5) TMI 47 - AT - Income Tax

Issues Involved:
1. Inclusion of income of M/s. Pathare Dhru & Co. in the hands of M/s. Dhru & Co.
2. Refusal of registration to M/s. Pathare Dhru & Co. under section 185.
3. Disallowance of Rs. 1,69,500 paid to the retiring partner.
4. Disallowance of Rs. 9,000 for repairs and maintenance.
5. Treatment of Rs. 18,952 spent on cupboards, partitions, etc., as capital expenditure.
6. Additional ground related to disallowance of Rs. 1,69,500 in the case of Dhru & Co.

Issue-wise Detailed Analysis:

1. Inclusion of income of M/s. Pathare Dhru & Co. in the hands of M/s. Dhru & Co.:
The main issue was whether the income of M/s. Pathare Dhru & Co. should be included in the hands of M/s. Dhru & Co. The assessee argued that the two firms were assessed as separate entities for previous years and had different clientele, establishments, and no interlacing of activities. The department contended that the firms had the same partners with identical shares, suggesting interlacing and interlocking of management and finances, thus justifying the inclusion of income. The Tribunal referenced several cases, including CIT v. G. Parthasarathy Naidu & Sons, Deputy Commissioner of Sales Tax (Law) v. K. Kelukutty, and CIT v. Sree Radhakrishna Industries, ultimately concluding that the two firms should be assessed separately, as there was no interlacing of activities. The Tribunal directed the department to treat the two firms as separate units for assessment purposes.

2. Refusal of registration to M/s. Pathare Dhru & Co. under section 185:
The Tribunal noted that M/s. Pathare Dhru & Co. had applied for registration and provided the necessary documentation. Given the decision to treat the two firms separately, the Tribunal directed the Assessing Officer to grant registration to M/s. Pathare Dhru & Co. for the assessment year 1987-88, with the substantive assessment in the status of a registered firm.

3. Disallowance of Rs. 1,69,500 paid to the retiring partner:
The payment of Rs. 1,69,500 to the retiring partner, Mr. P.G. Pathare, was claimed as a revenue expenditure. The department treated it as a capital expenditure. The Tribunal, referencing cases such as CIT v. Late G.D. Naidu and CIT v. Coal Shipments (P.) Ltd, determined that the payment was for preserving the firm's business by preventing Mr. Pathare from competing for two years. It was not for acquiring a capital asset or enduring benefit. Thus, the Tribunal allowed the expenditure as a deduction under section 37(1) of the Act.

4. Disallowance of Rs. 9,000 for repairs and maintenance:
The Assessing Officer disallowed this expenditure due to a lack of vouchers and evidence. The Tribunal upheld this decision, declining to interfere.

5. Treatment of Rs. 18,952 spent on cupboards, partitions, etc., as capital expenditure:
The expenditure on cupboards, partitions, and interior decorations was treated as capital expenditure by the Assessing Officer. The Tribunal agreed, noting that the expenditure was for acquiring new assets, thus rightly treated as capital in nature.

6. Additional ground related to disallowance of Rs. 1,69,500 in the case of Dhru & Co.:
Given the Tribunal's decision to exclude the income of M/s. Pathare Dhru & Co. from the hands of Dhru & Co., and the substantive assessment of the payment to the retiring partner in the case of Pathare Dhru & Co., the additional ground in the case of Dhru & Co. was deemed infructuous.

Conclusion:
The Tribunal allowed ITA 8912 in relation to the main dispute, dismissed the additional ground as infructuous, allowed ITA 8911 of Pathare Dhru & Co., and partly allowed ITA 8910 of Pathare Dhru & Co. The decisions ensured that the two firms were treated as separate entities for assessment purposes, granted registration to M/s. Pathare Dhru & Co., allowed certain expenditures as revenue, and upheld others as capital.

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