1985 (8) TMI 106 - AT - Income Tax

Summary

Issues Involved:
1. Jurisdiction of the CIT under Section 263.
2. Doctrine of merger.
3. Disallowance of Rs. 2,40,000 paid to outgoing partners.

Issue-wise Detailed Analysis:

1. Jurisdiction of the CIT under Section 263:

The assessee contended that the CIT had no jurisdiction to review the order of the IAC(Asst.) under Section 263, arguing that Section 125A(4) is merely an enabling provision and that Section 263 was amended only w.e.f. 1st Oct., 1984, and thus not applicable retrospectively. The CIT, however, rejected these contentions, stating that the IAC(Asst.) and ITO have identical rights and obligations under the Act, and thus, the CIT had the authority to revise the order under Section 263. The Tribunal upheld the CIT's jurisdiction, noting that the IAC(Asst.) functions as an ITO and is subject to the CIT's revisionary powers. The Tribunal referenced the Supreme Court decision in Jogendra Nath Naskar vs. CIT, which supports the interpretation that the Explanation added to Section 263 is clarificatory.

2. Doctrine of Merger:

The assessee argued that the order of the IAC(Asst.) had merged with the order of the CIT(A) and thus, the CIT could not pass an order under Section 263. The Tribunal, however, disagreed, referencing the doctrine of partial merger. According to the Tribunal, only the part of the assessment order that was the subject of the appeal merges with the appellate order. Since the issue of the Rs. 2,40,000 payment was not part of the appeal before the CIT(A), there was no complete merger. The Tribunal cited the Madhya Pradesh High Court decision in CIT vs. R. S. Banwarilal, which supports the doctrine of partial merger.

3. Disallowance of Rs. 2,40,000 Paid to Outgoing Partners:

On the merits, the Tribunal found that the payment of Rs. 2,40,000 to the outgoing partners was justified. The assessee argued that the payment was for future profits, similar to the case of Kartar Singh Dugal, and thus deductible. The Tribunal agreed, noting that the payment was made to the outgoing partners for their share of future profits from pending contracts, and the nomenclature of "goodwill" in the books did not change the nature of the payment. The Tribunal referenced the Punjab and Haryana High Court decisions in Kartar Singh Dugal and Sukhbir Parshad vs. CIT, which support the deduction of such payments as revenue expenditure. The Tribunal concluded that the IAC(Asst.) was justified in allowing the deduction under Section 154, and the CIT was not justified in disallowing it under Section 263.

Conclusion:

The Tribunal dismissed the assessee's contentions regarding the jurisdiction of the CIT and the doctrine of merger but accepted the assessee's contention on the merits, allowing the deduction of Rs. 2,40,000 paid to the outgoing partners. The appeal was thus partly allowed.