1989 (2) TMI 179 - AT - Income Tax

Accounting Year, Assessment Year, Capital Asset, Partnership Deed, Per Annum, Tenancy Rights

Summary

Issues Involved:
1. Nature of the payment made to the retiring partner: whether it is capital expenditure or revenue expenditure.
2. Applicability of case laws cited by the assessee.
3. Validity of the CIT's invocation of jurisdiction under Section 263 of the Income-Tax Act, 1961.
4. Examination of the principles of natural justice.
5. Evaluation of the true nature of the payment based on the partnership and retirement deeds.

Detailed Analysis:

1. Nature of the Payment Made to the Retiring Partner:
The primary issue revolves around whether the payment of Rs. 12,000 per annum for five years to the retiring partner for the use of goodwill is capital expenditure or revenue expenditure. The CIT held that this payment was in fact a repayment of a capital asset and thus not allowable as a deduction in the computation of the firm's total income. The Tribunal upheld this view, noting that the payment was essentially for the acquisition of goodwill, which is a capital asset, and not merely for its use.

2. Applicability of Case Laws Cited by the Assessee:
The assessee cited two significant cases: Devidas Vithaldas & Co. v. CIT and Vithaldas Thakordas & Co. v. CIT, arguing that the payment should be considered as business expenditure. However, the Tribunal found these cases distinguishable. In Devidas Vithaldas & Co., the Supreme Court held that the payment was for a license and not for the sale of goodwill. The Tribunal noted that in the present case, the goodwill did not exclusively belong to the retiring partner, unlike in Devidas Vithaldas & Co. Similarly, in Vithaldas Thakordas & Co., the payment was for the user of goodwill granted by the widow of the original owner, which was not analogous to the present case where no such exclusive ownership of goodwill by the retiring partner was established.

3. Validity of the CIT's Invocation of Jurisdiction under Section 263:
The CIT invoked Section 263 of the Income-Tax Act, 1961, to revise the assessment order, deeming it erroneous and prejudicial to the interests of revenue. The Tribunal supported this action, referencing the Delhi High Court's decision in Gee Vee Enterprises v. Addl. CIT, which emphasized that the Income-Tax Officer (ITO) is not only an adjudicator but also an investigator. The ITO's failure to apply his mind or investigate the claim properly justified the CIT's revision of the assessment order.

4. Examination of the Principles of Natural Justice:
The Tribunal confirmed that the CIT adhered to the principles of natural justice by issuing a show cause notice and considering the written submissions and contentions of the assessee before concluding that the payment was for the acquisition of goodwill.

5. Evaluation of the True Nature of the Payment Based on the Partnership and Retirement Deeds:
The Tribunal examined the partnership and retirement deeds, noting that the goodwill of the partnership business did not exclusively belong to the retiring partner. The payment was structured as Rs. 12,000 per annum for five years and Rs. 1,000 per annum thereafter, irrespective of profits or losses. The Tribunal concluded that this arrangement was essentially a method to pay the retiring partner her share of the net partnership assets, including goodwill, in staggered instalments. This payment, therefore, was capital in nature. The Tribunal also noted that the close relationship between the partners suggested a tailor-made device to present the payment as revenue expenditure, which was not admissible.

Conclusion:
The Tribunal dismissed the appeal, upholding the CIT's revisional order that the payment of Rs. 12,000 per annum to the retiring partner was capital expenditure and not allowable as a revenue deduction. The Tribunal found that the CIT was justified in invoking Section 263 and that the case laws cited by the assessee were not applicable to the facts of the case. The principles of natural justice were duly followed, and the true nature of the payment was determined to be a capital repayment rather than a revenue expense.