9911796707
TMI Blog1989 (9) TMI 183X X X X Extracts X X X X X X X X Extracts X X X X ..... ive partners in this partnership firm doing business of exhibition of cinematograph films in a cinema theatre constructed by them called Eros Theatre. They are (1) Mr. H.M. Manekji, (2) Mrs. Evalyn Manekji, (3) Mrs. Aimai N. Irani, (4) Mrs. Shirley Carey, and (5) Mr. Darius N. Irani. The terms and conditions of the partnership were said to be evidenced by the partnership deed dated 25-1-1972. Copy of the said partnership deed was not filed anywhere. After carrying on the said business themselves for some time the partnership let out the theatre to Shri Manikkavasagam, son of Shri Vedadri under a lease deed dated 17-5-1976 registered as Document No. 1265 of 1976. Despite the theatre having been let out to Shri Manikkavasagam and despite the lessee running the theatre, the original partnership of five partners was continuing as lessor of the theatre. The Profit and Loss, balance sheet, the partners capital and current accounts of the said firm for the period from 1-7-1978 to 5-6-1979 were furnished at pages 11 to 14 of the paperbook filed before me. From the entries found in the partners capital accounts of this firm relating to the said period it is found that the assets of the firm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nts of the firm shall be closed as usual in the normal circumstances and the proportionate income or loss as up to date of the above referred happening shall be credited or debited as the case may be, in such partner's account and all amounts found payable to such partner shall be paid within a period of six months from the date of such happening. It is specifically agreed among the parties of all parts herein that no partner shall claim any amount towards goodwill, either at the time of retirement or dissolution of the firm. " 5. It is the case of the assessee that dissolution of the firm had taken place on 15-9-1979 and the said dissolution was stated to have been evidenced by a deed dated 28-9-1979. A copy of the dissolution deed was furnished in the paper compilation filed before me. In the said deed it was acknowledged that Mr. H.M. Manekji, Mrs. Evalyn Manekji, Mrs. Aimai N. Irani, Mrs. Shirley Carey and Mr. Darius N. Irani had a total capital outlay of Rs. 4,50,000 to their credit. It is agreed in the deed of dissolution that the above five parties (which is for the sake of brevity hereinafter called the Parsi group) were allowed to withdraw Rs. 4,50,000 from the firm towa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tor of cinematograph films under the same name and style or such other name and style as they deem fit. The dissolution deed empowered the Tamil group of partners to get their name mutated in cinematograph licence, electric licence as legal owners of the theatre. So also they are entitled to change the existing telephone in the theatre in their name. The Tamil group of partners undertook to discharge Schedule 'C' liabilities by themselves and they agreed to indemnify the Parsi group of partners for their failure to discharge the liabilities mentioned in Schedule 'C'. The Parsi group of partners undertook to make available the records and documents relating to Suit No. C.S. 365 of 1979 on the file of Madras High Court to the Tamil group of partners. It was also agreed that if the Tamil group of partners are going to get vacant possession of the theatre from the lessee, Shri Manikkavasagam, they can do so at their cost without rendering the Parsi group liable in any manner. In Schedule 'A' to the dissolution deed the immovable properties possessed by the firm were all mentioned. Simply stated, it comprised of the site in which the Eros Theatre was located along with the Eros Theatre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m under the so called deed of dissolution dated 28-9-1979 with effect from 15-9-1979. 7. For the assessment year 1981-82 the assessee-firm submitted its original return dated 3-12-1981 admitting a consolidated income of Rs. 13,782 for the whole accounting year from 15-9-1979 to 15-9-1980. Subsequently on 20-12-1982 the assessee itself revised its return and admitted a total income of Rs. 20,225 for the period from 1-7-1979 to 15-9-1980. The break up of the income for the two periods is as follows : Rs. 6,443 for the period from 1-7-1979 to 15-9-1979 and Rs. 13,782 for the period from 16-10-1979 to 15-9-1980. For the preceding year, which is immediately preceding the assessment year 1981-82 the assessee claimed depreciation of Rs. 3,784 on assets including land and buildings, furniture and electrical equipment. However, for the present assessment year 1981-82 the assessee claimed depreciation on the enhanced value of the assets. The difference between the old value and the enhanced value of the following assets are found to be as follows : Old value Enhanced value Land ... Rs. 10,000 Rs. 7,08,000 Building ... Rs. 69,702 Furniture ... Rs. 1,205 Rs. 32,000 Electrical equip ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... against Rs. 37,341 claimed by the assessee, the Income-tax Officer allowed only Rs. 6,723 for the assessment year 1982-83. For the assessment year 1981-82 as against the full claim of Rs. 36,773 the depreciation allowed was only Rs. 4,328. 9. Against the disallowance the assessee went up in appeal before the Appellate Assistant Commissioner, 'E' Range, Madras. The assessee put forward the following contentions : The assessee-firm had revalued the assets prior to the admission of the new partners who had contributed capital based on the revaluation of the properties. The Income-tax Officer did not consider the fact that the old firm (comprising of Parsi and Tamil groups of partners) had been actually dissolved and the new firm was formed. The partners of the new firm (Tamil group of partners) paid for the new value of the properties and hence were eligible for the depreciation on the cost of assets to them. The Appellate Assistant Commissioner, however, observed that the Income-tax Officer had correctly allowed depreciation on the written down value of the assets and also correctly disallowed the assessee's claim for depreciation on the appreciated value of the assets. Hence these ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... imal Amar Talkies v. CIT [1982] 138 ITR 660. He further contended that even according to the provisions of the Partnership Act the dissolution was not complete. The firm was taken over as a going concern and if it is taken over as a going concern no revaluation is permitted. Reliance is placed upon the Andhra Pradesh High Court decision in Addl. CIT v. Allada Kanthayya [1981] 127 ITR 401. He also relied on the Karnataka High Court decision in Sangam Silks v. CIT [1980] 122 ITR 479. The learned departmental representative contended that the case of the assessee was that the revaluation of assets held by the then firm took place on 5-6-1979 and not on 15-9-1979. On 5-6-1979 the firm comprised of only five partners (Parsi group). The Tamil group of partners was inducted only on 6-6-1979. He argued that revaluation does not bring about a new asset. From the narration of facts it can be seen he argues that there are three firms in existence, (i) the firm which was in existence before 6-6-1979, (ii) the firm which was in existence from 6-6-1979 to 15-9-1979, and (iii) the firm which was in existence after 16-9-1979. According to the assessee the revaluation of assets took place when th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... allotment of a particular partner. The concept of partition or the concept of co-owners of the property dividing or agreeing to divide such property in severalty can never apply to what happens when a firm is dissolved, and one property or another is allotted to a partner. This principle was reiterated in the subsequent decision of the Supreme Court in CIT v. Dewas Cine Corpn. [1968] 68 ITR 240 and by the Gujarat High Court in Chief Controlling Revenue Authority v. Chaturbhuj AIR 1977 Guj. 1. Therefore I am unable to agree with the learned counsel for the assessee when he argues that the Tamil group of partners were admitted into the partnership as co-owners of the assets of the partnership after paying a consideration therefor, namely, Rs. 4,75,000. Up to 5-6-1979 the firm comprising of Parsi group of five partners was running the firm. From 6-6-1979 both the Parsi and the Tamil groups, totally comprising eight partners, were running the firm. The case of the assessee that a complete dissolution took place between 5-6-1979 and 15-9-1979 was never established. Therefore I hold that when the three Tamil groups of partners were admitted into the partnership no succession of one firm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve of its real character. The real character of the deed can be found out only on a consideration of all the contents of the said document. I have gone fully through the so-called deed of dissolution dated 28-9-1979. I am of the opinion that the deed appeared to be that of a deed of retirement under which the Parsi group of partners had walked out of the firm after accepting Rs. 4,40,994 towards their share and they have relinquished all their rights and liabilities in favour of the Tamil group of partners. The relinquishment of the rights of the Parsi group was not in favour of any one in the Tamil group of partners but in favour of all the three of them. No regular account taking or settlement of accounts took place within all the partners. The assets and liabilities of the firm were not discharged fully and completely. For instance the suit claim for Rs. 90,000 was pending against the firm in C.S. No. 365 of 1979 on the file of the High Court of Madras and this liability was taken over by the Tamil group of partners under the terms of the so-called dissolution deed dated 28-9-1979. Therefore, the deed dated 28-9-1979 can more appropriately be called a deed of retirement of the P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ive to hold or more appropriately be held as retirement deed and not dissolution deed. (6) Incoming partners by their capital contribution would not acquire any fractional interest in any particular asset among the plant and machinery held by the firm. At any particular point of time during the currency of the firm the right of a partner is the right to work out his share in the excess of assets over the liabilities of the firm. (7) It is not correct to say that dissolution deed transfers the interest of the Parsi group of partners in A, B and C Schedule properties and liabilities to the Tamil group of partners. What all the Parsi group can be said to have done under that deed was to transfer their interest in the firm to the Tamil group of partners. Unless and until the result of the firm was arrived at in between the Tamil partners and a dissolution and rendition of accounts took place between them, it cannot be said that the assets in A and B Schedule properties, mentioned under the deed dated 28-9-1979, cease to belong to the firm or that the firm dissolved and that the Tamil group of partners acquired individual rights to the plant and machinery. (8) From the facts and circums ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rom 1-10-1964 and all the four of them have executed a partnership deed dated 19-10-1964. R and his wife retired from the partnership on 31-10-1964 after relinquishing their rights from the partnership in favour of N and JM on payment of the amounts due to R, his wife and his three sons as per the credits appearing in their favour in the account books of the firm as on 31-10-1964. Subsequently a new partnership was constituted between N and JM on 1st November, 1964. For the assessment years 1967-68 to 1971-72 the assessee-firm claimed depreciation on the enhanced value of the mill assets, i.e., on Rs. 33,50,000. However, the Income-tax Officer granted depreciation only on the written down value of the relevant previous years. The Tribunal upheld the assessee's claim for depreciation on the revalued value of the mill assets. The matter was taken on reference to the High Court. The High Court held that it was a case of reconstitution of the firm and there was no dissolution of the firm. The same assessable entity continued even after 30-9-1964. In those circumstances the assessee-firm could claim depreciation only on the written down value of Rs. 14,61,621. In the present case also o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st necessarily be its cost to him at the time of partition, whether mentioned in the partition deed or ascertained aliunde. If the valuation of the property for purposes of partition was not notional but was real and that was the basis for allocating properties to different members, the cost of a property allotted to a member cannot be that at which it was purchased by the joint family in the remote past, but would be the value given to it for the purpose of allotment or at which it was auctioned for the purpose of partition ". Firstly the case was that of a partition between Hindu coparceners. The sine qua non to apply the ratio of the said decision is that one should give a finding that at the time of partition the valuation put against the property belonging to the joint family was not notional but was real, on the basis of which only the allotment of shares took place. However, in this case, as already held by me, contributing the share capital of Rs. 4,75,000 and being inducted as partners of the firm does not amount to getting the rights as a co-owner at any ascertained price. As already held the right of a partner is only the right to share the excess of the assets of the fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the assessee. 20. The learned departmental representative relied on the decision of the Madhya Pradesh High Court in the case of Vimal Amar Talkies. The facts of the case as well as the ratio of the case were succinctly given in the head-note of the decision at page 661 which are as follows : " The assessee-firm initially consisted of five partners. On 30th April, 1971, four partners retired. The fifth partner was left alone in the firm, and as the firm could not continue without there being at least two partners, it stood dissolved. The fifth partner inherited the assets of the firm as a result of the retirement of the other partners. On 1st May, 1971, the fifth partner entered into another partnership with one M and two minors were admitted to the benefits of the partnership. All the assets and liabilities of the dissolved partnership were taken over by the new partnership. The assessee filed two returns, one for the period from 30th October, 1970 to 30th April, 1971, and the other for the period from 1st May, 1971 to 19th October, 1971. The ITO held that there was merely a change in the constitution of the firm and he computed the income for both the periods by one assessm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thorities are correct in granting depreciation to the assessee-firm on the original written down value of plant and machinery and the other assets of the firm but not on the revalued value of those assets. 23. In the appeal for the assessment year 1981-82 the only other ground on which my decision is invited is the disallowance of legal expenses of Rs. 2,000 on the ground that it was capital expenditure. The disallowance was confirmed by the Appellate Assistant Commissioner. It is contended that the legal expenses should have been allowed as revenue expenditure as no additional benefit or an asset of an enduring nature, has been created by incurring such expenditure. It is also contended that such expenditure should have been allowed as normal business expenditure incurred in the course of regular business. The Appellate Assistant Commissioner held that the Income-tax Officer disallowed a total sum of Rs. 7,096 representing Corporation tax arrears and legal charges. He held that the Corporation tax related to the period prior to the relevant previous year and the legal expenses were in the nature of penalty for infraction of law. The finding of the Appellate Assistant Commissione ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ayable to the Electricity Board were to be borne by the Tamil group of partners. The lessee had to withdraw C.S. No. 365 of 1979 and C.S. No. 595 of 1979 filed against the assessee, whereas the Tamil group of partners should withdraw the suit filed in C.S. No. 742 of 1980 against the lessee as settled out of court. The entertainment tax arrears which were agreed to be borne by the Tamil group of partners under the stipulations of the compromise deed dated 15-12-1980 are furnished at page 14 of the paper book furnished to me. The document at page 14 is the certificate given by the Commercial Tax Officer, Adyar Assessment Circle, Madras and it is dated 16-12-1980. The certificate shows that a total amount of Rs. 1,35,644 was paid by Shri Manikkavasagam, lessee of Eros Theatre towards the arrears of entertainment tax due to the Government right from 1977-78 to 1980-81. However, out of the total amount two items of Rs. 10,482 and Rs. 5,390 pertain to Meenakshi Talkies, Tindivanam and not to Eros Theatre. 25. During the assessment stage it was the contention of the assessee that the licence to exhibit cinematograph films at Eros Theatre was cancelled by the Commercial Taxes Department ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as no necessity for him to file income-tax return for that period. The licence to run the theatre would bring an enduring benefit to the assessee and therefore the expenditure for renewing the licence is capital in nature. On this ground the Appellate Assistant Commissioner confirmed the disallowance made by the Income-tax Officer. 27. In this second appeal Shri Devanathan, the learned counsel for the assessee argued that with a view to preserve the assets of the firm there was compelling necessity to incur the expenditure now claimed as deduction (Rs. 1,05,904). This expenditure indirectly facilitates the assessee to carry on the business of exhibition of cinematograph films and hence it should be allowed under section 37 of the Income-tax Act. He also submitted that unless the entertainment tax arrears were paid, no licence would be renewed by the Government authority and unless the licence is obtained no sort of business can be carried on in the Eros Theatre. He invited my attention to the commentary of Chaturvedi and Pithisaria's Income-tax Law, Third Edition, at pages 1295 and 1296, which reads as follows : " Gaining a direct benefit not essential. In order that an expenditu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f Shri Manikkavasagam and to the extent of the said undertaking the assessee had stepped into the shoes of Shri Manikkavasagam, the assessee is entitled for deduction of Rs. 1,05,904. The learned counsel for the assessee also relied on the following case laws : (1) Eastern Investment Ltd. v. CIT [1951] 20 ITR 1 (SC) ; (2) Sassoon J. David Co. (P.) Ltd. v. CIT [1979] 118 ITR 261 (SC) and (3) Empire Jute Co. Ltd. v. CIT [1980] 124 ITR 1/3 Taxman 69 (SC) and argued for the proposition that the fact that somebody other than the assessee is also benefited by the expenditure should not come in the way of an expenditure being allowed by way of deduction under section 37 of the Income-tax Act if it satisfies otherwise the test laid down by law. 28. The learned departmental representative countered this argument stating that firstly there is no evidence that the assessee paid the arrears of entertainment tax to the extent of Rs. 1,05,904. The certificate given by the Commercial Tax Officer at page 14 of the paper book clearly shows that it was Shri Manikkavasagam who had paid the amount and discharged the arrears of entertainment tax due to the Commercial Tax authorities and not by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he extent mentioned in the Schedule 'C' hereunder there is not other liability for the firm for any period prior to the execution of these presents and more especially prior to 6-6-1979 on which date the parties of the 6th, 7th and 8th parts herein became partners and that they indemnify and keep indemnified the parties of the 6th, 7th and 8th parts herein against losses, and damages by reason of any claims for period prior to 6-6-1979 ". As can be seen from the above clause the Parsi group of partners clearly undertook to indemnify the Tamil group of partners for any loss or damage by reason of any claims for the period prior to 6-6-1979. When the claims relate to 1970-71 and 1971-72 obviously they are claims prior to the lease deed dated 17-5-1976 in favour of Shri Manikkavasagam and also they are quite prior to the Tamil group of partners were inducted into the partnership firm on 6-6-1979. Expenses incurred only for the current year are deductible under section 37 especially when the expenditure is incurred under a statutory liability. In this case the expenditure was incurred under the Tamilnadu Entertainment Tax Act, 1939 and TNLAF Act, 1961. The liabilities under those Acts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... asy to comprehend the assessee's claim and accept it ". Again at pages 781 and 782 the following is what is held by the Madras High Court : " If the partners of the seller and the buyer are the same, even though they are fictionally treated as different legal entities, it ceases to be a sale. Even so, in the instant case, merely because for purposes of taxation laws the assessee and the firm are two different legal entities, it cannot be said that in the light of the facts disclosed, the business of the firm and the assessee are in any manner different. The nexus interlacing in their business is so conspicuous that their fictional legal individuality in tax laws became submerged in their commercial unison, as understood in the common law of partnership. It, therefore, follows that, if the business of the firm and the assessee is thus interlocked, then the assessee's claim for deduction of the statutory liability in such a common trading activity between the assessee and the firm has to be upheld under section 37(1) of the Income-tax Act, 1961 ". From the above facts it is obvious that in that case the firm and the assessee were treated as one entity. So the liability of the erstwhi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... usion of the Tribunal based on facts was correct ". Therefore following the decision and following my above reasonings I hold that either Rs. 1,05,904 or any part of it is an allowable expenditure in the hands of the assessee-firm and this claim is dismissed. 33. The only other point remains to be dealt with is the disallowance of Corporation tax arrears and legal charges. The total amount claimed and disallowed by the Income-tax Officer was Rs. 7,096. The disallowance was upheld by the Appellate Assistant Commissioner on the ground that the Corporation tax related to the period prior to the relevant previous years. The legal expenses were in the nature of penalty for infraction of law. The break-up for the amount of Rs. 7,096 is as follows : Municipal taxes due from 1-10-1975 to 31-3-1978 are Rs. 1,045.31, Rs. 2,190.62 and Rs. 2,090.62. Legal charges Rs. 1,409. The disallowance was made on the ground that the municipal tax relate to the earlier assessment years and does not pertain to the present accounting year. I have already held that there is only one firm continuing and there was only continuation of firm and there was no succession of one firm by the other. It is not kno ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
