9911796707
TMI Blog1982 (8) TMI 25X X X X Extracts X X X X X X X X Extracts X X X X ..... was, written between the outgoing partners, continuing partners and incoming partners, namely, Moti Lal, Nem Chand, Janki Devi and Jinendra Kumar Jain. The relevant clauses for the purpose of these references are as under: "1. That the retiring partners had accepted the statement of accounts prepared as on the 19th day of January, 1967, in the books of account of the firm as true and correct and each of the retiring partners had also accepted the accounts lying in the credit or debit of his respective accounts as on 19-1-1967 as true and correct. 2. That each of the retiring partners had received or had paid according to the credit or the debit balance lying in his respective account as shown in the statement of accounts prepared as on 19-1-1967, referred to above. 3. That the retiring partners received Rs. 10 lakhs only in proportion to their respective shares in the old firm as lump sum consideration in full and final settlement of the transfer of the goodwill, quota rights, quota entitlements and all other rights, titles, and interest in the movable and immovable properties of the old firm comprising of the stock-in-trade, materials, book-debts, contracts, effects used in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nue expense ? (2) Whether, on the facts and circumstances of the case, the Tribunal Was right in holding that there is no material on the record on the basis of which it may be possible to split up the quantum of compensation in respect of each of the various items ? (3) Whether, on the facts and circumstances of the case and on the construction of (i) partnership deed dated January 20, 1967 (annexure A), (ii) memorandum dated January 28, 1967 (Annexure C), and (iii) account book entries, the Tribunal was right in holding that the payment of Rs. 10,00,000 or any part thereof was not a revenue expense allowable to the assessee-firm ? However, at the time of the hearing, no arguments were addressed on questions Nos. 1 and 2 by the learned counsel for the assessee and the same are accordingly answered in favour of the Revenue and against the firm. Two of the outgoing partners, Sarvshri Mahabir Parshad and Satbir Parshad, who received Rs. 2,50,000 and Rs. 1,87,500 respectively, claimed before the assessing authority that the same had been received on account of their share of the capital and as such was not a revenue receipt. The assessing authority repelled their contentions but a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Rs. 10,00,000 was paid to the outgoing partners, on their retirement from partnership. The amount could be ascribed either wholly to their share of the capital assets or to the estimated profits because of the increase in the market price of the raw material already received and the value of quota rights or on both counts in which case it may have further to be determined as to what part I of the amount was paid on account of capital assets and what part on account of the estimated profits and quota rights. But in either case the nature of, the amount paid would be the same qua both the parties and it cannot be that it may be a capital expenditure on the part of one party but a revenue receipt in the hands of the other party. Though, as held in Empire Jute Co. Ltd. v. CIT [1980] 124 ITR 1 (SC), it is not universally a true proposition that what may be a capital receipt in the hands of a, payee must necessarily be a capital expenditure in relation to the payer. But in the case of the payment made to a retiring partner by the continuing partners, it passes our comprehension if, under any circumstance; the amount paid can have two different characteristics, qua the two parties. So ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r in the capital assets as well as the share of future profits and quota rights, refused to apportion the same because the assessee had failed to do it himself and to produce any material from which it could be so done. None of the two reasons given are sustainable and., in fact, they run counter to the material available on the record. The assessee all through had been asserting on the basis of the balance-sheet of the two firms, annexs. D and E, and the chart, annex. G, showing the book value, market value, written down value and their different closing stock, building, machinery, trucks, vehicles, and in pending import application, import licence that the whole of the amount of Rs. 10,00,000 had been paid on account of the difference in the market value of the closing stock of the raw material and the estimated future profits. These documents and the other annexures containing the details of the trading account were conveniently ignored by the assessing authorities and instead it was erroneously observed that the assessee had failed to specify as to on, what account the payment of Rs. 10,00,000 had been paid and apportion the same in case it was paid by them on account of capita ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alogy would apply to the surrender of the rights in the import licence and anything paid on its account would equally be revenue expenditure. No part of the amount of Rs. 10,00,000 was thus paid to the retiring partners for acquiring their share in any capital asset of enduring benefit and had instead been paid for the purposes of the business on account of the estimated profits on the raw material already in stock but transferred on its book value or to be acquired against the quota rights and the import licence of the firm which continued to exist though with different constitution. The test to determine the nature of the expenditure was recently laid down by the Supreme Court in Empire jute Co.'s case [1980] 124 ITR I in the following terms (p. 80): " What is material to consider is the nature of the advantage in commercial sense and it is only where the advantage is in the capital field that the expenditure would be disallowable on an application of this test. If the advantage consists merely in facilitating the assessee's trading operations or enabling the management and conduct of the assessee's business to be carried on more efficiently or more profitably while leaving the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ded to be made for the use of these assets. The reference to import licences, quota licences, cars and telephones, are only to emphasise that the retiring partners were giving up all their rights, title and interest in the firm in consideration of the payment of the sum of Rs. 1 lakh. " From a bare perusal of the above observation, it is apparent that the Bench proceeded on the basis that the amount paid on account of share capital did not represent the entire value of the interest of the retiring partners. There was, however, no basis for this observation because both the parties had accepted the correctness of the accounts and the balance-sheet showing the assets and liabilities of the dissolved firm. further observation that the amount of Rs. 1 lakh was paid towards various assets of the firm was equally conjectural because there was nothing before the court to go beyond the balance-sheet which was accepted to be correct between the four partners. There can be no dispute if the retiring partners are paid any sum on account of their share in the capital assets, of the firm it would certainly be a capital expenditure. But, if the amount is paid on account of the estimated profits ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd not for the purpose of producing profits in the conduct of the business. Obviously, the facts being totally different, this case is also of no help to the Revenue. It was next contended that in any case the amount which was paid for the acquisition of goodwill would be a capital expenditure, the goodwill being a capital asset. Reliance for this proposition was placed on Devidas Vithaldas & Co. v. CIT [1972] 84 ITR 277 (SC) and S. Kuppuswami v. CIT [1954] 25 ITR 349 (Mad). According to the terms settled between the retiring partners and the continuing partners, the firms were not dissolved and the continuing partners were entitled to carry on business in the firms' names. What was done was that the retiring partners were restrained from setting up any business in the name of the said firms. There was thus no acquisition of any goodwill by the continuing firms and no part of the amount paid could thus be ascribed towards the purchase of any goodwill. In view of the foregoing discussion, the two questions in ITR No. 39 and 40 of 1976 are answered in the affirmative, in favour of the Revenue and against the assessee, whereas question No. 3 in ITR No. 48 of 1976, is answered in the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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