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TMI Blog1975 (7) TMI 41X X X X Extracts X X X X X X X X Extracts X X X X ..... hese partners were carrying on the aforesaid business on terms and conditions contained in a deed of partnership executed on 27th May, 1954. According to this deed, Natwarlal had 7 annas share, Kanji had 3 annas share, Chimanlal had 2 annas 6 pies share and Harilal had 3 annas 6 pies share. According to the deed the trade name, goodwill and tenancy rights, etc., were to belong "absolutely to Natwarlal Mohanlal and Harilal Mohanlal and no other partner shall have any rights thereto". On 18th August, 1961, Kanji Champsey died. It appears that the firm had a number of import quotas and licences for import of dates and other commodities in which the firm dealt. On the death of Kanji Champsey the other three partners continued to carry on this business and a fresh deed of partnership was entered into on 23rd September, 1961 (giving effect to the deed as and from 19th August, 1961), Kanji Champsey having died on 18th August, 1961. Under this new deed Natwarlal was given 50% share, Chimanlal Vadilal was given 25% share and Harilal Mohanlal was given 25% share in the profits of the firm. Clause 15 of this new deed of partnership provided that Smt. Gunvantibai Kanji for herself and as mothe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ights the continuing partners agreed to pay to the said Bai Gunwanti for self and on behalf of all the heirs of the deceased partner, as and by way of consideration for the acquisition and use by the continuing partners of the share and interest of the said late Kanji Champsey as one of the partners of the old firm, a sum of Rs. 600 per month for and during the period of five years with effect from 19th August, 1961. In other words, relinquishment by Bai Gunwanti and other heirs of the deceased's share, right and interest in the quota rights of the old firm in favour of the continuing partners and payment of consideration therefor to Bai Gunwanti were clearly recorded in this agreement. Pursuant to this arrangement and agreement between the parties a sum of Rs. 600 per month was paid to Bai Gunwanti by the assessee-firm and for the three months which fell during the accounting period being S.Y. 2017 a sum of Rs. 1,800 was paid which was claimed by the assessee as a deduction in computation of the assessable income of the firm for the assessment year under consideration. The Income-tax Officer by his letter dated 10th January, 1963, made enquiries of the assessee-firm as to the basi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s on the one hand and Bai Gunwanti on the other, were part and parcel of one and the same transaction; that the recitals pertaining to relinquishment of the share in the quota rights, etc., on the part of the legal heirs of the deceased partner contained in both the documents were for the purpose of satisfying the requirements of the Import Trade Control Policy particularly paragraph 78, and that in substance the continuing partners merely obtained the user of the entire quotas and licences and that it was really a case where the lady had permitted user by the continuing partners of the share and interest of the deceased in the firm inclusive of quota rights and licences and, therefore, the payment represented a revenue expenditure and the deduction claimed was allowable. The Tribunal considered the three decisions reported in V. N. V. Devarajulu Chetty and Co. v. Commissioner of Income-tax, Vithaldas Thakordas Co. v. Commissioner of Income-tax and M. S. Kandappa Mudaliar v. Commissioner of Income-tax, and principally relying upon the decision of the Madras High Court in the last mentioned case it held in favour of the assessee, that the expenditure could be allowed as a deductio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the acquisition of the share and interest of the deceased partner in the licences and quota rights by the continuing partners. He principally relied upon the following three recitals which occur in the agreement and the operative part contained in paragraph 2 of the agreement. The relevant recitals run thus : " AND WHEREAS the parties hereto of the other part as the legal representatives of the said late Kanji Champsey have relinquished their right to the import/export licences and/or all other quota rights as were held by the said old firm wherein the said late Kanji Champsey was one of the partners AND WHEREAS the continuing partners have become entitled to the import/export licences and/or all other quota rights and other allied licences and rights in connection with the business of the said partnership firm AND WHEREAS in consideration of the relinquishment of the said rights the continuing partners have agreed to pay to the said Bai Gunwanti, widow of the late Kanji Champsey, for self and on behalf of all the parties hereto of the other part a sum of Rs. 600 per month for the period hereinafter mentioned for the acquisition and use by the continuing partners of the share ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wanti for the three months during the accounting period should be held to be of a capital nature and should not be allowed as a deduction in computing the assessable income of the assessee. On the other hand, Mr. Dastur, appearing for the assessee, has contended that if the substance of the transaction as represented by the two documents, namely, the new deed of partnership dated 23rd September, 1961, and the agreement dated 24th November, 1961, was looked at, it would appear clear that what the continuing partners did under the transaction was not acquisition of any new or further right, but the firm represented by the continuing partners was merely maintaining whatever rights it had before the death of Kanji Champsey. He disputed that quota rights are capital assets and further disputed that any capital assets were acquired as such by the continuing partners by the arrangement in question. He contended that after all a quota right is nothing but a right or an advantage which the holder thereof has which enables him to apply for and obtain import licence of certain value (being some percentage of the quota of the basic year) for the commodities to which the quota right relates ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deduction by way of business expenditure. This court held that the said sum paid to the widow was not an appropriation of the profits of the partnership after they had been ascertained, that the arrangement was not in the nature of a joint venture or a quasi-partnership, but that the payment was a revenue expenditure wholly and exclusively incurred for the purposes of the business, and was admissible for deduction under section 10(2)(xii) of the Act. In terms this court observed : " The agreement between the firm and Bai Tarabai (the widow) is a simple one and all that the partnership is doing is paying an amount fixed by reference to profits as a fee or charge for the use of the goodwill granted to it by Bai Tarabai." In other words, obviously this court took the view that the payment to the widow was made for the use of V's name for their bullion business. In the other case, the Madras High Court had to consider the nature of payment of a sum of Rs. 18,911 made in the following circumstances. A firm of five partners started a wholesale business in piece-goods in September, 1940. In October, 1942, two of the five partners retired from the firm and the three surviving partner ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r persons entered into a partnership for trading in cotton, yarn and piece-goods, and when the trade was subjected to control the firm obtained the prescribed quotas from time to time to carry on its export trade. One of the partners retired from the firm on 5th February, 1944, and the firm was reconstituted under the same trade name with the surviving three partners as the continuing partners. The new firm entered into an agreement on 14th April, 1944, with the partner who had retired, that until the said partner who had retired could obtain a separate quota the firm was to "buy the entire quota goods and use it for their business and as recompense for the same, pay the partner who had retired in accordance with the prevailing conditions". In accordance with this agreement the firm paid to the retired partner Rs. 13,500 and Rs. 10,000 during the accounting years 1944-45 and 1946-47, and claimed that these amounts should be deducted from their taxable profits. The claim was disallowed by the lower authorities on the ground that the payments were of a capital nature. On the terms of the agreement the court took the view that under the agreement with the retired partner nothing was l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to Sabapathy, what the assessee paid Sabapathy was really an addition to the price of the goods that the assessee firm purchased for export to Ceylon on the basis of the quotas issued to the assessee-firm. Such payments came within the principle laid down by this court in V. N. V. Devarajulu Chetty and Co. v. Commissioner of Income-tax and, as we pointed out above, the Assistant Commissioner was right in applying that principle." It would thus be seen that, even proceeding on the basis that the assessee-firm had acquired the quota rights of the retired partner, in that case the Madras High Court took the view having regard to the real nature of the quota rights and the advantages earned by the quota-holder, that the payments made by the firm to the retired partner were really in the nature of business expenditure or revenue expenditure, for, in substance, the assessee-firm had laid out the moneys by way of addition to the price of the stock-in-trade purchased by the assessee for export. The facts in the case before us are almost similar to the facts which obtained in the aforesaid Madras case. Admittedly, under the original deed of partnership dated 27th May, 1954, there was not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and use by the continuing partners of the share and interest of the deceased Kanji Champsey in the import/export licences and all other quota rights held by the old firm, but if the real nature of the quota rights and the type of the benefit thereunder received by the holder thereof are taken into account, it would appear clear that in substance what Bai Gunwanti did was to permit the continuing partners the use of her deceased husband's share and interest in the quota rights held by the old firm enabling the continuing partners to obtain import licences for the commodities to which the quota related, that is to say, to secure or obtain for themselves the stock-in-trade in which the new firm was to deal in the course of its business. Even if the expression "for the acquisition and use" occurring in the relevant recitals and the operative part of the agreement dated 24th November, 1961, is given its proper meaning, in effect what the continuing partners obtained was the use of the share and interest of the deceased partner in the quota rights which were held by the old firm which enabled the continuing partners to apply for and obtain the necessary import licences to import stock-i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the arrangement in fact was that Bai Gunwanti would permit the user of the licences and quotas in return for payment of Rs. 600 per month for the period specified in the agreement to be made by the continuing partners to her. Having regard to these facts which obtain in the instant case, it is clear to our mind that the object or purpose for which the payment was agreed to be made by the continuing partners to Bai Gunwanti under the agreement dated 24th November, 1961, was that the payment was in consideration of the user of the share and interest of the deceased partner in the quota rights that was made available to the continuing partners and since such user merely enabled the continuing partners to have the necessary facility to purchase their stock-in-trade in which they were dealing, the purpose of expenditure was clearly not to acquire any capital asset of an enduring nature. In this view of the matter, we are of the view that the Tribunal was right in coming to the conclusion that the payment of Rs. 1,800 that was made during the three months falling within the accounting period of Samvat year 2017 was in the nature of revenue expenditure and was an allowable deduction in c ..... 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