Stock-in-trade payment as revenue expenditure deductible when made to secure exclusive title for resale

Profits of the dissolved old partnership were not taxable in the hands of retired partners, because the business and earnings belonged to the continuing new firm after dissolution and were to be apportioned only among its three continuing partners. A payment to retiring partners for forward contracts and the goods received under them was treated as revenue expenditure, because it was part of the trading cost of securing exclusive title to stock-in-trade for resale rather than consideration for a capital asset or enduring business right. The payment was therefore deductible in computing business profits.

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Issues: (i) Whether the firm's profits for the year of account were to be apportioned among the three continuing partners of the new firm or among the five partners of the dissolved old firm; (ii) Whether the sum paid to the retiring partners in respect of the forward contracts and the goods received thereunder was deductible as revenue expenditure or was capital expenditure.

Issue (i): Whether the firm's profits for the year of account were to be apportioned among the three continuing partners of the new firm or among the five partners of the dissolved old firm.

Analysis: The old partnership had been dissolved before the relevant year of account. The profits arose from business carried on by the new firm in its own right, after the dissolution, and were earned while it was trading as owner of the goods. The continuing firm alone was registered for the assessment year, and the retired partners had no subsisting interest in the profits of the new firm.

Conclusion: The profits were correctly apportioned among the three continuing partners of the new firm and not among the five partners of the dissolved firm.

Issue (ii): Whether the sum paid to the retiring partners in respect of the forward contracts and the goods received thereunder was deductible as revenue expenditure or was capital expenditure.

Analysis: The payment was linked to the acquisition of the goods that formed the stock-in-trade of the new firm and was made to obtain exclusive title to those goods for resale. The decisive question was the true nature of the expenditure, not merely whether it was paid out of profits. A payment made as part of the price of circulating capital or stock-in-trade is allowable, whereas expenditure to acquire fixed capital or enduring business rights is not. On the facts, the amount was part of the current trading cost of the goods and not consideration for acquiring the business as a capital asset.

Conclusion: The sum was revenue expenditure and an admissible deduction in computing the firm's profits.

Final Conclusion: The reference was answered only partly against the assessee on the first question and in its favour on the second, with the payment held deductible and the firm's profits held assessable only among the continuing partners.

Ratio Decidendi: A payment made to secure exclusive title to stock-in-trade for immediate resale is revenue expenditure deductible in computing business profits, even if the amount is measured by reference to profits or paid out of profits, provided the payment is not in substance consideration for acquiring a capital asset or enduring business right.

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