Revenue expenditure for acquiring exclusive title to stock in trade is deductible, and profits allocate to the new firm's partners.

Profits of the 1943-44 accounting year must be apportioned to the three partners who carried on business as the new firm because the new firm realised sales proceeds in its own right and was separately assessed; rights of retiring partners were isolated and released later. A payment made to retiring partners to obtain exclusive title to incoming goods constituted part of the purchase price of stock in trade and thereby circulating capital; it was revenue expenditure, not acquisition of enduring fixed rights nor merely a division of ascertained profits, and therefore deductible in computing the new firm's taxable profits.

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Issues: (i) Whether the profits for the year of account 1943-44 must be apportioned among the three continuing partners of the new firm or among the five partners of the old dissolved firm; (ii) Whether the sum of Rs. 18,911-12-0 paid to the two retiring partners is deductible from the new firm's taxable profits or is not deductible (capital or non-deductible) because paid out of profits or as capital expenditure.

Issue (i): Whether the profits of the year of account 1943-44 are to be apportioned between the three continuing partners of the new firm or among the five partners of the dissolved old firm.

Analysis: The old five-partner firm was dissolved on 31 October 1942 and the three surviving partners carried on business as a new firm. The profits on sales of the bales were realised by the new firm while it carried on business in its own right and the new firm alone was registered for the assessment year. The retiring partners' rights had been isolated and subsequently released by deed in March 1944.

Conclusion: Issue (i) answered against the assessee; profits are to be apportioned among the three partners of the new firm.

Issue (ii): Whether the payment of Rs. 18,911-12-0 to the retiring partners is deductible as revenue expenditure wholly and exclusively for the purposes of the new firm's business, or is non-deductible capital expenditure or merely a distribution of profits.

Analysis: The Court examined authorities distinguishing payments that are genuine trading outgoings from payments that amount to a mere division of ascertained profits or the acquisition of fixed capital or goodwill. The retiring partners had reserved isolated rights in respect of the unexecuted forward contracts; when the goods arrived the new firm acquired exclusive title to the goods by paying the retiring partners sums fixed by arbitrators. The payment was part of the price effectively paid to obtain the goods which constituted the new firm's stock-in-trade; it was not payment for the acquisition of enduring rights forming fixed capital nor a mere division of ascertained profits but an expenditure incurred in acquiring circulating capital for resale. Applying tests of commercial accountancy and decided authorities, the payment was treated as revenue expenditure deductible under Section 10(2)(xv) of the Income-tax Act.

Conclusion: Issue (ii) answered in favour of the assessee; the sum of Rs. 18,911-12-0 is revenue expenditure deductible in computing the new firm's taxable profits.

Final Conclusion: The reference is answered by upholding that the profits of the relevant year are to be apportioned among the three partners of the new firm (issue i answered against the assessee) while holding that the disputed payment of Rs. 18,911-12-0 is revenue expenditure deductible from the new firm's profits (issue ii answered in favour of the assessee); accordingly the reference is partly allowed and costs awarded to the assessee.

Ratio Decidendi: A payment made to acquire exclusive title to goods forming stock-in-trade, being part of the price of circulating capital acquired for resale, is revenue expenditure and deductible under Section 10(2)(xv) of the Income-tax Act, whereas a mere distribution of ascertained profits or the acquisition of enduring fixed rights is capital and not deductible.

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