1936 (12) TMI 27 - HC - Income Tax

Sum paid under lease deemed capital expenditure; Partners jointly assessed post-firm dissolution.

Chengalvaroya Chettiar Versus Commissioner of Income Tax, Madras

The Court held that the sum paid by the assessee under the lease agreement was a capital expenditure, not a revenue expenditure. Additionally, the Court ... - Issues:1. Whether the sum paid by the assessee under the lease agreement is a revenue or capital expenditure.2. Whether the Income Tax Officer had jurisdiction to assess the firm as a unit after its dissolution under Section 44 of the Act.Analysis:1. The first issue pertains to the nature of the payment made by the assessee under a lease agreement. The sum of money paid was initially treated as a revenue expenditure by the Income Tax Officer but was later considered a capital expenditure following a High Court decision. The Court examined the language of the lease agreement and compared it to a previous case. Despite the presence of the term 'annual lease amount,' the Court held that the transaction was similar to the one in the previous case and concluded that the payment was a capital expenditure. The Court emphasized that the nature of the expenditure was crucial, and the specific wording in the agreement did not change its character. Therefore, the Court answered the first question affirmatively, stating that the sum paid was a capital expenditure.2. The second issue revolves around the Income Tax authorities' jurisdiction to assess partners jointly after the dissolution of a firm under Section 44 of the Act. The section aims to prevent tax avoidance by holding partners liable for the firm's tax liabilities even after discontinuance. The Court interpreted the phrase 'tax payable' in the section and rejected the argument that it required a prior assessment on the firm before its discontinuance. The Court reasoned that the objective was to ensure tax collection on the firm's profits earned before dissolution. Therefore, the partners could be assessed jointly and severally for the firm's tax liabilities. The Court held that the partners were correctly assessed by the Income Tax authorities, and the tax was deemed payable based on the firm's earnings before discontinuance. Consequently, the Court answered the second question in favor of the Income Tax authorities, allowing them to assess the partners jointly.