1979 (12) TMI 29 - HC - Income Tax

Payment to Retiring Partners Not Deductible as Revenue Expense: Tribunal Decision Upheld

General Auto Parts Co. Versus Commissioner Of Income-Tax, Delhi (Central)

The Tribunal concluded that the payment of Rs. one lakh to the retiring partners was a capital expenditure related to the reconstitution of the firm, not ... Firm Issues Involved:1. Whether the payment of Rs. one lakh to the retiring partners included revenue expenditure deductible from the income of the assessee.2. If the payment is considered revenue expenditure, whether there was any legal difficulty in allowing it as a deduction.3. Whether the claim of the assessee deducting Rs. 51,924 from his income was correctly disallowed.Detailed Analysis:Issue 1: Nature of Payment to Retiring PartnersThe primary issue was whether the payment of Rs. one lakh to the retiring partners was a revenue expenditure deductible from the income of the assessee. The Tribunal concluded that the payment was made on the occasion of the dissolution of the old firm and the formation of a new one. It was deemed to be the value of the outgoing partners' shares in the assets of the partnership firm. The Tribunal emphasized that the payment was not incidental to the carrying on of the business but was related to its reconstitution, thus categorizing it as a capital expenditure. The Tribunal's decision was based on the principle that no partner can claim a specific share in any specific item of partnership assets, but only in the assets of the partnership as a whole.Issue 2: Legal Difficulty in Allowing DeductionSince the payment was categorized as capital expenditure, the Tribunal found no legal grounds to allow it as a revenue expense deduction from the income of the assessee. The Tribunal maintained that the payment was not incidental to the business operations but was related to a fundamental structural change in the firm's framework.Issue 3: Disallowance of Rs. 51,924 DeductionThe assessee claimed that Rs. 51,923.85, part of the Rs. one lakh payment, was for the appreciation in the value of stocks and licenses and thus should be deductible. However, the Tribunal rejected this claim, stating that the payment was for acquiring the right, title, and interest of the retiring partners in the assets of the former firm. The Tribunal found that the bifurcation of the payment in the firm's books did not correlate with the clauses of the dissolution deed and that the entire payment was a capital expenditure. The Tribunal also noted that the retiring partners treated the entire sum as a capital receipt.Conclusion:The Tribunal's decision was upheld, and the payment was deemed a capital expenditure, not deductible as a revenue expense. The Tribunal's view was that the payment was made for the reconstitution of the firm's framework and not for the ongoing business operations. The claim of the assessee for deducting Rs. 51,924 from his income was correctly disallowed. The Tribunal's decision was based on the holistic reading of the dissolution agreement and the nature of the payment, emphasizing that it was for acquiring the retiring partners' interests in the firm's assets.