1975 (7) TMI 41 - HC - Income Tax

Deduction allowed for payment to deceased partner's widow as revenue expenditure.

The court held that the payment of Rs. 1,800 to the widow of the deceased partner was for the user of quota rights, enabling the continuing partners to ... Capital Or Revenue Expenditure, One Partner Issues Involved:1. Admissibility of deduction of Rs. 1,800 paid to the widow of the deceased partner in computing the income of the assessee-firm for the assessment year 1962-63.Issue-wise Detailed Analysis:1. Admissibility of Deduction:The primary issue is whether the payment of Rs. 1,800 made by the assessee-firm to the widow of the deceased partner can be considered an admissible deduction while computing the firm's income for the assessment year 1962-63.Facts and Circumstances:- The assessee-firm, M/s. Natwarlal Mohanlal & Co., originally had four partners. Upon the death of one partner, Kanji Champsey, the remaining partners continued the business and entered into a new partnership deed on 23rd September, 1961.- Clause 15 of the new deed stated that the legal representatives of the deceased partner had relinquished their rights to import licences and quota rights in favor of the continuing partners.- A subsequent agreement on 24th November, 1961, between the continuing partners and the widow of the deceased partner, Bai Gunwanti, stipulated a payment of Rs. 600 per month for five years as consideration for the relinquishment of quota rights.Income-tax Officer's Decision:- The Income-tax Officer disallowed the deduction of Rs. 1,800, considering it an ex gratia payment with no basis for the fixed amount, thus treating it as a capital expenditure.Appellate Assistant Commissioner's Decision:- The Appellate Assistant Commissioner upheld the Income-tax Officer's decision, viewing the payment as an outright acquisition of the deceased partner's share in the quota rights, thus not wholly and exclusively incurred for business purposes.Tribunal's Decision:- The Tribunal reversed the decisions of the lower authorities, concluding that the payment was for the user of the rights to quotas and licences, and thus represented a revenue expenditure. The Tribunal relied on the decision of the Madras High Court in M. S. Kandappa Mudaliar v. Commissioner of Income-tax.Arguments by Revenue:- The revenue argued that the payment was for the acquisition of the deceased partner's share in the quota rights, making it a capital expenditure. They emphasized the language in the agreement that indicated a transfer of rights.Arguments by Assessee:- The assessee contended that the payment was for the user of the quota rights, not for acquiring any new or further rights. They argued that quota rights are not capital assets and the expenditure was for obtaining stock-in-trade, thus a revenue expenditure.Court's Analysis:- The court examined the nature of quota rights and the agreements in question. They noted that the real nature of the transaction was the use of the deceased partner's share in the quota rights to obtain import licences, which enabled the continuing partners to purchase their stock-in-trade.- The court referenced the Madras High Court's decision in M. S. Kandappa Mudaliar v. Commissioner of Income-tax, which held that payments for the use of quota rights were revenue expenditures.Conclusion:- The court concluded that the payment of Rs. 1,800 was for the user of the quota rights, enabling the continuing partners to obtain stock-in-trade, and thus was a revenue expenditure.- The payment was an allowable deduction in computing the assessable income of the assessee.Final Judgment:- The question was answered in the affirmative and in favor of the assessee. The revenue was directed to pay the costs of the assessee.