2023 (11) TMI 330 - AT - Income Tax

Payment to Retiring Partner is Capital, Not Revenue, Expenditure: Tribunal Reverses Prior Ruling on Partnership Firm.

ITO, Ward-7 (1), Pune. Versus M/s. Sarsan Developers

ITO, Ward-7 (1), Pune. Versus M/s. Sarsan Developers - TMI Issues involved:The judgment involves the issue of whether the amount paid to a retiring partner by a partnership firm for giving up their interest should be treated as a revenue expenditure or a capital expenditure.Summary:Issue 1: Nature of expenditure paid to retiring partnerThe case involved a partnership firm engaged in land development that paid an amount to a retiring partner, Kumar Housing Corporation Limited. The Assessing Officer disallowed this amount as a deduction under section 37(1) of the Income Tax Act. On appeal, the CIT(A) held that the payment should be treated as a revenue expenditure and not a capital expenditure. The Revenue challenged this decision, arguing that the payment was of a capital nature. The Tribunal examined the settlement deed and relevant case law, concluding that the amount paid to the retiring partner was indeed a capital expenditure. Citing precedents, the Tribunal held that the CIT(A)'s decision was incorrect, and the payment should be treated as a capital expenditure. Therefore, the appeal by the Revenue was allowed.This judgment clarifies the distinction between revenue and capital expenditures in the context of payments made to retiring partners by partnership firms involved in land development. The Tribunal's analysis of the settlement deed and relevant legal precedents provides guidance on how such payments should be treated for tax purposes, ensuring consistency and adherence to established principles in determining the nature of such expenditures.