TaxTMI 
TaxTMI 
2005 (8) TMI 72
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....andum of understanding entered into between the parties on August 6, 1990, the parties decided that the two partners, namely, Narcinva Purxotoma Quenim and Smt. Crisnabai Vaman Quenim would disassociate from the partnership firm and the continuing partner Mandovi Hotels Private Limited would continue the business. The said memorandum of understanding incorporated the mutually agreed terms and conditions. Thereafter the dissolution deed was executed on September 4, 1990, between the three partners. The partners mutually decided to dissolve the partnership firm as from September 1, 1990. It was also agreed between the partners that all assets and liabilities of the partnership business shall be taken over by Mandovi Hotels Private Limited and the business shall continue to be carried on by the said partner. The dissolution deed incorporated the other terms agreed upon between the parties. For the assessment year 1994-1995, respondent No. 1-Mandovi Hotels Private Limited (for short "the assessee") filed its return of income declaring total income at Rs. 28,945 after set off of unabsorbed depreciation of Rs. 5,58,727 and deduction under section 80HHD of Rs. 49,803. The return was proce....
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....ken over by the continuing partner. The partnership business shall be continued solely by the party of the Third Part from the September 1, 1990, to the entire exclusion of the retiring partners. In consideration of the above, the party of the Third Part hereby agree and undertake to pay the retiring partners as provided hereunder. The continuing partner shall pay to the retiring partners annually a sum equivalent to 30 per cent, of the net profits of the business, subject to a minimum amount of Rs. 60,000 for a period of seven years, commencing from September 1, 1990." It was thus agreed upon between the partners that all the assets of the partnership business as on August 31, 1990, would be taken over by the continuing partner, i.e. the assessee and that the partnership business would be continued solely by the assessee from September 1, 1990. The assessee agreed and undertook to pay to the retiring partners annually a sum equivalent to 30 per cent, of the net profits of the business subject to a minimum amount of Rs. 60,000 for a period of seven years commencing from September 1, 1990. Can it be said that the amount so paid by the assessee in the relevant year calculate....
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.... as by the revenue in support of their case. Inter alia, the assessee heavily relied upon the judgment of the Supreme Court in the case of Travancore Sugars and Chemicals Ltd. v. CIT [1966] 62 ITR 566. The assessee also relied upon the judgments of the Supreme Court in the cases of Devidas Vithaldas and Co. v. CIT [1972] 84 ITR 277 and CIT v. Sitaldas Tirathdas [1961] 41 ITR 367. On the other hand, the revenue placed reliance on the judgment of the Supreme Court in the case of CIT v. Jalan Trading Co. P. Ltd. [1985] 155 ITR 536. Since the assessee has not put in appearance, we considered the aforesaid judgments with the assistance of learned counsel for the Revenue. As has been said umpteen times the question whether a particular expenditure is in the nature of capital expenditure or in the nature of revenue expenditure has to be decided on the facts of each case. The court has to ascertain the true nature and the character of the transaction from the terms of the agreement and the surrounding circumstances. No single test is decisive. However, the broad tests laid down by the courts from time to time though applied in the peculiar facts of that case may help in deciding and ....
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.... the capital value of the assets. In the third place, the annual payment of 20 per cent commission every year is not related to or tied up, in any way, to any fixed sum agreed between the parties as part of the purchase price of the three undertakings. There is no reference to any capital sum in this part of the agreement. On the contrary, the very nature of the payments excludes the idea that any connection with the capital sum was intended by the parties. It is true that the purchaser may buy a running concern and fix a certain price and the price may be payable in a lump sum or may be payable by instalments. The mere fact that the capital sum is payable by instalments spread over a certain length of time will not convert the nature of that payment from the capital expenditure into a revenue expenditure, but the payment of instalments in such a case would always have some relationship to the actual price fixed for the sale of the particular undertaking. As we have already mentioned, there is no specific sum fixed in the present case as an additional amount of price payable in addition to the cash consideration and payable by instalments or by any particular method. In view of the....
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....965] 58 ITR 241; [1964] AC 948 (PC)). In CIT v. Coal Shipments P. Ltd. [1971] 82 ITR 902 (SC), an agreement was arrived at between two companies exporting coal to Burma. The assessee-company agreed thereunder to pay, in consideration of the other company forbearing from exporting and procuring coal for its export by the assessee-company, five annas per ton (subsequently raised to Rs. 1-5-0 per ton). The amounts so paid to the other company were taxed in the hands of that company. The respondent-company claimed them as admissible business expenditure for the assessment year in question. The Revenue, on the other hand, claimed that the payments were for acquiring monopoly and were, therefore, not allowable as revenue expenditure. This court upheld the assessee's contention that the expenditures were not for acquiring the monopoly, but were made to make the business more facile and profitable, that they were made as a temporary measure and not for deriving an advantage of an enduring character. Observing that the agreement between the two companies was not for any fixed term and could be terminated at any time at the volition of any of the parties, it was held that, although an enduri....
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....n. The expression enduring advantage' is, thus, a relative term, not enduring in the sense of its being permanent, but is sufficiently durable depending upon the nature of the terms upon which it can be acquired. So also the expression once and for all', which does not mean payment at one time of the whole amount, but includes payment of a lump sum as distinct from recurrent, distributed in periodic instalments. The other test sometimes applied is payment when it is referable to fixed capital or capital assets as against payment referable to circulating capital or stock-in-trade. But, this test also is not capable of being treated as of uniform application. Price paid for the acquisition of a capital asset may take sometimes the form of payments of a revenue character. The simplest example is interest paid on the unpaid purchase price of capital asset. Though in relation to and referable to acquisition of a capital asset, it is none the less a revenue disbursement. On the other hand, in Assam Bengal Cement Co. Ltd. v. CIT [1955] 27 ITR 34 (SC), where the payment in question was for eliminating competition, the test of the expenditure having been incurred for and referable to a c....
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....nsideration. This court stated: 'It is often difficult, in any particular case, to decide and determine whether a particular expenditure is in the nature of capital expenditure or in the nature of revenue expenditure. It is not easy to distinguish whether an agreement is for the payment of price stipulated in instalments or for making annual payments in the nature of income. The court has to look not only into the documents but also at the surrounding circumstance as to arrive at a decision as to what was the real nature of the transaction from the commercial point of view. No single test of universal application can be discovered for a solution of the question. The name which the parties may give to the transaction which is the source of the receipt and the characterization of the receipt by them are of little consequence. The court has to ascertain the true nature and character of the transaction from the covenants of the agreement tested in the light of surrounding circumstances'." The Supreme Court also observed that in so far as the tests are concerned, the test laid down in Assam Bengal Cement Co. Ltd. v. CIT [1955] 27 ITR 34 (SC) and Travancore Sugars and Chemicals Lim....
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....into the question as to whether the assessee was in fact separate from, and independent of, the partnership firm. It is true that the tenability of the claim of deducibility as a business expenditure of the amount was examined by taking it for granted that the payment had been made by the assessee to the firm. But the exact position not having been investigated, no finding has been recorded at any stage. The fact that the partnership and the assessee-company bear the same name and soon after incorporation, the agreement assigning the firm's rights in favour of the company had been entered, had obviously led the Income-tax Officer to doubt the bona fides." Jalan's case [1985] 155 ITR 536, upon which strong reliance is placed by the learned counsel for the Revenue, cannot be applied to the facts of this case. In that case neither the Assessing Officer nor the appellate authority nor the Appellate Tribunal nor the High Court went into the question whether the assessee was in fact a separate firm, and independent of, the partnership firm. The exact position was not investigated, nor any finding recorded. Even otherwise, as has been repeatedly held by the Supreme Court, whether an ex....