Income-tax--

----Capital or revenue expenditure---Firm---Amount paid to retiring partner- Amount paid in discharge of a statutory liability---. Not for advancement of business---Is revenue expenditure---Indian Income Tax Act, 1961, S.37.

Two partners of the assessee-firm ousted the other partner, Q and carried on the business of the firm without any final settlement of accounts as between them and Q. Q challenged this action by commencing legal -proceedings and a settlement was reached which was recorded in the books of the firm. Q was paid Rs.70,000 on account of her share in the partnership firm. The firm claimed deduction of Rs.70,000 as revenue expenditure. The Income-tax Officer treated it as capital expenditure, whereas the Commissioner (Appeals) allowed the appeal treating it as revenue expenditure. The Tribunal affirmed the order of the appellate authority. On a reference:

Held, that the amount paid to Q was in discharge of a statutory liability which was redeemed by paying the share of retiring partner. It was not for the purpose of advancement of the business of the firm but it was a mere discharge of the liability of the firm. It was revenue expenditure.

V.K. Tankha for the Commissioner.

Nemo for the Assessee

JUDGMENT

This is a reference under section 256(1) of the Income Tax Act 1961 (hereinafter referred to as "I.T. Act"), at the instance of the Revenue and the following question of law has been referred by the Tribunal for answer of this Court:

"Whether, on the facts and circumstances of the case, the Tribunal was justified in holding that the amount of Rs.70,000 paid to one of the partners who was ousted from the benefits of partnership was a revenue expenditure and not a capital expenditure?"

The brief facts giving rise to this reference are thus: The year of assessment involved in 1978-79. The firm, Star Agency, was constituted by six partners as was evidenced from the deed of partnership, dated November 22, 1973. The partnership was at will. Smt. Qamrunnissa, one of the partners of the said firm, had a 23 per cent. share therein. The other two partners of the said firm, namely, Muhammad Javed and Muhammad Sabir, ousted Smt. Qamrunnissa from the partnership on October 29, 1974, and they carried on the business of the firm with the property of the firm without any final settlement of accounts as between them and Smt. Qamrunnissa. They carried on the business of the firm with the name of the firm, Delhi Beedi Sales Agencies, Bhopal, who is the assessee in this case. Smt. Qamrunnissa challenged that action of the two partners by commencing legal proceedings in that behalf and the matter was settled between the parties on November 11, 1987, and Smt. Qamrunnissa was paid Rs.70,000 on account of her share in the partnership firm. The terms of the settlement were recorded in the books of the assessee-firm by making an entry, which was signed by the partners. The material terms of the said settlement read as under:

(i) The dispute having arisen among the partners of Star Agency Smt. A. Qamrunnissa was removed from the partnership and a new partnership in the name of Delhi Beedi Sales Agency was constituted with effect from October 29, 1974.

(ii) The entire assets of Star Agency were used by Delhi Beedi Sales Agency without rendering accounts to Smt. Qamrunnissa and as such the new firm took advantage of that and, therefore, the partners of the old firm Star Agency decided that for the use of her share of assets and goodwill of Star Agency, Smt. Qamrunnissa was to be paid Rs.70,000.

The assessee-firm claimed deduction of Rs.70,000 as revenue expenditure. The Income-tax Officer treated it as expenditure of capital nature and disallowed the claim. Therefore, the assessee went in appeal and the appellate authority allowed the appeal holding that the amount of Rs.70,000 which was paid to Smt. Qamrunnissa was not a capital asset or for the benefit of the business. It is held that the payment made to Smt. Qamrunnissa was under the sole statutory liability under section 37 of the Indian Partnership Act and the same was debited to the profit and loss account. Aggrieved against the order of the Commissioner of Income-tax (Appeals), the Department approached the Tribunal and the Tribunal affirmed the findings of the appellate authority. Hence, the Department/Revenue requested the Tribunal to make a reference and, accordingly, the Tribunal has referred the aforesaid question of law for answer of this Court.

We have heard learned counsel for the applicant/Revenue and perused the records. It depends upon the nature of the transaction that whether it should be treated to be a revenue expenditure or a capital expenditure under section 37 of the Income-tax Act. In the present case, in fact a sum of Rs.70,000 was paid to Smt. Qamrunnissa not for further expansion of the business but in order to discharge the statutory liability of a retiring partner. Smt. Qamrunnissa was a partner in the earlier firm, Star Agency, and that firm was dissolved and a new firm, Delhi Beedi Sales Agencies, was constituted leaving the third partner; therefore, she had to resort to legal proceedings and in that a settlement was arrived at and as per the terms of the settlement reproduced above, the amount of Rs.70,000 was paid to her for use of her share of the assets and goodwill of Star Agency. Therefore, it was in discharge of the statutory liability, which was redeemed by paying the share of the retiring partner. It cannot be said to be for the purpose of advancement of the business of the partnership firm, but it was a mere discharge of the liability of the firm. Therefore, it can be correctly styled as a revenue expenditure and not capital expenditure. The view taken by the appellate authority as well as by the Tribunal appears to be justified and there is no reason to take a different view in the matter. Hence, we answer this reference in favour of the assessee and against the Revenue.

M.B.A./1653A/FC Reference answered.