COMMISSIONER OF INCOME TAX vs SANGAM ENTERPRISES

Maruth, J.

The following question is referred by the Tribunal, Hyderabad, u/s 256(1) of the Income Tax Act, 1961 (hereinafter referred to as `the Act'') at the instance of the revenue:

"Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is justified in holding that an amount of Rs. 1 lakh paid to Shri A. Rami Reddy, the retiring partner, for relinquishing his 2/16th share, interest and title in the properties and in the assets and liabilities, goodwill etc., in favour of the remaining partners is a revenue expenditure deductible from the total income of the assessee-firm?"

The assessee is a registered partnership firm consisting of six partners. One Shri A. Rami Reddy is one of the partners having 2 16th share in the properties of the firm. The firm was running two cinema theatres at Vizag. During the relevant assessment year 1983-84, one of the partners, Shri A. Rami Reddy, retired from the partnership firm on 20-3-1982. He was paid. an amount of Rs. 1 lakh which was standing to his credit. A relinquishment deed was executed. Relevant para in the relinquishment deed reads as follows:

"And whereas I desire to retire from the partnership and my intention having been conveyed to all of you orally and all of you having agreed to release me from the partnership from this day, I hereby relinquish my 2/16th share, interest and title in the schedule mentioned properties and in the assets and liabilities including Hypothecation to Bank or in the bank guarantees, goodwill, etc., in favour of all of you for a consideration of Rs. 1,00,000 paid to me by way of a crossed Demand Draft No. (106/ 88) D.DA No. 419497 dated 19-3-1982 on Andhra Bank, Sultan Bazaar, Hyderabad. Inasmuch as the consideration having thus been fully received by me, I hereby relinquish my title, share interest and ownership in the schedule mentioned properties and in the asset; and liabilities including hypothecation to bank or in bank guarantees in favour of all of you and either myself or my heirs at law have no legal right or title in any manner whatsoever over the said properties from this day."

The assessing authority held that this amount of Rs. 1 lakh debited to the profits and loss account is a capital expenditure. On appeal, the appellate authority confirmed the same. On further appeal, the Tribunal held that the expenditure incurred by the assessee is a revenue expenditure. In support of their finding, they relied on clause- 11 of the partnership deed (extracted above) and also observations made in COMMISSIONER OF Income Tax Vs. PURAN DAS RANCHODDAS and SONS., . Hence, the revenue is before us.

To consider whether expenditure incurred by the assessee under the said circumstances mentioned above is revenue or capital expenditure, it is relevant to consider the clause of the relinquishment deed extracted above. On a perusal of the said clause, it is clear that the retiring partner relinquished his 2/16th share in the partnership firm, interest and title in the schedule mentioned property and assets and liabilities including hypothecation to bank or guarantees in the bank, etc., for a consideration of Rs. 1 lakh in favour of the assessee. The amount of Rs. 1 lakh is paid by a draft. In other words, under a relinquishment deed the retiring partner relinquished his interest in the assets of the firm, both movable and immovable. If once there is relinquishment of interest and title by the retiring partner in the assets of the firm, it results in acquisition of assets by the assessee-firm. Therefore, it is a capital expenditure and not revenue expenditure.

The reference by the Tribunal to the observations made in Puran Das''s case (supra) is misconceived. The learned Judges held that acquisition of goodwill is the revenue asset. In spite of service of notice, none appeared for the assessee.

In view of the above, the question referred by the Tribunal is answered against the assessee and in the negative. R.C. is, accordingly, disposed of.