M/s Universal Infrastructure, Nagpur V. Deputy Commissioner of Income tax, Cir -8, Nagpur

ITA 294/NAG/2012

• Counselvise Citation: [2016] 132 COUNSELVISE.COM (IT) 2192 (ITAT-NAGPUR)
• Duration Of Justice: 3 year(s) 10 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-05-2016
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: DB
• Next Hearing Date: 25-04-2016
• Assessment Year: 2006-2007
• Appeal Filed On: 16-07-2012
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Keywords: Capital asset; Depreciation; Commercial expediency; Revenue expenditure; Capital expenditure
• Section: 143(3); 37(1); 147

Judgement Text

1 ITA NOS. 294 & 295/NAG/2012. IN THE INCOME TAX APPELLATE TRIBUNAL, NAGPUR BENCH, NAGPUR. BEFORE SHRI MUKUL K. SHRAWAT, JUDICIAL MEMBER AND SHRI SHAMIM YAHYA, ACCOUNTANT MEMBER. I.T.A. NOS. 294 & 295/NAG/2012 ASSESSMENT YEARS : 2006 - 07 & 2007 - 08. M/S UNIVERSAL INFRASTRUCTURE, DY. COMMISSIONER OF INCOME - TAX, NAGPUR. VS. CIRCLE - 8, NAGPUR. (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI GIRISH B. PUROHIT. RESPONDENT : SHRI D. RAVI KUMAR. DATE OF HEARING : 25 - 04 - 201 6 DATE OF PRONOUNCEMENT : 31 ST MAY, 2016. O R D E R PER MUKUL K. SHRAWAT, J.M. THESE TWO APPEALS HAVE BEEN FILED BY THE ASSESSEE EMANATING FROM A COMBINED ORDER OF LEARNED CIT(APPEALS) - II, NAGPUR DATED 09 - 02 - 2012 FOR THE ASSESSMENT YEARS 2006 - 07 AND 2007 - 08. FOR BOTH THE YEARS IDENTICAL ISSUE HAS BEEN RAISED AS PER THE FOLLOWING SUBSTANTIVE GROUNDS : 1. THE ORDER PASSED BY A.O. IS ILLEGAL, INVALID AND BAD IN LAW. 2. THE LEARNED A.O. ERRED IN DISALLOWING SUM OF RS.22,50,000/ - B EING THE CLAIM OF PAYMENT MADE TO RETIRING PARTNER HOLDING THE SAME AS CAPITAL EXPENDITURE AS AGAINST CLAIMED AS REVENUE EXPENDITURE BY ASSESSEE. 3. THE LEARNED CIT(A) ERRED IN LAW AND FACTS IN CONFIRMING THE ADDITION MADE BY A.O. AT RS.22,50,000/ - ON ACCOUN T OF PAYMENT MADE BY ASSESSEE TO RETIRING PARTNER. 2 ITA NOS. 294 & 295/NAG/2012. 4. THE PAYMENT MADE TO RETIRING PARTNER CLAIMED AS REVENUE EXPENDITURE OUGHT TO HAVE BEEN ACCEPTED AS CLAIMED. 2. FACTS IN BRIEF AS EMERGED FROM THE CORRESPONDING ASSESSMENT ORDER PASSED U/S 143(3) READ WITH SECTION 147 DATED 27 - 11 - 2009 WERE THAT THE CASE OF THE ASSESSEE FIRM WAS REOPENED U/S 147/148 OF I.T. ACT BECAUSE IT WAS NOTICED BY THE AO THAT THE ASSESSEE HAD CLAIMED AN EXPENDITURE OF RS.22.5 LAKHS RESPECTIVELY FOR THE YEARS UNDER CONSIDERATION, WH ICH ACCORDING TO THE AO WAS IN THE NATURE OF CAPITAL EXPENDITURE. THE AO HAS NARRATED THE FOLLOWING FACTS : AS PER THE TERMS OF AGREEMENT APART FROM CAPITAL, REMUNERATION AND SHARE OF PROFIT AS ON DATE SHRI KACHURE WAS GIVEN A COMPENSATION OF RS.54,00, 000/ - . ACCORDINGLY THE FOLLOWING PAYMENT WAS MADE BY THE FIRM TO SHRI KACHURE. 30.07.2005 BY CHECQUE OF BHANDARA CO - OP BANK RS.20,00,000/ - 23.02.2006 BY CHECQUE OF BHANDARA CO - OP BANK RS.25,00,000/ - TWO SETS OF SHOPS VALUED AT RS. 9,00,000/ - TOTAL RS.54,00,000/ - OUT OF WHICH EXPENSES OF RS.9 LACS + RS.22.50 WAS CLAIMED IN THE A.Y.2006 - 07 AND EXPENSES OF RS.22.50 LACS BROUGHT FORWARD AS LIABILITY AND WRITTEN OFF IN THE A.Y. 2007 - 08. IT WAS THE CONTENTION OF THE ASSESSEE THAT THE ENTIRE PAYM ENT OF RS.54 LACS IS ALLOWABLE REVENUE EXPENDITURE DURING THE RESPECTIVE YEARS. THE NATURE OF PAYMENT NEEDS TO BE PROBED FURTHER. WHAT THE FIRM STAND TO GAIN BY MAKING THE PAYMENT? THE RETIRING PARTNER RELINQUISHED HIS 1/3 RD SHARE IN THE PARTNERSHIP FIRM, INTEREST AND TITLE IN THE PROPERTY AND ASSETS AND LIABILITY. IN THIS REGARD FOLLOWING PARAS WHICH APPEARS ON THE PAGE 3 & 4 OF THE DEED IS RELEVANT : - 3 ITA NOS. 294 & 295/NAG/2012. PARA 3 : IN CONSIDERATION OF HAVING RECEIVED THE AMOUNT OF HIS SHARE ALONG WITH PREMIUM DESIRED BY HIM, THE RETIRING PARTNER HAS RELINQUISHED ALL HIS RIGHTS, INTEREST, ENTITLEMENT IN FAVOUR OF CONTINUING PARTNERS. PARA 4 : RETIRING PARTNER DECLARE THAT HE HAS WILLINGLY RETIRED HAVING SETTLED ALL HIS CLAIMS OF WHATSOEVER NA TURE AND HE SHALL NOT LODGE ANY CLAIM OR DEMAND AGAINST SAID CONTINUING PARTNERS OR FIRM OR CORPORATION AND THE RETIRING PARTNER HAS AGREED TO SIGN, ALL PAPERS, DOCUMENTS, BONDS, LETTERS, AUTHORITIES AND TO EXTEND ALL CO - OPERATION WHICH MAY BE FOUND NECESS ARY BY THE CONTINUING PARTNERS TO GIVE THE FULL EFFECT TO THE RETIREMENT OF THE RETIRING PARTNER AND TO ALLOW THE CONTINUING PARTNERS TO CONTINUE THE BUSINESS OF THE PARTNERSHIP PEACEFULLY. 3. IT HAS ALSO BEEN DISCUSSED BY THE AO THAT T HERE WERE SEVERAL INVESTMENT IN IMMOVABLE PROPERTIES AND ON ACCOUNT OF RELINQUISHMENT OF THE RIGHTS BY THE RETIRING PARTNER THE TITLE OVER THE PROPERTIES AS WELL AS THE GOODWILL WERE TRANSFERRED IN FAVOUR OF THE REMAINING PARTNERS. HENCE THE EXPENDITURE WA S A CAPITAL EXPENDITURE. THE AO HAS PLACED RELIANCE ON A DECISION OF CIT VS. SANGAM ENTERPRISES 163 CTR 232 (A.P.) AS A RESULT THE EXPENDITURE WHICH WAS CLAIMED BY THE ASSESSEE WAS DISALLOWED RESPECTIVELY FOR BOTH THE YEARS. BEING AGGRIEVED, THE MATTER WAS CARRIED BEFORE THE FIRST APPELLATE AUTHORITY. 4. LEARNED CIT(APPEALS) HAS EXAMINED SOME OF THE CLAUSES OF THE RETIREMENT DEED DATED 28 - 07 - 2005 AND THEREAFTER OBSERVED THAT THE RETIRING PARTNER, NAMELY, SHRI RAJESH MANIKRAO PACHORE HAD JOINED THE PARTNER SHIP OF THE FIRM M/S UNIVERSAL INFRASTRUCTURES, CONSTITUTED BY PARTNERSHIP DEED EXECUTED ON 06 - 07 - 2001. THE SAID PARTNER HAD CONVEYED HIS INTENTION TO RETIRE FROM THE PARTNERSHIP WITH EFFECT FROM 26 - 07 - 2005. HIS ACCOUNTS WERE SETTLED. IN THE OPINION OF LE A RNED CIT(APPEALS) THE REMAINING PARTNERS HAVE ACQUIRED THE RIGHTS OF THE RETIRING PARTNER IN THE FIRM AND THE FIRM HAS INCURRED THE CAPITAL EXPENDITURE. LEARNED CIT(APPEALS) HAS ENDORSED THE VIEW TAKEN BY THE AO IN THE FOLLOWING MANNER : 4 ITA NOS. 294 & 295/NAG/2012. 6.0 I HAVE CONSIDERED THE SUBMISSIONS MADE AND PERUSAL OF RETIREMENT DEED CLEARLY BRINGS OUT THAT : IT IS A CASE OF A PARTNER FROM PARTNERSHIP AND THE RETIRING PARTNER IS PAID FOR HIS CAPITAL AND THE ENTIRE GOODWILL AT THE TIME OF RETIREMENT AFTER DUE VALUATION MUTU ALLY AGREED AND RETIRING PARTNER. IN RETURN THE REMAINING PARTNERS SHARE HAVE GONE UP FROM TO 1/3 EACH. APPELLANTS RELIANCE OF THE CASE LAWS QUOTED IS MISPLACED AS HONBLE SUPREME COURT HAS CLEARLY HELD THAT PAYMENT MADE FOR PURCHASE OF GOOD WILL IS CA PITAL EXPENDITURE AN IN THE CASE AT HAND PAYMENT IS MADE BY REMAINING PARTNERS OF THE FIRM TO RETIRING PARTNER BOTH FOR HIS CAPITAL AND GOODWILL I.E. TO ACQUIRE THE INCOME EARNING APPARATUS ALONGWITH THE GOOD WILL OF THE FIRM (AT A MUTUALLY AGREED PRICE). EACH OF THE REMAINING THREE PARTNERS ARE NOW PARTNER FOR 1/3 SHARE OF INCOME INSTEAD OF SHARE EARLIER AND NO CONTINUING PAYMENT IS TO BE MADE TO RETIRING PARTNER FOR USE OF GOOD WILL. HENCE, THE A.O. HAS RIGHTLY TREATED THE OUT GO IN BOTH THE YEARS AS CA PITAL EXPENDITURE FOLLOWING THE JUDGMENT OF MINOO MEHTA VS. CIT AS IT IS OUT RIGHT PURCHASE OF SHARE OF GOOD WILL OF RETIRING PARTNER BY CONTINUING PARTNERS. 5.1 HOWEVER, IT APPEARS THAT APPELLANT HAS NOT DEBITED RS.9,00,000/ - PAID TO RETIRING PARTNER IN HIS P & L ACCOUNT, NOR APPELLANT HAS DEBITED COST OF FLAT GIVEN TO HIM IN P& L ACCOUNT BUT ONLY DEBITED RS.45 LAKHS IN TWO YEARS IN PROFIT AND LOSS ACCOUNT AND CLAIMED IT TO BE REVENUE IN NATURE BUT AS DISCUSSED ABOVE, THESE PAYMENTS ARE FOR PURCHASE OF SH ARE OF RETIRING PARTNER IS CLEARLY GOOD WILL, HENCE CAPITAL IN NATURE AND DISALLOWANCES MADE BY A.O. ARE UPHELD. 5.2 ONE SMALL ISSUE REGARDING RS.9,00,000/ - DISALLOWED BY A.O. EVEN WHEN APPELLANT HAS NOT DEBITED THE PAYMENT OF RS.9,00,000/ - TO RETIRING PA RTNER. A.O. IS DIRECTED TO VERIFY THE CLAIM AND ALLOW IT AS ONCE THE PAYMENT IS NOT DEBITED TO P & L ACCOUNT BY APPELLANT, IT CANNOT BE DISALLOWED BY A.O. 5. FROM THE SIDE OF THE APPELLANT, LEARNED A.R. MR. GIRISH B. PUROHIT APPEARED AND PLEADED THAT TH E PARTNERSHIP WAS NOT DISSOLVED AND ONLY IN A SITUATION WHEN A PARTNERSHIP I S DISSOLVED THEN ONLY THE GOODWILL IS TO BE TREATED AS AN ASSET IN TERMS OF SECTION 55 OF THE INDIAN PARTNERSHIP ACT. THE EXPENDITURE WHICH WAS INCURRED BY THE FIRM WAS WRONGLY PRE SUMED AS A CAPITAL EXPENDITURE. 5 ITA NOS. 294 & 295/NAG/2012. THE FIRM REMAINED IN EXISTENCE AND THE AMOUNT PAID TO THE RETIRING PARTNER WAS A PREMIUM OF GOODWILL WHICH WAS TO BE USED BY THE PARTNERSHIP FIRM AND IT WAS NOT ANY KIND OF PURCHASE OF GOODWILL. THE BUSINESS WAS CARRIED OUT UNDER THE SAME NAME AND STYLE OF PARTNERSHIP AND THE AMOUNT WAS PAID TO PROTECT THE CONTINUING BUSINESS OF THE PARTNERSHIP FIRM. RELIANCE WAS PLACED ON FEW DECISIONS AS UNDER : 1. CIT VS. PIO NEER ENG. SYNDICATE 175 ITR 93. 2. DALMIA JAIN VS. CIT 81 ITR 754. 3. DEVIDAS VITHALDAS & CO. VS. CIT 84 ITR 277 (SC). 4. CIT VS. DHARAMPAL SHANTISARUP 162 ITR 134. (P&H). 5. MOHANLAL HARGOVINDDAS VS. CIT 6. HINDUSTAN FORESTS CO. LTD. VS. CIT 1966 TAX PUB (DT) 050 (PUNJAB - HC). 6. FROM THE SIDE OF THE REVENUE, LEARNED D.R. MR. RAVI KUMAR APPEARED AND PLACED RELIANCE ON THE FINDINGS OF THE REVENUE AUTHORITIES. LEARNED D.R. HAS ALSO PLACED RELIANCE ON THE DECISION OF SANGAM ENTERPRISES 163 CTR 232 AND MINU F. MEHTA 217 ITR 578. 7. WE HAVE HE ARD BOTH THE SIDES AT SOME LENGTH. WE HAVE CAREFULLY PERUSED THE DOCUMENTS FILED BEFORE US IN THE LIGHT OF THE DEED OF RETIREMENT DATED 26 TH JULY, 2005 AND THE CASE LAWS CITED. THE ADMITTED FACTUAL POSITION WAS T HAT ONE OF THE PARTNER OF THE FIRM HAS EXPRE SSED TO RETIRE FROM THE FIRM, HENCE ON HIS RETIREMENT AN AMOUNT OF RS.54 LAKHS WAS PAID, THE DETAILS OF PAYMENTS HAVE ALREADY BEEN REFERRED ABOVE. IN THE BACKGROUND OF THE ADMITTED FACTUAL POSITION A LEGAL QUESTION HAS BEEN RAISED THAT WHETHER SUCH A PAYME NT WAS IN THE NATURE OF CAPITAL EXPENDITURE OR IN THE NATURE OF REVENUE EXPENDITURE. IN OUR CONSIDERED OPINION, THE DECISION OF HONBLE ANDHRA PRADESH HIGH COURT PRONOUNCED IN THE CASE OF CIT VS. SANGAM ENTERPRISES 240 ITR 13 IS SQUARELY 6 ITA NOS. 294 & 295/NAG/2012. APPLICABLE TO SETTLE THIS CONTROVERSY. THE SALIENT FEATURES OF THIS CASE LAW WERE THAT THE PARTNERSHIP FIRM ORIGINALLY CONSISTED OF SIX PARTNERS. ONE OF THE PARTNER RETIRED FROM THE PARTNERSHIP FIRM AFTER RELINQUISHING HIS SHARE IN THE FIRM ALONG WITH INTEREST ENTITLED IN THE PROPERTIES AND ASSETS AND LIABILITIES. A SUM OF RS.1 LAKH WAS PAID TO THE RETIRING PARTNER. AS PER THE RELINQUISHMENT DEED THE RETIRING PARTNER HAD RELINQUISHED HIS INTEREST IN THE ASSETS OF THE FIRM, BOTH MOVABLE AND IMMOVABLE. THE RELINQUISHMENT T HUS RESULTED INTO ACQUISITION OF ASSETS BY THE ASSESSEE FIRM, THEREFORE, AS PER HONBLE COURT IT WAS A CAPITAL EXPENDITURE AND NOT A REVENUE EXPENDITURE . FURTHER IN THE CASE OF MINU F. MEHTA 217 ITR 578 (BOM.), A VIEW WAS EXPRESSED THAT IN A SITUATION WHEN PAYMENT WAS MADE TO A RETIRING PARTNER THEN IT WAS NOT A PAYMENT FOR THE PURPOSE OF PROTECTING THE BUSINESS. THE HONBLE COURT HAS ALSO EXPRESSED THAT THE PAYMENT TO A RETIRING PARTNER COULD NOT BE REGARDED AS A REVENUE EXPENDITURE INCURRED WHOLLY AND EXC LUSIVELY FOR THE PURPOSE OF RUNNING THE BUSINESS. IN TRUTH AND SUBSTANCE IT IS IN THE NATURE OF CAPITAL EXPENDITURE BECAUSE THE REAL PURPOSE OF THIS PAYMENT WAS TO ACQUIRE THE INTEREST OF THE RETIRING PA RTNER IN THE BUSINESS OF THE FIRM. THE HONBLE COURT HAS CONCLUDED THAT THE PAYMENT FOR ACQUIRING A PROFIT YIELDING ASSET IS IN THE NATURE OF CAPITAL EXPENDITURE. ONE MORE CASE HAS ALSO BEEN CITED BEFORE US VIZ. CIT VS. STANDARD MAKING AND ALLIED PRO D UCTS CORPORATION 226 ITR 1 AND THE VIEW EXPRESSED WAS THAT THE PAYMENT TO A RETIRING PARTNER COULD NOT BE SAID TO BE INCIDENTAL TO THE CARRYING ON OF THE BUSINESS. BY AGREEING WITH THE MAIN JUDGEMENT ONE OF THE L ORDSHIP HAS ALSO COMMENTED THAT ON THE AFOR ESAID SETTLED LEGAL POSITION, WHAT A FIRM PAYS AND RETIRING PARTNER GETS ON SEVERANCE OF HIS RELATIONSHIP, IS RIGHT OF A RETIRING PARTNER IN THE SHARE OF PROFITS AND ASSETS OF THE FIRM. THE HONBLE COURT HAS, THEREFORE, ANSWERED THE QUESTION IN FAVOUR OF T HE REVENUE. 8. AS FAR AS THE CASE LAWS CITED BY THE APPELLANT ARE CONCERNED, WE HAVE THOROUGHLY EXAMINED ALL OF THEM BUT THOSE DECISIONS ARE NOT EXACTLY ON THE LEGAL 7 ITA NOS. 294 & 295/NAG/2012. ISSUE AS RAISED BEFORE US. THE LEARNED A.R. MR. GIRISH B. PUROHIT HAS PLACED RELIANCE ON THE DECISION OF PIONEER ENG. SYNDICATE 175 ITR 93 BUT WE HAVE NOTICED THAT THE FACTS WERE ALTOGETHER DIFFERENT AND THE PAYMENT WAS FOUND TO BE IN THE NATURE OF REVENUE EXPENDITURE BECAUSE IT WAS INCURRED ON THE GROUND OF COMMERCIAL EXPEDIENCY, WHICH HAD NO T RESULTED INTO ACQUISITION OF ANY CAPITAL ASSET. LIKEWISE IN THE CASE OF ITC LTD. 95 TTJ 1017 (KOL - TRIB) THE ITC CLASSIC HAD SUFFERED HUGE LOSSES AND THE EXPENDITURE WAS INCURRED ON RESTRUCTURING OF THE SAID COMPANY. THE EXPENDITURE INCURRED ON RESTRUCTUR ING WAS CLAIMED AS AN EXPENDITURE U/S 37(1) OF I.T. ACT WHICH WAS HELD AS AN ALLOWABLE EXPENDITURE. IN OUR OPINION THE CONTEXT UNDER WHICH THE DECISION WAS PRONOUNCED WAS ALTOGETHER DIFFERENT, HENCE THE RELIANCE BY LEARNED A.R. IS MISPLACED. REST OF THE D ECISIONS ARE NOT EXACTLY ON THE LEGAL ISSUE AS RAISED IN THIS APPEAL, THEREFORE, KEEPING BREVITY IN MIND, NEED NOT BE DISCUSSED IN EXTENSO. HOWEVER, BEFORE WE CONCLUDE IT IS WORTH TO MENTION THAT THERE ARE SEVERAL DECISIONS WHEREIN PAYMENT WAS MADE TO A R ETIRING PARTNER TOWARDS ACQUIRING GOODWILL AND COMMERCIAL RIGHTS AND, THEREFORE, IN THOSE CASES THE PROVISIONS OF SECTION 32(1) READ WITH CLAUSE (II) EXPLANATION 3(B) FOR THE PURPOSE OF ENTITLEMENT OF DEPRECIATION WAS CLAIMED. IN SUCH CASES THE ISSUE WAS S ETTLED IN THE MANNER THAT EXPLANATION 3 TO SECTION 32(1) HAS DEFINED EXPRESSION ASSET WHICH INCLUDE INTANGIBLE ASSETS , HENCE ENTITLED FOR DEPRECIATION. THE PURPOSE OF REFERRING THIS SECTION IN HIS APPEAL IS THAT WHILE DECIDING THE ADMISSIBILITY OF DEPR ECIATION THE COURTS HAVE FIRST HELD THAT THE EXPENDITURE IN QUESTION WAS CAPITAL EXPENDITURE AND THEREAFTER IF FOUND THAT INTANGIBLE ASSETS HAD BEEN ACQUIRED THEN THE CLAIM OF DEPRECIATION WAS ACCORDINGLY DECIDED. HENCE AN ANALOGY CAN BE SAFELY DRAWN THA T IF IN THIS CASE THE APPELLANT IS ARGUING THAT THE EXPENDITURE WAS INCURRED TOWARDS GOODWILL FOR RUNNING OF THE BUSINESS THEN ALSO THE NATURE OF THE EXPENDITURE WAS NOTHING BUT CAPITAL EXPENDITURE. WE, THEREFORE, CONCLUDE THAT THE VIEW TAKEN BY THE REVE NUE AUTHORITIES WAS A LEGALLY CORRECT VIEW. HENCE HEREBY APPROVED. THE GROUNDS RAISED BY THE ASSESSEE ARE DISMISSED. 8 ITA NOS. 294 & 295/NAG/2012. 9. IN THE RESULT, BOTH THE APPEALS OF THE ASSESSEE ARE DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON THIS 31 ST DAY OF MAY, 2016. SD/ - SD/ - (SHAMIM YAHYA) (MUKUL K. SHRAWAT) ACCOUNTANT MEMBER JUDICIA L MEMBER NAGPUR, DATED: 31 ST MAY , 2016. COPY FORWARDED TO : 1. M/S UNIVERSAL INFRASTRUCTURES, OPP. DURGA MATA MANDIR, PRATAP NAGAR, NAGPUR. 2. D.C.I.T., CIRCLE - 8, NAGPUR. 3. COMMISSIONER OF INCOME - TAX - IV, NAGPUR. 4. CIT(APPEALS) - I I, NAGPUR. 5. D.R., ITAT, NAGPUR. 6. GUARD FILE TRUE COPY BY ORDER ASSISTANT REGISTRAR, ITAT, NAGPUR WAKODE.