Rao Bahadur R. Guruswamy Naidu Udumalpet vs The Commissioner of Income Tax, Madras

Satyanarayana Rao, J.—The Income Tax Appellate Tribunal, Madras Bench, have referred to us for decision u/s 66 of the Income Tax Act the following question: "Whether on the facts and in the circumstances I of the case, the payment of Rs. 1,14,000 by the assessee for the purchase of the interest of Palaniappa Chettiar in the managing agency firm of Bhagyalakshmi & Co. was properly treated as capital expenditure."

The assessee is one of the partners of Bhagyalakshmi & Co. who are the managing agents of Palani Andavar Mills Ltd. The remuneration of these managing agents consisted of a monthly payment of Rs. 1000 and a percentage commission on various items. There were four partners, G. T. Venkataswami Naidu and Bros., Palaniappa Chettiar, the assessee and Venkatasubba Naidu. Their shares were six annas, five annas, two annas six pies and two annas six pies respectively. The assessee purchased the interest of Palaniappa Chettiar in the managing agency firm for a consideration of a sum of Rs. 1,14,000 paid by him to Palaniappa Chettiar. In the assessment year he claimed that that amount should be deducted as a revenue expenditure and should not be treated as a capital expenditure. This contention was negatived by the revenue authorities and at his instance the question stated above was referred to us.

On the facts as stated above the answer that we should give to the question does not admit of any serious doubt. It is not a case where any fresh capital was put into the partnership with a view to increase its profits. The assessee purchased for its exclusive benefit the interest of Palaniappa Chettiar, one of the partners who owned a five annas interest in the partnership. For acquiring that asset which was a profit yielding one he had to expend this amount. It is in the nature of capital expenditure for acquiring a profit yielding asset. In such circumstances, it is impossible to accept the contention strenuously pressed on behalf of the assessee by Mr. Subbaraya Aiyar, his learned advocate, that it is really in the nature of a revenue expenditure. We think that the view taken by the revenue authorities is correct and that the question referred to us must be answered in the affirmative and against the assessee. The assessee should pay the costs of the Commissioner of Income Tax which we fix at Rs. 250.