Thondepu Pharma Distributors vs Commissioner of Income Tax

G. Bikshapathy, J.—This application is filed by the assessee u/s 256(2) of the Income Tax Act, 1961, seeking a direction to the appellate Tribunal to refer the following question of law to this court for opinion :

"Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is justified in law in holding that the annuity of Rs. 1,26,000 paid to the Balaji Trust is not allowable as revenue expenditure in the hands of the firm ?"

The assessee is a partnership firm. The assessment relates to the assessment year 1985-86. The assessee claimed a sum of Rs. 1,26,000 as annuity payment to a trust, Balaji Trust. It was stated that one of the partners of the assessee-firm, T. V. Hanumantha Rao, entered into an agreement with Balaji Trust represented by Shri A. Parthasarathi. As per the terms of the agreement, he has agreed to hand over the distribution of goods manufactured by Sarabhai Chemicals and S. G. Pharmaceuticals to the assessee. It was also agreed to deposit not less than Rs. 9 lakhs with the assessee-firm at the interest rate of 24 per cent. per annum. In consideration of the said arrangement, Sri Hanumantha Rao agreed to pay annuity of Rs. 1,26,000 towards the use of trade name. The said amount is required to be paid within three months after the end of each accounting year. The agreement was in force for five years from April 1, 1984.

The assessee-firm claimed deduction in respect of the said annuity payment of Rs. 1,26,000, on the ground that it was revenue expenditure. The Income Tax Officer refused to accept the claim of the ground that there was no evidence to show that Balaji Trust was given distribution by Sarabhai Chemicals and S. G. Pharmaceuticals and that no appointment letter appears to have been given to confirm the distribution. He also held that in the absence of any right claimed by Balaji Trust, the question of distribution of such right to the assessee-firm carrying on business would not arise. It was also pointed out by the Income Tax Officer that the transaction of entering into agreement between Sri Hanumantha Rao and Parthasarathi was only a device to avoid tax, as Parthasarathi who was a trustee of Balaji Trust himself joined as a partner of the assessee-firm. Commenting on the agreement, the Income Tax Officer stated that it was entered by Sri Hanumantha Rao in his individual capacity and not on behalf of the firm, and, therefore, the payment cannot be allowed. Therefore, the claim for deduction cannot be allowed in the hands of the firm, treating it as revenue expenditure. Accordingly, the Income Tax Officer, by an order dated February 28, 1986, rejected the claim of annuity for deduction.

Having been unsuccessful before the Income Tax Officer, the assessee filed an appeal before the Commissioner of Income Tax (Appeals). The learned appellate authority dismissed the Appeal No. 2/V.II of 1985-86 dated August 8, 1989, while upholding the findings of the Income Tax Officer.

Against the said order of dismissal of the first appeal, the assessee filed an appeal before the Income Tax Appellate Tribunal. The Tribunal, after considering the records, came to a categorical conclusion that there was no evidence to support the claim of the assessee. The Tribunal found that there was no evidence to the effect that the agreement was executed on behalf of the assessee-firm and hence, it should be treated as the agreement entered into by Sri Hanumantha Rao in his individual capacity. Hence, the assessee-firm cannot claim the annuity payment by way of deduction in its hands. The Tribunal also considered the letter addressed by Sarabhai Chemicals wherein it was stated that Balaji Trust had expressed its difficulty in mobilising the funds and, therefore, with their consent Sarabhai Chemicals agreed to supply stocks from April 1, 1984. Therefore, it was a transaction between the assessee and the distributor to whom it directly supplied the material earlier. The Tribunal found that there was no evidence to establish the basis for transfer of distribution rights either in favour of Sri Hanumantha Rao or the assessee-firm. Accordingly, the Tribunal found that there was no basis for making payment on account of annuity. The Tribunal, accordingly, dismissed the appeal of the assessee by its order dated October 31, 1994.

The assessee made an application for referring the question of law as stated supra to this court for opinion. The Tribunal by its considered order rejected the request. It is the case of the assessee that the order refusing to refer a question of law is illegal and unwarranted. We are unable to accept the said contention. The nature of the annuity was gone into by the authorities with reference to the evidence on record and it was found that there was no evidence to support the claim of the assessee.

Therefore, the Tribunal was justified in concluding that the issue does not involve any referable question of law, we do not find any infirmity in the order of the Tribunal.

Accordingly, the Income Tax case is dismissed. No costs.