TMI Blog2002 (12) TMI 34X X X X Extracts X X X X X X X X Extracts X X X X ..... 5-96. These members were erstwhile partners of the dissolved firm which was carrying on the business of manufacturing bee dies under the firm name "Mangalore Ganesha Beedi Works". The firm was comprised of 13 partners. It stood dissolved on December 6, 1987, by efflux of time. Thereafter, the business was carried on behalf of all the erstwhile partners as an association of persons till the affairs of the firm was finally wound up. The assets of the firm were ultimately sold to the present assessee under orders of this court in winding up proceedings on November 20, 1994. On and from November 21, 1994, the business of the erstwhile dissolved firm became that of the present assessee. Thus, during the previous year for the assessment year 1995-96, from April 1, 1994 to November 20, 1994, the business was being carried on for and on behalf of the association of persons comprised of the erstwhile 13 partners (i.e., for 234 days). But for the period November 21, 1994 to March 31, 1995, the business was carried on by and on behalf of the purchasing association of persons i.e., the assessee (for 131 days). Before entering into the facts in detail, we find it advantageous to clarify the b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rm is evidenced by a partnership deed dated June 30, 1982. According to the averments made in the deed, the last reconstitution of the firm became effective from June 6, 1982. According to the deed of partnership, the firm comprised the following 13 partners: Sl. No. Name of the partners Percentage of share 1. B. Raghurama Prabhu 14.50% 2. M. Janardhana Rao 7.65% 3. M. Ananda Rao 7.65% 4. M. Vinoda Rao 7.50% 5. M. Pushpalatha, W/o. Subraya Baliga 12.50% 6. Hemalatha, W/o. Ragunath Shenoy 12.50% 7. M. Suresh Rao 7.55% 8. M. Vishwanath Rao 7.55% 9. M. Ramanatha Rao 2.50% 10. Jaganath Shenoy 2.50% 11. Vatsala Shenoy, D/o. M. Janardhana Rao 7.55% 12. M. Gopinath Shenoy 2.50% 13. Arathi Shenoy, D/o. M. Janardhana Rao 7.55% Clause (3) of the partnership deed provided for the duration of the firm. This clause reads as under: "3. The duration of the partnership shall be five years in the first instanc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sferee or assignee partner or partners." Winding up of the firm by sale of its assets: It is a matter of record that despite dissolution of the firm, because of differences between the erstwhile partners, the affairs of the firm could not be wound up. So two of the partners of the firm filed a petition before this court under the provisions of Part X of the Companies Act, 1956, for winding up of the affairs of the firm in terms of section 583(4)(a) thereof. This petition was numbered as Co. P. No. 1 of 1988. By order dated November 3/5, 1988, this court permitted the group of partners (7) having controlling interest to continue the business as an interim arrangement till the completion of winding up proceedings. Subsequently, under order dated June 14, 1991, this court framed the scheme for winding up of the affairs of the firm by selling its assets as a going concern. Paragraph 29 of the order contains the scheme. Clauses (i), (iii) and (v) of this scheme are material for the present purposes and accordingly are being reproduced hereunder: "(i) The dissolved partnership firm-Mangalore Ganesh Beedi Works as a going concern shall be sold to such of its partner/s, who makes an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s accepted and the group of persons offering the said amount are directed to deposit within 60 days from today with the official liquidator the entire amount of rupees ninety two crores together with actual profits earned from December 6, 1987 till March 31, 1994 and proportionate profit from April 1, 1994 till the date of deposit in terms of the orders of this court earlier issued in C.A. No. 313 of 1994." At the instance of the three partners offering highest bid, clause (1) of the order dated September 21, 1994 was amended by a subsequent order dated September 29, 1994. The modified clause (1) of the order dated September 21, 1994 read as under: "The highest bid amount of rupees ninety-two crores is accepted and the group of partners offering the said amount are directed to deposit that part of the bid amount of rupees ninety two crores which is proportionate to the shares held by the out-going partners together with profits on the same basis from December 6, 1987 till the date of deposit, within a period of 60 days from September 29, 1994 in any of the nationalised banks in the name of the official liquidator. The rest of our order dated September 21, 1994 remains intact." ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the business of the partnership had been continued even after June 13, 1987 (sic December 6, 1987) by mutual consent in the same manner as it was being carried on before the expiry of the term of the partnership." In the above view of the matter, the Tribunal was justified in holding that the income arising out of the business of the erstwhile firm for the first part of the period, namely, for 234 days, as well as the capital gains arising out of the sale of the assets of the firm to the present assessee-AOPs-3 could not have been assessed in the hands of the assessee the AOPs-3. So far as the AOPs-3 is concerned, the income assessable is the actual profits earned for the year ended March 31, 1995. Question No. (ii).--Whether the Tribunal was right in holding that the assessee was entitled to deduction of Rs. 13,96,08,653 as revenue expenditure being interest and service charges paid to financial institutions? It is not in dispute and is borne from the records that the members of assessee AOPs-3 had jointly borrowed a sum of Rs. 113.75 crores from banks and other financial institutions in their collective names for making payments against the purchase of the assets of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... siness of the firm was deemed to have been handed over to them on November 21, 1994. Therefore, as noticed above, the business was carried on by and on behalf of the assessee-AOPs-3 only for 131 days in the previous year which was less than 180 days. This being the factual position, the assessee-AOPs-3 was entitled to only 50 per cent. of the depreciation in terms of the second proviso to section 32(1) of the Act. The Tribunal has dealt with this aspect in paragraph 3 of the impugned order. It has proceeded to grant 100 per cent. depreciation on a mistaken notion that the assessee-AOPs was carrying on business right from April 1, 1994. This is clearly an error of record. Accordingly, we hold that the assessee was entitled to only 50 per cent. depreciation on the depreciable assets acquired by it. Question No. (v).--Whether the assessee was entitled to claim any deduction on the alleged expenditure of acquisition of patent rights, copy rights and know-how in terms of sections 35A and 35AB of the Act? In our judgment rendered in Income-tax Appeal in B. Raghurama Prabhu Estate v. Joint CIT [2003] 264 ITR 124 (Karn) (I.T.A. No. 134 of 2000) and connected appeals, which have been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... know-how to which any value could have been assigned. So far as the trade mark is concerned, it had value but that was taken to be part of the tangible assets. It was recognised by this court that the main asset of the firm was the goodwill earned by the beedies manufactured by it. Curiously, after purchasing the assets of the firm, the assessee-AOPs-3 through its valuer got the value of the goodwill being Rs. 72 crares bifurcated in the ratio of 50 per cent. know-how, 30 per cent. copyright and 20 per cent. for trade mark thereby rendering the value of the goodwill to "zero". The Assessing Officer as well as the Commissioner of Income-tax (Appeals) rejected the claim of the assessee-AOPs-3 that they can claim any depreciation or deduction in respect of trade marks, copyright and technical know-how. But, the Vice-President without giving any good reasons has directed that the trade mark, copyright and technical know-how should be treated as part of plant and machinery and self-assessed value given by the assessee should be capitalised and accordingly depreciation should be granted. In our opinion, the direction given by the Tribunal is bereft of any acceptable reasoning. It is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... payment was capital in nature, therefore, both the Assessing Officer as well as the Commissioner of Income-tax (Appeals) had rejected the frivolous claim made by the assessee AOPs-3. But, curiously, the Tribunal in a slip shod method and without even applying itself to the facts of the case, has directed for deduction of the amount in question as revenue expenditure. Therefore, this direction given by the Tribunal is also set aside. Question No. (ix).--Whether the assessee was entitled to deduction of Rs. 69,49,209 representing the interest paid to the outgoing partners? The facts in this regard had been discussed in detail by the Commissioner of Income-tax (Appeals) in paragraph 22 of its order. It has not been disputed by the Department even before us that the amount in question represents the interest paid to the outgoing partners. Admittedly, the recipients of the interest amount were not the members of the assessee-AOPs-3. Therefore, the Tribunal was right in agreeing with the finding of the Commissioner of Income-tax (Appeals) that the amount in question should have been allowed as a revenue expenditure. For the aforesaid reasons, the appeals filed by the Department ar ..... X X X X Extracts X X X X X X X X Extracts X X X X
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