TMI Blog1987 (7) TMI 126X X X X Extracts X X X X X X X X Extracts X X X X ..... n computing the total income of the assessee. It was noticed that the said Directors were carrying on business in partnership in the name and style of M/s. Malhotra Steel Corporation. On 16-10-78 the assessee company became a partner in that firm. Thereafter the firm was dissolved with effect from 30-6-80 and the business was taken over by the assessee company. A dissolution deed was drawn on 1-8-80. Clause 6 of the deed of dissolution stated that the company was not in a position to make full payment of the balance standing to the credit of the abovementioned three persons in their capital account and hence they agreed to retain amounts of Rs. 2 lakhs each in each of their respective sarafi account for ten years. In consideration thereof the company agreed to pay to each of them for a period of 10 years 5% of the net profit of the company or 15% per annum on the amounts credited to the sarafi account of each of them, whichever is higher. The abovementioned payments of Rs. 2,57,729 to each of them were claimed to have been made in terms of clause 6 of the dissolution deed at 5% of the net profit of the company." 4. The CIT was of the view that the order of the ITO was erroneous a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be seen rather than events in the subsequent period. (5) That the assessee's business was subject to wide fluctuations and substantial profit in subsequent years was not a ground for disallowing a payment which had been made on the basis of a valid document (dissolution deed) drawn up earlier. (6) There was no motive to reduce the burden of tax since the three outgoing partners to whom the amounts had been paid were in the higher income bracket and also subjected to wealth-tax and payment of C.D.S. (7) That if the outgoing partners had taken the amount by way of goodwill then no tax liability would have been attracted. (8) That even if the Balance Sheet for the period ending 30-6-81 is taken into account the assessee could not have discharged the liability to the ex-partners on account of heavy financial commitments which included ; (i) Current liabilities Rs. 78.24 lakhs (including provision for taxation Rs. 32.89 lakhs) (ii) Unpaid liabilities Rs. 8.23 lakhs (iii) Proposed dividend Rs. 1.48 lakhs (iv) Creditors Rs. 35.63 lakhs (9) That stocks could not be pledged with the banks for obtaining unlimited funds since such borrowings had also to be regulated by ce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere entitled to 45% of the assets of the firm including goodwill and that while making up of the accounts of the partnership for the purpose of dissolution and to determine the amount payable to them as consideration for retention of Rs. 6 lakhs this aspect that they had 45% share in the assets of the firm including goodwill which they agreed to be taken over by the company obviously weighed with them and was taken into account. It is evident from this that the agreement to pay the amounts as per Clause 6 was made in order to compensate the outgoing partners for their loss due to their retirement from the firm. In other words, the agreement provided for paying their share in the goodwill of the firm during a span of 10 years instead of by a lump sum. The assessee company has drawn attention to the liabilities of the firm required to be discharged by it and the scarce resource position, in order to drive home its point that Rs. 6 lakhs was required to be retained for business considerations or for commercial expediency. The amount of Rs. 6 lakhs is relatively very small compared to the volume of the business taken over by the company. While explaining the resources position, the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ears so that the outgoing partners can be compensated for their loss on retiring from the firm and for parting with the goodwill of the business in favour of the assessee. Payment made for acquiring goodwill is not deductible while arriving at the profit chargeable to tax. The claim of the assessee that the incidence of tax in the case of outgoing partners as a result of inclusion of the amount received by them for retaining Rs. 2,00,000 each was more than the tax payable by the company in case of absence of such payment, is also not correct. The chart (Annexure-D) filed by the assessee shows that only in asstt. year 1982-83, that too in the case of only one partner, the incidence of tax was slightly higher than the tax payable by the company. The incidence of tax in the case of company was higher than the incidence of tax of the 3 outgoing partners taken together. Moreover, if the goodwill was paid in lump sum the outgoing partners would have paid higher tax on the income generated from it and also wealth-tax on amount so received. In the absence of an agreement providing for such high payments, the profits of the company would have been more and the company would have paid high ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arned counsel for the assessee has advanced detailed arguments in support of his case. After reiterating the facts which have already been stated by us he has made submissions on lines similar to the ones as before the CIT. The new points raised by him are :-- (1) The order is contradictory since the CIT has considered the amount as being (i) wholly disallowable and (ii) partly disallowable either under sec. 40A(2) or 40A(8). (2) That the CIT had ignored certain vital and relevant facts mentioned in the reply to the show cause notice while at the same time importing into the order certain irrelevant facts. (3) That the CIT had to consider the position as on 30-6-1980 (date of dissolution) and not for the subsequent period. (4) That the genuineness of the transaction was not doubted by the revenue at any stage. (5) That the matter had to be looked at from the point of view of the assessee and not that of the tax authorities. (6) That sharing of profits even if it was assumed to be so was not prohibited by law and the payment was allowable as a deduction. In support of his arguments the following decisions were cited by the learned counsel: (1) Dharamvir Dhir v. CIT [19 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... payment of Rs. 7,93,187 to retain a sum of Rs. 6 lakhs could not be considered reasonable. It was also urged that section 40A(8) was applicable since the amount in question came within the meaning of the term "deposit". In support of his arguments the learned D.R. derived support from the following decisions : (i) CIT v. Panipat Woollen General Mills Co. Ltd. [1976] 103 ITR 66 (SC) (ii) Lachminarayan Madan Lal v. CIT [1972] 86 ITR 439 (SC) (iii) Swadeshi Cotton Mills Co. Ltd. v. CIT [1967] 63 ITR 57 (SC) (iv) W.T. Suren Co. (P.) Ltd. v. CIT [1971] 80 ITR 602 (Bom.) 9. In his reply the learned counsel for the assessee submitted that the various decisions cited by the learned D.R. were distinguishable on facts. According to him, the payments were to the outgoing partners and not creditors simpliciter. It was also contended that it was never the case of the revenue that the arrangement was a "colourable device" to avoid tax and cases cited by the learned D.R. to this effect were not applicable at all. 10. We have examined the rival contentions and have also perused the material on record as also the paper book filed by the assessee's counsel. It is seen that this was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... khs respectively. Admittedly the 3 partners of the firm who opted out did not get anything on account of goodwill etc. and they were entitled only to the amounts standing to their credit and determined at Rs. 12,23,768. This was payable to them on the basis of the terms outlined in Clause 6 of the dissolution deed which is as under: "As the party hereto of the Fourth Part is not in a position to make payment in full of abovestated amounts, the parties hereto of the First Part, Second Part and Third Part each has agreed to retain amounts of Rs. 2,00,000 (Rupees two lacs only) in each of their respective sharafi accounts with the party hereto of the Fourth Part, for a minimum period of ten years, and in consideration of the parties hereto of the First Part, Second Part and Third part having agreed to retain end keep the amount of Rs. 2,00,000 (Rupees two lacs only) in each of their respective sharafi accounts with the party hereto of the Fourth Part, the party hereto of the Fourth part has agreed to pay to each of the parties hereto of the First Part, Second Part and Third Part, for a period of ten years, either of the amounts as stated in para, (A) or part (B) below, whichever amo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... who knows what is good for it. 15. We have also found that the ex-partners are assessed to tax in a high bracket and on the basis of the details placed at page 25 of the paper book the returned incomes for A.Y. 1982-83 are as under: Name Returned Tax paid Average Income Rate 1. Shri R.L. Malhotra 15.85 lakhs 10.23 lakhs 65% 2. Shri Ravi Malhotra 3.46 " 2.06 " 60% 3. Shri Ashok Malhotra 2.82 " 1.63 " 58% These figures support the assessee's case to the effect that there was no attempt to evade taxes. 16. It is also an admitted fact that the transaction is not doubted since there is no whisper to this effect either in the order of the ITO or the CIT. The arguments of the learned DR to the effect that it is a "device" are accordingly overruled although the payer and payee are the same set of persons. 17. We are however not impressed with the terms of the arrangement and find it rather strange that a sum of Rs. 7.93 lakhs has to be paid to retain an amount of Rs. 6 lakhs and also have a recurring liability to do so for another period of 9 years. A perusal of page 24 of the paper book shows that the following payments have been made under the arrangement: Asstt. Yea ..... X X X X Extracts X X X X X X X X Extracts X X X X
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