The Pune Bench of Income Tax Appellate Tribunal (ITAT) held that the amount paid to the retiring partner in terms of settlement arrived at between two partners for giving up his interest in the partnership firm is a capital expenditure.
The assessee M/s. Sarsan Developers is a partnership firm engaged in the business of development of lands. The Return of Income for the Assessment Year 2014-15 was filed declaring Rs.Nil income. During the previous year relevant to the assessment year under consideration, the assessee firm debited development expenses of Rs.13,40,50,885/- which includes an amount of Rs.5,60,73,319/paid to retiring partner, namely, Kumar Housing Corporation Limited.
The Assessing Officer (AO) was of the opinion that the amount paid on retirement of partner cannot be allowed as deduction and, accordingly, added to the closing work-in-progress by disallowing the same as deduction under Section 37(1) of the Income Tax Act,1961.
The Commissioner of Income Tax (Appeals) [CIT(A)] held that the provisions of Section 45(4) of the Income Tax Act has no application and, therefore, disallowance of payment by holding to be capital expenditure is not justified, it should be allowed as revenue expenditure.
Being aggrieved by the decision of the CIT(A), the Revenue filed an appeal before the Tribunal.
The Departmental Representative contended that the CIT(A) without appreciating proper facts of the case wrongly held that the amount paid to the retiring partner is revenue nature.
The Authorised Representative of the assessee (AR) submits that the amount was paid to the retiring partner on account of settlement arrived at between two partners towards the expenditure incurred at that time and, therefore, it is not the amount paid to the retiring partner.
The Bench comprising of Inturi Rama Rao, Accountant Member and S. S. Viswanethra Ravi, Judicial Member held that the amount of Rs.4,99,90,000/- was paid to the retiring partner in terms of settlement arrived at between two partners for giving up his interest in the partnership firm, there cannot be any dispute that the amount paid to a retiring partner for giving up his interest in the partnership firm is a capital expenditure.
It was further noted that the CIT(A) without appreciating proper facts of the case went on to hold that the payment of money to the retiring partner is revenue expenditure.
Therefore, the decision of the CIT(A) was reversed and so the grounds of appeal filed by the Revenue was allowed.
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