1966 PLP 619 (PTD)

T. V. Viswanatha Iyer for the Assessee. C. S. Rama Rao Sahib for the Commissioner. RAJAGOPALAN, J.-After the partition between them in 1940, the four brothers, Kandappa Mudaliar, Krishna Mudaliar, Subbaraya Mudaliar and Sabapathy Mudaliar, entered into a partnership. The firm was known as M. S. Kandappa Mudaliar, and it traded in cotton, yarn and piecegoods. One of its lines of business was the export of piecegoods to Ceylon. When that was subjected to control, the firm obtained the prescribed quotas from time to time to carry on its export trade. Sabapathy Mudaliar retired from the partnership on 6th February 1944. The firm was reconstituted under the same trade name with the other three brothers as partners. The firm was entitled to its export quotas and the parties agreed that arrangements should be made with Sabapathy to get his quota separately in proportion to the 3 annas 3 pies share he had held in the dissolved partnership. As it would necessarily take some time to obtain a re-allocation of the quotas from the authorities, the new firm, which consisted of the three brothers, and -which is the assessee in these proceedings, entered into an agreement with Sabapathy on 14th April 1944. After referring to the retirement of Sabapathy on 6th February 1944, that agreement, Annexure Exh. A-1, provided "Whereas we, the partners, have obtained cloth quota for export to Ceylon and whereas you are entitled to get a release and obtain your Re. 0-3-3 share in the above and until you are able to obtain quota for yourself, it is hereby agreed that we would buy the entire quota goods and use it for our business and as recompense for the same we hereby agree to pay you in accordance with the prevailing conditions and the opinion of other merchants. This agreement shall have force only until you are able to secure your quota." There was a re-allocation of quotas as between the assessee firm and Sabapathy only in 1946. In the relevant accounting years ending respectively with 1st February 1945, and 26th January 1947, the assessee firm, which had continued its export business under the quotas issued before the re-allocation, paid to. Sabapathy under the terms of the agreement dated 14th April 1944, a sum of Rs. 13,500 on 1st February 1945, and a further sum of Rs. 10,000 on 26th January 1947. The payments were by credit to Sabapathy in the assessee's books with corresponding debit entries. The assessee firm claimed to deduct these sums from its assessable income in the corresponding assessment years, 1945-46 and 1947-48. The claims which were disallowed by the Income-tax Officer were allowed on appeal by the Appellate Assistant Commissioner. 7 he Department appealed to the Tribunal. The Tribunal agreed with the view taken by the Income-tax Officer and disallowed the claim. On the application of the assessee the Tribunal referred to this Court under section 66(1) of the Income-tax Act the following question: "Whether the payments made to Sabapathy Mudaliar, Rs. 13,500 and Rs. 10,000 during the accounting years 1944-45 and 1946-47 respectively, can be deducted from the taxable profits of the assessee under the provisions of the Act?'' The genuineness of the agreement dated 14th April 1944, and that of the two payments made under it were never doubted. In paragraph 7 of the statement of the case, the Tribunal recorded: "The Income-tax Officer disallowed the claim of the assessee on the ground that the payment was capital in nature as these sums were paid to Sabapathy Mudaliar to acquire the rights over his share of Ceylon export quota." The Assistant Commissioner held: "The retiring partner's share was not acquired. All that happened was that temporarily a portion of the quota which belonged to the retiring partner was utilised for making exports to Ceylon. This is not materially different from the usual procedure adopted by exporters who were purchasing export quota from others. Such purchases are not considered as acquiring capital assets. There is therefore no justification for treating this transaction differently." The Appellate Assistant Commissioner referred to Devarajulu Chesty & Co. v. Commissioner of Income-tax, and held that the principle of that decision should justify the claim of the assessee being allowed. The Tribunal stated that the sums in question had been paid on account of the assessee making use of the quota that fell to the share of Sabapathy, and it concluded: "The sum . . . if paid to Sabapathy represents a premium paid to him for his withdrawing from the export branch of the firm. In that view of the matter the allowance made by the. Appellate Assistant Commissioner is, in our opinion, wrong." In our opinion, the view taken by the `Appellate Assistant Commissioner was right and that taken by the Tribunal was erroneous. What the Tribunal in effect held, agreeing with the Income-tax Officer, was that the expenditure was of a capital nature, though the Tribunal characterised the payments as premia paid for the withdrawal of Sabapathy from the export branch of the firm. The Tribunal apparently overlooked the fact, that Sabapathy had retired from the partnership even on 6th February 1944, and that there could be no question of paying him any premium for the export branch alone of the business of the original firm. At no stage was it the contention of the Department that it was a case of allocation of profits earned by the assessee firm from its export trade with Ceylon, though what was payable to Sabapathy under the terms of the agreement was apparently computed' on the basis those profits. That the profits furnished the basis for the arithmetical computation of what had to be paid to Sabapathy did not determine the nature of the payment. As pointed out in Devarajulu Chetty & Co. v. Commissioner of Income-tax. "It is the quality of the payment that is the test and not its admeasurement." The obligation to pay Sabapathy arose under the agreement, though the quantification thereof was deferred. What was the nature of that obligation is the question. Was it undertaken to acquire any capital asset for the assessee firm, in which case of course, the expenditure would be of a capital nature. It was not capital expenditure. Nothing was laid out by the assessee firm on the acquisition of any capital asset, any asset of an enduring nature, with the aid of which the assessee firm could earn profits., It was not even a case of acquisition of any fresh quota rights, whether or not quota rights could be viewed as capital assets. The assessee firm had its quota rights, and it was bound to get its quota till the authorities complied with its request to order an allocation of quotas between .the firm and Sabapathy. What the assessee agreed to pay Sabapathy was for the use of the quota with which the assessee could acquire its stock-in-trade, cloth, for export to Ceylon till Sabapathy was allotted his separate quota. Even had it been a case of the assessee firm acquiring the quota rights of Sabapathy-and we have held that factually it was not a case of such acquisition-the expenditure would not have been of a capital nature. The Appellate Assistant Commissioner, it should be remembered, recorded with reference to what he called the usual procedure adopted by exporters, who were purchasing export quota from others, that such purchasers were not considered as acquiring capital assets. It is not, of course, the practice of the Department that decides the validity of a claim to deduct under section 10(2)(xv) of the Act the expenditure incurred for purchasing quota rights of others. In our opinion, the practice referred to by the Appellate Assistant Commissioner had legal sanction behind it. The quota itself, it should be remembered, is not a marketable commodity, though we have earlier referred to the transaction as a purchase of quota rights. It was really a case of payment made for the use of the quota issued to another. The export itself has to be in the n1me of the trader who holds the quota: The quota all through stands in the name of the person in whose name it was issued. Even had Sabapathy been allotted special quotas, and the assessee paid him money for the use of these quotas, the payment would still have been of monies laid out by way of addition to the price of the goods purchased by the assess" for export. The Tribunal recorded in paragraph 8 of its order: "When a quota was granted to a firm, according to the Foreign Trade Controller, there would normally be no reason to split it up according to the partners and grant the seceding partner separate quota. In that view of the matter, Sabapathy Mudaliar was not, by himself, entitled to get a quota merely because he was a partner in the assessee firm." There was no basis for this statement. It was not disputed during the arguments before us that normally the authorities that issued quotas did recognise the claims of the partner of a dissolved partnership for fresh allocation of quotas. That, however, does not really affect the question at issue before us. This was a case where an allocation was made in 1946, but the payments were made before, when the assessee firm was in a position to use the whole of the quotas allotted to it, which included what Sabapathy could claim for himself, a claim which the partners that remained in the assessee firm were prepared to support. As what the assessee undertook to pay was for the use of the full quota including what would eventually be allotted to Sabapathy, what the assessee paid Sabapathy was really an addition to the price of toe goods that the assessee firm purchased for export to Ceylon on the basis of the quotas issued to the assessee firm. Such payments came within the principle laid down by this Court in Devarajulu Chetty & Co. v. Commissioner of Income-tax, and as we pointed out above the Assistant Commissioner was right in applying that principle. We answer the question referred to this Court in the affirmative and in favour of the assessee. The assessee will be entitled to the costs of this reference. Counsel's fee Rs.

250. Reference answered in the affirmative