1. The relevant assessment year for purposes of this reference is 1962-63. The assessee-firm carrying on business in the name of M/s. Nagindas Kilabhai & Company deals in textile machinery parts through its branches at Ahmedabad, Bombay, Kanpur, Calcutta, Indore, Surat and Malegaon. The partnership dated January 1, 1959, between eight partners, namely, (1) Shri Anubhai N. Shah, (2) Shri Dilipbhai A. Shah, (3) Shri Vimalbhai N. Shah, (4) Shri Gautambhai V. Shah, (5) Shri Vikrambhai V. Shah, (6) Shri Manibhai M. Patel, (7) Shri Rameshbhai M. Patel and (8) Shri Natverbhai M. Patel. On account of some differences arising between the partners, it was decided between them that Shri Anubhai N. Shah and his son, Shri Dilipbhai A. Shah, should retire with effect from January 1, 1961. On what terms and conditions these two partners should retire was the subject-matter of reference to the sole arbitrator, one Shri Narottambhai P. Hathising, under an agreement of March 25, 1961. The said arbitrator by his award of October 2, 1961, laid down terms and conditions on which the aforesaid two partners should retire from the firm and all its branches. A deed of retirement of partnership was executed on October 10, 1961, in terms of the said award. Broadly, the terms of retirement were that the remaining partners should continue the business of partnership firm under the name and style of M/s. Nagindas Kilabhai & Company and the two retiring partners should transfer all their shares, rights, title and interests in the assets and liabilities of the said firm to the remaining partners and they should retire with effect from January 1, 1961. In consideration of their retirement and release of their interests from the assets and liabilities of the firm, it was agreed that the continuing partners of M/s. Nagindas Kilabhai & Company would pay a sum of Rs. 39,000 to each of the two retiring partners per annum for the accounting year ending on the December 31, 1961, to the accounting year ending on December 31, 1966, and such annual payment was to be made on or before day of May 30,of each year following the year in respect of which such payments were to be made. It was further agreed that such payments were to be made every year from the gross receipts of the firm before ascertaining the net trading results or the profits distributable to the partners and before any distribution could be made to them of the net profit, if any, and such annual payments as described were to be made to each of the partners as specified above by the firm of M/s. Nagindas Kilabhai & Company as might be reconstituted from time to time in consideration of the said retiring partners permitting the firm to make use of the goodwill, name, quota rights, import license, premises and staff of the firm of M/s. Nagindas Kilabhai & Company, and also in consideration of their forgoing share of the profits which would have accrued to them under the contracts entered into by the firm and which were pending at the date of their forgoing share of the profits which would have accrued to them under the contracts entered into by the firm and which were pending at the date of their retirement and for an exclusive right in these goods which formed the stock-in-trade of the firm. It was also agreed between the retiring partners as well as the continuing partners that for purposes of securing payment of the amount aforesaid, a floating charge should be created on all the properties and assets of the firm of M/s. Nagindas Kilabhai & Company incurred expenses of Rs. 26,136, comprising, inter alia, of stamp duty of Rs. 17,780 and Rs. 2,369.51, as registration fees and Rs. 5,865, as legal charges. It is an admitted position that as regards the question of payment of Rs. 78,000, every year to the two retiring partners, it was not claimed as revenue expenses but was accepted as capital expenditure. It is in respect of this amount of Rs. 26,136 that the assessee-firm claimed that it was business expenditure before the Income-tax Officer, and Which, therefore, should be allowed as admissible expenditure. The Income-tax Officer by his order of January 30, 1967, held that since the said expenses were connected with the disbursement which was of capital nature, they could not be treated as revenue expenditure and he, therefore, disallowed the claim of the assessee.

2. The assessee, therefore, carried the matter in appeal before the Appellate Assistant Commissioner, where the same claim based on the same contention was advanced. The Appellate Assistant Commissioner, however, by his order of March 21, 1970, confirmed the order of the Income-tax Officer and disallowed the claim of the assessee. He, therefore, took the matter in appeal before the Tribunal.

3. The Tribunal accepted the assessee's contention that instead of the payment being made of the entire amount in lump sum, the partners agreed to pay the said amount by yearly installments, and, to ensure such payments, a floating charge on the properties of the firm was created in favour of the retiring partners. It was also pointed out that if the entire amounts in lump sum were to be paid, the financial position of the firm would have been affected and the assets would have been depleted. It was also urged before the Tribunal that the arrangement was arrived at in order that the business could be carried on without impairing any of the assets, and, therefore, the entire transaction was effected with a view to carry on the business and to preserve the assets intact. The Tribunal viewed the entire transaction as a commercial expediency and treated it as a revenue expenditure. The Tribunal, therefore, allowed the appeal of the assessee. It is at the instance of the Additional Commissioner of Income-tax that the following question has been refer to us for our opinion :

"Whether, on the facts and in the circumstances of the case, the Tribunal was correct in law in holding that the expenses of Rs. 26,136 incurred by the assessee on stamp duty, registration fees, etc., of the deed of retirement of partnership should be allowed as business expenditure ?"

4. On behalf of the revenue, the learned advocate, Mr. Kaji, contended in the first instance that the expenses in question have nothing to do with the business of the new firm. In any case, it was contended by him that by virtue of a deed of is solution, the partners got a right to use the shares and interests of the retiring partners in various assets of the firm which they had prior to their retirement and any expenses incurred for acquisition of the capital assets must be held to be capital expenditure since what is acquired for by the new firm was a benefit of enduring nature.

5. On behalf of the assessee, these contentions were sought to be replied by urging that in the first place there was no dissolution of partnership for all intents and purposes and the creation of a new partnership in its place. It was merely a case of retirement of two partners and, on the true view of the substance of the transaction, the outgoing partners were not receiving any consideration for the sale of their interests in the partnership, but the valuation of the shares in the net partnership assets after deducting liabilities and prior charges was determined on taking accounts on the footing of a notional sale of partnership assets and, therefore, there is no question of any acquisition of any interest by the continuing partners in the firm.

6. As laid down by the Supreme Court in Devidas Vithaldas & Co. v. Commissioner of Income-tax it is not the form but the substance of the transaction that matters in this question. We have, therefore, to find out what was the real nature of the transaction on the true construction of the document which was executed between the retiring partners as well as the continuing partners, and which has been described as a deed of dissolution of partnership, incorporating the terms and conditions of the award of the sole arbitrator, Shri Narottam P. Hathisingh. The document was made on day of October 12, 1961, between the retiring partners, namely, Shri Anubhai N. Shah and Shri Dilipbhai A. Shah, who have been described as parties of the first part, and Shri Vimalbhai N. Shah, Sri Gautambhai V. Shah and Shri Vikrambhai V. Shah, who have been described as parties of the second part, and Shri Manibhai M. Patel, Shri Rameshbhai M. Patel and Shri Natverlal M. Patel, who have been described as parties of the third part. It appears clearly that the two retiring partners, namely, Shri Anubhai N. Shah and Dilipbhai A. Shah, were father and son. The parties of the second part comprise of Shri Vimalbhai N. Shah and his two sons, Gautambhai and Vikrambhai, and the parties of the third part comprised of Manibhai and his two sons, Rameshbhai and Natverlal. The relevant clauses for purposes of this reference ar clauses 2,3,4 and 5, which read as under :

"2. That the parties of the first part have ceased on and from the day of January 1, 1961, to have any share or interest in the firm of Messrs. Nagindas Kilabhai & Co., nor do they have any right in respect of its property save as provided hereinafter.

3. That in accordance with the said award, Shri Anubhai N. Shah and Shri Dilipbhai A. Shah shall be said the sum of Rs. 39,000(Rupees thirty-nine thousand only) each per annum for each of the accounting years ending on the December 31, 1961, December 31, 1962, December 31, 1966, and that such payment shall be made on or before the 30th day of May of each of the years following the year in respect of which such payments are to be made. Such sums laid down in the said award shall be paid every year from the gross receipt of the firm before ascertaining the net trading results or the profits distributable to the partners and before any distribution can be made to them of the net profits, if any, such payments as described above are to be made to each of the parties of the first part and specified above by the firm of Messrs. Nagindas Kilabhai & Co., as reconstituted from time to time in return for the parties of the first part permitting the firm to make use of the goodwill, name, quota rights, import license, premises and staff of the firm of Nagindas Kilabhai & Co., and also in return for the parties of the first part forgoing their share of the profits which would have accrued to them under contracts entered into by the firm and which were pending at the date of their retirement and for an exclusive right to these goods which form the stock-in-trade of the firm.

4. That in accordance with the terms of the said award the parties of the second and third parts shall procure and arrange for furnishing a bank guarantee as may be approved by the parties of the first part for the due payment of the sums mentioned in clause 3 above and that till such guarantee is procured the parties of the second part shall pledge with the parties of the first part their 4,000 shares of the Metro Wood & Engineering Works Private Ltd., with blank transfer forms duly signed by the registered holders thereof.

5. That for further securing the payment of the sums mentioned in clause 3 above a floating charge is hereby created on all the properties and assets of Messrs. Nagindas Kilabhai & Co. For the sake of clarity it is added that this floating charge is not to restrict in any manner the continuing or future partners from dealing with such assets of Messrs. Nagindas Kilabhai & Co., as required for the business of the firm."

7. On behalf of the revenue much emphasis was laid on the fact that this deed of dissolution was made in the terms of the award of the arbitrator who was appointed for purposes of determining the terms and conditions on which the retiring partners had to retire from the firm, and its branches, and on which their respective shares and interests in all assets, stock-in-trade, liabilities and debts, agency rights, tenancy rights, quota rights and goodwill and other properties, articles and things belonging to the said firm and its branches were to be sold, transferred and assigned to the remaining partners. It was, therefore, urged on behalf of the revenue that a new firm came into existence which purchased the respective shares and interests of the retiring partners in the assets, stock-in-trade, agency rights, quota rights, goodwill and all other properties belonging to the firm and for purposes of getting all these things and rights transferred and assigned to the new firm, the new firm was under obligation to make annual payments, and in order to secure these annual payments, a floating charge was agreed to be created on the assets of the new firm for which a document was required to be drawn up and registered. The contention was, therefore, that the expenses incurred for purposes of drawing up of the document and its registration for purposes of creating a floating charge on the assets of the new firm cannot have anything to do with the business of the firm because in the very nature of the arrangement effected between the retiring partners and the continuing partners, the annual payments were agreed to be made for purposes of acquisition of rights and interests of the retiring partners in the assets and properties of the old firm, and if the expenses were not in connection with the business of the new firm, they could not be claimed as admissible expenses by the assessee- Fireman any case, it was urged that having regard to the admitted position that annual payments to be made were for acquisition of the rights and interests of the retiring partners in the assets and properties of the old firm, they were capital payments and any expenses connected with acquisition of the capital right must necessarily be capital expenses and could not be allowed to be deducted as revenue expenses, as has been sought to be done by the Tribunal. In support of this contention, Mr. Kaji, the learned advocate for the revenue, relied on the decision of the Bombay High Court in Adarsha Dugdhalaya v. Commissioner of Income-tax where a question arose as to whether the payment of Rs. 1,65,500 being the amount of arbitrator's fees and costs of the solicitors on the two sides in the two suits filed by the retiring partners of a firm as directed by the continuing firm ? The contention urged in that case on behalf of the assessee was that since the expenses were incurred by the assessee-firm in the litigation instituted by the two erstwhile partners making certain claims which, if they were allowed as claimed, would have wiped out its assets and would have prevented the firm from carrying on its business and earning profits, and the expenses should, therefore, be allowed as revenue expenses. Negativing this contention, the Division Bench of the Bombay High Court held that the suit in its essence was a suit for the settlement and adjustment of the rights inter se between the partners and had nothing to do with the subsequent carrying on of the business by the continuing partners. The Division Bench also held that the expenditure incurred was not for the purposes of carrying on its business, and it was not an expenditure in the nature of a revenue expenditure. We have not been able to appreciate how this decision of the Bombay High Court can be of any assistance to the cause of the revenue. It cannot be said here in the present reference before us that the annual payments which the remaining partners of the firm agreed to make to the retiring partners had nothing to do with the business of firm. In this connection a short reference to clause 3 of the deed of dissolution between the partners would clinch the issue. After providing in the said clause that such sums to be paid annually were to be paid every year from the gross respites of the firm before ascertaining the net trading results or the profits distributable to the partners, it has been stated as under :

"..... and before any distribution can be made to them of the net profits if any and such payments as described above are to be made to each of the parties of the first part as specified above by the firm of Masers Nagindas Kilabhai & Co., as reconstituted from time to time ........... in return for the parties of the first part forgoing their share of the profits which would have accrued to them under contracts entered into by the firm and which were pending at the date of their retirement and for an exclusive right to those goods which form the stock-in-trade of the firm."

8. It, therefore, cannot bee successfully urged as has been sought to be donee by Mr. Kaji on behalf of the revenue that the arrangement between the parties had nothing to do with the business of the firm. It has been clearly stated in clause 3 that the annual payments were to be made in consideration of the retiring partners forgoing their shares in the profits under the contracts which were outstanding on the date of their retirement as well as their interests in the stock-in-trade which was taken over by the continuing partners of the firm. It cannot, therefore, be said that this arrangement had nothing to do with the business of the firm.

9. The second attack of Mr. Kaji is that, as these expenses in question were incurred for acquisition of the capital assets by the new firm, they should necessarily be treated as capital expenses and sold not be allowed as deductions as revenue expenses. Now this entire contention proceeds on an assumption. When a partner retires from a firm and receives any amount in lieu of his share, can it be said that there is a transfer or there is a sale of his share, can it be said that there is a transfer or there is a sale of his right or interest in the properties of the firm to the continuing partners ? This question has been concluded by the decision of the Full Bench of this High Court in Velo Industries v. Collector, Bhavnagar. Where a question arose under a stamp reference, whether a document recording terms and conditions of retirement of a partner from a firm would be within the mischief of article 25, clause (b) of Schedule I of the Bombay Stamp Act, 1958. The facts in the case before the Full Bench were that a partner retired from the partnership and the amount of his share in the net partnership assets after deducting liabilities and prior charges was determined on taking accounts on the footing of a notional sale of the partnership assets and was given to him. The question arose, whether what he received by way of payment was his share in the partnership or was it a price of the she of his interest in the partnership ? Bhagwati C.J. (as he then was), speaking for the court, after relying on the decision of the Supreme Court in Commissioner Of Income Tax, Madhya Pradesh v. Dewas Cine Corporation said :

"It is clear that the interest of a partner in the partnership is not an interest in a specific item of the partnership property, but, as pointed out by the Supreme Court, it is a right to obtain his share of profits from time to time during the subsistence of the partnership and on dissolution of the partnership or his retirement from the partnership, to get the value of his share in the net partnership assets which remain after satisfying the liabilities set out in clause (a) and sub-clauses (i), (ii) and (iii) of clause (b) of section 48. When, therefore, a partner retires from the partnership and the amount of his share in the net partnership assets after deduction of liabilities and prior charges is determined on taking accounts on the footing of a notional sale of the partnership assets and given to him, what he receives is his share in the partnership and not any price for sale of his interest in the partnership. His share in the partnership is worked out by taking accounts in the manner prescribed by the relevant provisions of the partnership law and it is this and this only, namely, his share in the partnership which he receives in terms of money. There is in this transaction no element of sale; the retiring partner does not sell his interest in the partnership to the continuing partners. He, on the contrary, carves out his interest and takes it away by evaluating it. This is exactly what happened in the present case. The three partners retired from the firm continued with the remaining partners and the partnership assets continued to belong to the firm composed of the continuing partners. There was clearly and indisputably no sale of interest in the partnership assets by the retiring partners to the continuing partners."

10. After referring to the decision of the Supreme Court in Dewas Cine Corporation's case Bhagwati C.J. (as he then was) proceeded to observe.

"What is given to him by way of his share in the partnership, whether it be cash or some property of the partnership, is received by him as his share in the net partnership assets, after deducting liabilities and prior charges on settlement of accounts and there is no transfer of any interest in property from him to the continuing partners nor is it for a price. It is merely an adjustment of the rights between the retiring partners and the continuing partners in the assets of the partnership; the share of the retiring partner in the partnership is made over to him."

11. In view of this concluded question, therefore, it cannot be urged that in the present case there is any transfer or for that matter any sale of the rights, interests, or shares of the retiring partners in the partnership assets of the old firm to the new firm.

12. On a close scrutiny of the terms and conditions contained in the deed of dissolution, the arrangement appears to be simple. The two partners, namely, Anubhai and his son, Dilipbhai, retired with effect from January 1, 1961, and in consideration of their rights and interests in the assets and properties of the old firm it was agreed that the remaining partners should pay annually a sum of Rs. 39,000 to each of them for a period of five years. Such payments were to be made from the gross receipts of the firm and in order to secure these payments, a floating charge was created on the properties and assets of the firm. The remaining partners were to carry on the business of the firm as it was with it s branched as they were situated at that time with stock-in-trade of the old firm and with the aid of all the assets and properties including the quota rights, agency rights, tenancy rights, goodwill and all other articles and things belonging to the said firm. It has been also agreed that the remaining partners should furnish a bank guarantee to the retiring partners so as to secure the annual payments. The bank guarantee has been furnished by a deed of guarantee executed by the Bank of India Ltd., Ahmedabad Branch (as it was then prior to its nationalisation), somewhere in 1962. It should be recalled that the deed of dissolution was executed on October 12, 1961. The deed of guarantee was executed by the Bank of India at the instance of the continuing partners. In our opinion, therefore, there is no merit in the contention urged on behalf of the revenue that there was a transfer of the capital assets by the retiring partners and the consequent acquisition by the new firm. In fact, as observed by us here in above, there was no new firm coming into existence on the retirement of the aforesaid two partners. The old firm continued under the same name and style and carried on its business in the same commodities at Ahmedabad and at various centers where it has got its branches. No new partners have been taken up and the remaining partners continued the business of the firm with the old stock-in-trade and also carried on the business under the contracts pending with thee old firm on the date of the retirement of the aforesaid two partners. In that view of the matter, therefore, we cannot accede to the submission of Mr. Kaji, the learned advocate on behalf of the revenue, that since these expenses were laid out in connection with the transfer of the capital assets, they must necessarily be labeled as capital expenses and should not be allowed as admissible deductions.

13. Mr. Kaji has relied on the decision of the Supreme Court in Devidas Vithaldas & Co.'s case where an arrangement was made between a chartered accountant who retired and a chartered accountant who carried on the business of the old firm for the payment of certain amount at a specified percentage of profits in lieu of the new firm being allowed to use the goodwill of the old firm. The court on a consideration of the construction of the terms and conditions of the arrangement held that the transaction under the deed of dissolution was merely a license and not a sale of the goodwill, and the payments were in the nature of royalty and were treated as admissible deductions. Relying on this decision it was contended that if there is an outright sale of the capital assets such as goodwill, by the retiring partners to the remaining partners, the expenses incurred in connection with such sale cannot be allowed as revenue expenses. As observed by us above, this contention proceeds on the assumption that there is a transfer of the rights and shares of the retiring partners to the remaining partners or for that matter to the new firm. This assumption, as we have observed above, is wholly unfounded. In this connection our attention has been drawn by the learned advocate of the assessee to the decision of this court in Commissioner of Income-tax v. Mohanbhai Pamabhai. Where the court was concerned with the question of the payment made on relinquishment of interest in partnership assets by a retiring partners, and whether such payment can be brought to tax as capital gains under section 45 of the Income-tax Act, 1961. The Division Bench of this court held :

"The interest of a partner in a partnership is not interest in any specific item of the partnership property. It is a right to obtain his share of profits from time to time during the subsistence of the partnership and on dissolution of the partnership or on his retirement from the partnership to get the value of his share in the net partnership assets which remain after satisfying the debts and liabilities of the partnership. When, therefore, a partner retires from a partnership and the amount of his share in the net partnership assets after deduction of liabilities and prior charges is determined on taking accounts on the footing of notional sale of the partnership assets and given to him, what he receives is his share in the partnership and not any consideration for transfer of his interest in the partnership to the continuing partners. His share in the partnership is worked out by taking accounts in the manner prescribed by the relevant provisions of the partnership law and it is this, namely, his share in the partnership which he receives in terms of money. There is in this transaction no element of transfer of interest in the partnership assets by the retiring partner to the continuing partners."

14. The contention of the revenue that the arbitrator was appointed for deciding the terms and conditions on which the retiring partners had to sell, transfer and assign their interests in all the assets and properties of the firm is, therefore, in our opinion, misconceived. It is the real nature of the transaction that has to be considered, m and on the true construction of the document in question, we are of the opinion that the transaction was a transaction of retirement of the two partners and the notional sale of their rights and interests in the properties and assets of the firm was not a sale in substance and reality and was merely a payment of the value of their shares and interest in the properties and in assets of the firm. Therefore, there was consequently no transfer of the interest or share of the retiring partners. In that view of the matter, therefore, we answer the question referred to us in the affirmative and against the revenue. The revenue will pay costs of this reference to the assessee.

15. Question answered in the affirmative.