THONDEPU PHARMA DISTRIBUTORS Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) This application is filed by the assessee under section 256(2) of the Income-tax Act, 1961, seeking a direction to the appellate Tribunal to refer the following question of law to this court for opinion :

(2.) The assessee is a partnership firm. The assessment relates to the assessment year 1985-86. The assessee claimed a sum of Rs. 1,26,000 as annuity payment to a trust, Balaji Trust. It was stated that one of the partners of the assessee-firm, T. V. Hanumantha Rao, entered into an agreement with Balaji Trust represented by Shri A. Parthasarathi. As per the terms of the agreement, he has agreed to hand over the distribution of goods manufactured by Sarabhai Chemicals and S. G. Pharmaceuticals to the assessee. It was also agreed to deposit not less than Rs. 9 lakhs with the assessee-firm at the interest rate of 24 per cent. per annum. In consideration of the said arrangement, Sri Hanumantha Rao agreed to pay annuity of Rs. 1,26,000 towards the use of trade name. The said amount is required to be paid within three months after the end of each accounting year. The agreement was in force for five years from 1/04/1984.

(3.) The assessee-firm claimed deduction in respect of the said annuity payment of Rs. 1,26,000, on the ground that it was revenue expenditure. The Income-tax Officer refused to accept the claim of the ground that there was no evidence to show that Balaji Trust was given distribution by Sarabhai Chemicals and S. G. Pharmaceuticals and that no appointment letter appears to have been given to confirm the distribution. He also held that in the absence of any right claimed by Balaji Trust, the question of distribution of such right to the assessee-firm carrying on business would not arise. It was also pointed out by the Income-tax Officer that the transaction of entering into agreement between Sri Hanumantha Rao and Parthasarathi was only a device to avoid tax, as Parthasarathi who was a trustee of Balaji Trust himself joined as a partner of the assessee-firm. Commenting on the agreement, the Income-tax Officer stated that it was entered by Sri Hanumantha Rao in his individual capacity and not on behalf of the firm, and, therefore, the payment cannot be allowed. Therefore, the claim for deduction cannot be allowed in the hands of the firm, treating it as revenue expenditure. Accordingly, the Income-tax Officer, by an order dated 28/02/1986, rejected the claim of annuity for deduction.