M.N. Chandurkar, C.J. - (1.)IN these three tax cases which are being disposed of by this common judgment, three questions fall for consideration. These are as follows :
"1. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the payment of Rs. 50,000 made by the assessee to Pioneer Construction Company, Vijayawada, under the "Dissolution deed" dated January 1, 1966, was allowable as deduction in computing the income of the assessee for the assessment year 1969-70 ?

2. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in cancelling the order of the Commissioner of INcome-tax under section 263 of the INcome-Tax Act, 1961f, for the assessment year 1967-68 ?

3. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the payment of Rs. 50,000 made by the assessee to Pioneer Construction Company, Vijayawada, under the "dissolution deed" dated January 1, 1966, was allowable as deduction in computing the income of the assessee for the assessment year 1968-69 ?"

(2.)THE first question arises out of the assessment proceedings for the assessment year 1969-70 and the second and third questions arise in respect of the assessment years 1967-68 and 1968-69.
It is common ground that the answer to the second and third questions will depend upon what view we take to answer question No. 1. All these three questions arise out of a payment of Rs. 50,000 made by the assessee-company, Pioneer Engineering Syndicate, to Pioneer Construction Company, Vijayawada, hereinafter referred to as "the company", in terms of the same deed dated January, 1, 1966, which is described as a deed of dissolution.

All these questions have been referred in accordance with the directions of this court under section 256(2) of the Income-tax Act, 1961.

The assessee is a partnership firm which was originally constituted under an instrument of partnership deed dated April 1, 1962. The construction company which has been referred to by the Tribunal as the Vijayawada firm was closely associated with the assessee-firm and had two common partners. The Vijayawada firm was rendering financial aid to the assessee-firm as well as technical help and assistance to the assessee-firm in executing contracts.

The assessee-firm was reconstituted with effect from February 1, 1964. One partner had died, four partners had retired and seven new partners joined the firm with the result there were 17 partners and two minors admitted to the benefits of the partnership. The instrument of partnership dated February 1, 1964, contained certain clauses with regard to the assistance to be taken from the Vijayawada firm and the payments to be made to them. Clauses 14 and 15 which are the only relevant clauses read as follows :

"14. If, in addition to the finance provided by the partners, more finance is required, the same shall be obtained from the Pioneer Construction Company, Vijayawada-2, and the Associated Engineering Syndicate, Madras-14, only on the following terms :

1. Interest at 12 per cent. per annum shall be paid on the 31st March every year.

2. A commission of 2 1/2 per cent. of the value of the works executed payable on the 31st March every year to the above two firms in proportion to the average amounts borrowed from them.

It is agreed to make the following payments on the 31st March of every year for technical services to be rendered to the company.

15. (a) 3 per cent. of the value of the work executed to the Pioneer construction company, Vijayawada-2.

(b) 1 1/2 per cent. of the value of the work executed to the Associated Engineering Syndicated, 80, Lloyds Road, Royapettah, Madras-14.

(c) 1/2 per cent. of the value of the work executed to Sri P. V. Raj & Company, Gaganmahal Colony, Domalguda, Hyderabad-2.

(d) Rs. 1,000 per mensem to Sri P. V. Raj & Company, Gaganmahal Colony, Domalguda, Hyderabad."

(3.)THE assessee-firm was reconstituted with effect from January 1, 1966. Seven partners withdrew from the partnership. THE Vijayawada firm was also reconstituted. As a result of the reconstitution of both the firms, there were no common partners between the assessee-firm and the Vijayawada firm. THE new agreement of reconstitution dated January 1, 1966, was, however, styled as "agreement of dissolution". THE clause relevant for the purpose of these references in the agreement dated on January 1, 1966, reads as follows :
"5. THE continuing partners shall have the right to execute and exploit the pending contracts and the commitments or acceptances so far made in the matter of execution of contracts or on matters connected therewith.

THE continuing partners agree to pay the Pioneer Construction Company, Vijayawada, a sum of rupees fifty thousand only every year for the calendar years 1966, 1967 and 1968 in consideration of the existing agreement between the two firms regarding finance and technical services. This amount is payable in two equal installments on the 30th June and 31st December every year. THE Pioneer Construction Company shall not be entitled to any other payment other than the payment mentioned above."

In terms of clause 5 reproduced above, the assessee-firm paid Rs. 50,000 to the Vijayawada firm for the financial years 1966-67 to 1968-69. For each of these years, the assessee-firm claimed the said payments as deductions. This claim was allowed by the Income-tax Officer for the assessment years 1967-68 and 1968-69, However, for the assessement year 1969-70, the Income-tax Officer disallowed the deduction treating the payment as capital expenditure. In respect of the order of the Income-tax Officer for the assessement years 1967-68 and 1968-69, the Commissioner exercised his revisional jurisdiction under section 263 of the Income-tax Act, 1961, and set aside the deduction.

In respect of the assessment year 1969-70, in the appeal filed by the assessee, its contention that the payment of Rs. 50,000 was revenue in character was accepted by the Appellate Assistant Commissioner. The Revenue then filed an appeal before the Tribunal. On behalf of the Revenue, figures were quoted to show the amount which would have been actually payable to the Vijayawada firm in accordance with the original agreement. These figures were as follows : JUDGEMENT_93_ITR175_1989Html1.htm