Law:

Section:

Section 40(b) of the Income-tax Act, 1961 - Business disallowance - Interest, Salary, Etc., Paid by Firm to a Partner - Assessment year 1970-71 - Proprietary concern of a partner of assessee-firm undertook distribution of film as per agreement with assessee-firm and out of gross receipts, commission was retained by proprietary concern - Whether amount retained by proprietary concern could not be added to income of firm under section 40(b) as it was not an amount paid by assessee-firm to partner - Held, yes Section 37(1) of the Income-tax Act, 1961 - Business expenditure - Assessment year 1970-71 - Whether amount paid by assessee-firm to a partner for giving up interest in firm would be a capital expenditure - Held, yes - Whether amount paid to partner of assessee-firm for surrender of sub-distribution rights of a film would be a revenue expenditure - Held, yes FACTS The assessee was a partnership firm. There were two changes in the constitution of the assessee-firm during the assessment year 1970-71. Initially the firm consisted of N, B, R and S as partners. Then B retired and A came in as partner in place of B. Then N retired and the assessee-firm continued with the remaining three partners. The firm was constituted with the object of exploiting the distribution of the picture 'D' produced by V. The assessee-firm secured distribution rights over the aforesaid picture by an agreement entered into between V and N, on behalf of the assessee-firm. The picture was to be distributed, exhibited and exploited through J, a proprietary concern of N. For distribution and exhibition, J was to deduct 5 per cent of the gross receipts by way of commission. On retirement, N's share in the profits of the assessee-firm worked out to Rs. 1,37,073. Besides this, N was paid a further sum of Rs. 1,25,000. The additional payment was in consideration of (i) his assigning into the continuing partners of the assessee-firm all the benefits available to him as partner, (ii) his relinquishing all the benefits available to him as proprietor of J under the agreement of distribution dated 1-4-1969 with the assessee-firm regarding distribution, exhibition and exploitation of the picture 'D'.…

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