JUDGMENT V.N. Khare, J.
1. At the instance of the assessee that Income-tax Appellate Tribunal, Allahabad, has referred the following question for the opinion of this court ;
"Whether, on the facts and in the circumstances of the case, the Tribunal is justified in holding that the payment of Rs. 34,665 is a capital expenditure ?"
The assessee is a firm carrying on business in hardware, agricultural instruments and gandases. The assessee acquired the factory from one Sushil Bolts and Nuts Co. which had originally hired out the factory from the Technical Manager, Industrial Estate, Muzaffarpur, on August 3, 1967. On April 1, 1973, the firm, Sushil Bolts and Nuts Co. was dissolved by the partners and an agreement was entered into between the partners of the firm and the assessee whereby the factory was given in the tenancy of the assessee. The relevant Clauses (1) and (4) of the agreement provided as under :
"1. That the party of the second part shall be wholly responsible to make the payments of the arrears of rent and penalty, if any, up to April 1, 1973, which is a liability on the party of the first part.
2. That the party of the first part shall now and never claim any goodwill from the party of the second part for the aforesaid factory premises given to the party of the second part."
Subsequently, the estate officer made a demand of Rs. 43,311 towards the arrears of rent. The assessee paid the said amount and claimed it as deduction from income-tax, the Income-tax Officer, however, allowed one year's rent of the previous year towards deduction and disallowed the remaining amount, namely, Rs. 34,665. Aggrieved, the assessee filed an appeal before the appellate authority. The appellate authority accepted the case of the assessee. The Department, thereafter, filed a second appeal before the Tribunal. The Tribunal allowed the appeal holding that the sum of Rs. 34,665 paid by the assessee towards arrears of rent, in fact, was a capital expenditure.
2. From Clauses (1) and (4) of the agreement it is evidently clear that the assessee was required to pay the arrears of rent in lieu of goodwill purchased from the earlier firm. However, for the previous year the assessee was allowed deduction. After considering the matter, we find that in fact what was paid by the assessee was not towards the arrears of rent for the period prior to dissolution of the partnership firm but for acquiring goodwill. Thus, the amount spent was a capital expenditure. We, accordingly, answer the question in the affirmative and against the assessee.
3. There shall be no order as to costs.