Full Judgment Text
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PETITIONER:
DEVIDAS VITHALDAS & CO.
Vs.
RESPONDENT:
C.I.T., BOMBAY CITY
DATE OF JUDGMENT28/01/1972
BENCH:
SHELAT, J.M.
BENCH:
SHELAT, J.M.
SIKRI, S.M. (CJ)
KHANNA, HANS RAJ
MITTER, G.K.
CITATION:
1973 AIR 318 1973 SCR (2) 215
1972 SCC (3) 457
ACT:
Income-tax--Capital or Revenue expenditure--Goodwill--Deed
of dissolution of partnership reciting "sale" of goodwill in
consideration of share in the profits--Payment not related
to any lump-sum fixed as purchase price--Duration of payment
indefinite and amount indefinite--Payment made by vendee if
admissible deduction as revenue expenditure.
HEADNOTE:
P and A carried on business. as Chartered accountants in the
name of D.V. & Co.. On P retiring from partnership a deed of
dissolution was executed which provided that the business
would be carried on by A. By clause 2 of the deed, P, who
owned the rights and interest in the goodwill, "agreed to
sell" the goodwill to A and "as consideration for and in
full satisfaction of the purchase price of the goodwill" A
was to pay eight annas in the rupee in the net profits of
the business payable during the life time of P and after him
during the life time of his wife and then to their son
during his life time. Clause 6 provided that in the event
of A entering into partnership or transferring or assigning
his business so long as the business was carried on in the
name of D.V. & Co.. the partnership, the assignee or the
transferee was to pay the share in the profits in the manner
provided in cl. (2). A entered into partnership with C, the
deed of partnership reciting that the goodwill of the
business belonged solely to P which A had "bought" in
consideration of his agreeing to pay a share of eight annas
in the rupee and that the parties thereto pay five annas
four pies share in the profits, by way of purchase price of
the goodwill as agreed by P. The firm paid to P’s wife,
after the death of P, various amounts during the years 1955-
59. It claimed that those amounts should be deducted in its
assessments for those years. The Income-tax Officer and the
Appellate Assistant Commissioner rejected the claim holding
that the payments were capital and not revenue payments and
the transaction evidenced by the deed of dissolution was one
of outright sales. On appeal, the Tribunal held that the
payment,constituted only fee or rent for the use of the
goodwill so long as it was used and accordingly they were in
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the nature of revenue expenditure. On reference the High
Court answered in favour of the Revenue.
Allowing the appeal,
BELT) : (Sikri C.J. Dissenting) On the facts of the case the
transaction was a licence and not, a sale of the goodwill:
the disbursements in question, therefore, were in the nature
of royalty and must be treated as admissible deduction. [232
B]
(i) There is no single test of universal application for
deciding the question whether in agreement is for payment of
price in stipulated instalments or for making annual payment
in the nature of income and. therefore, the Court has to
look not only into the document relating to the transaction,
but also the surrounding circumstances to decide its true
nature, the name which the parties give to it being of
little consequence.
216
This does not mean that the legal character of the
transaction which is the source of the receipt in question
can be ignored and substituted by what the taxing authority
considers the substance of the matter. [224 B]
Travancore Sugars and Chemicals Ltd. vs. C.I.T., (1966) 62
I.T.R. 566, referred to.
(ii) One of the tests Courts have applied in distinguishing
between capital and revenue expenditure is whether the
expenditure in question was for bringing into existence an
asset or an advantage of "an enduring nature", and is made
"once and for all". It may be payable not necessarily Al
at once but even by instalments as against a recurrent
expenditure in the nature of operational expenses. The
question in such cases would be, is the expenditure the
assessee’s working expenditure laid out as part of the
process of profit earning or a capital outlay necessary for
the acquisition of a property or rights of a permanent
character the possession of which is a condition of carrying
on the trade. But the expressions "enduring benefit", and
rights of a permanent character are only descriptive and not
definitive and are relative in meaning, not synonymous with
’perpetual’ or ’everlasting’. The expression "enduring
benefit" is thus a relative term not enduring in the sense
of its being permanent, but is sufficiently durable
depending upon the nature of the terms upon which it can be
acquired. So also the the expression "once and for all"
which does not mean payment at one time of the whole amount
but includes payment of a lump-sum, as distinct from
recurrent, distributed in periodic instalments. [22 F]
Atherton v. British Insulated and Helsby Cables Ltd., 10
T.C. 155; Assam Bengal Cement Co. Ltd. v. CI..T. 27 I.T.R.
34, 46; Robert Addie and Sons’ Collieries Ltd. v.
Commissioner of Inland Revenue, 8 T.C. 671; Commissioner of
Taxes v. Nchanga Consolidated Copper Mines Ltd., (1965) 58
I.T.R. 241; C.I.T. West Bengal v. Coal Shipment (P) Ltd.,
Civil Appeals Nos. 1494 to 1498 of 1971, decided on October
14, 1971; C.I.T. v. Finlay Mills, (1951) 20 I.T.R. 475;
Henriksen.v. Grafton Hotel Lid., 24 T.C. 453 and Strick v.
Regent Oil Co. Ltd., 43 T.C. 1, 38 referred to.
The other test sometimes applied, is payment when it is
referrable to fixed capital or capital assets as against
payment referrable to circulating capital or stock-in-trade.
This test also is not capable of being treated as of uniform
application. [226 F]
Assam Bengal Cement Co. Ltd. v. C.I.T., 27 I.T.R., 34. 46,
referred to.
(iii) Acquisition of the goodwill of a business is, without
doubt acquisition of a capital asset, and therefore, its
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purchase price would be capital expenditure. It would not
make any difference whether it is Paid in a lump-sum at one
time or in instalments distributed over a specific period.
Where, however, the transaction is not one for acquisition
of the goodwill but, for the right to use it, the
expenditure would be a revenue expenditure. [226 H]
In Re Ramjidas Jaini & Co., (1945) I.T.R. 430; Kuppuswami v.
C.I.T. (1954) 25 I.T.R. 349; Ogden v. Medway Cinemas Ltd.,
18 T.C. 691; The Secretary of State for India v. Scoble,
[19O3], A.C. 299; Jones v. Commissioner of Inland Revenue, 7
T.C. 310; Commissioner of Inland Revenue v. Ramsay, 20 T.C.
79; Vithaldas Thakerdas and Co. v. C.I.T., [1946] I.T.R. 822
and Travancore Sugars and Chemicals Ltd. v. C.I.T., (1966)
62 I.T.R. 566, referred to.
217
(iv) In the present case even though Cl. (2) of the deed of
dissolution uses expressions such as "agreed to sell" and
"the purchase price of the goodwill," these expressions are
not determinative of the exact nature of the transaction or
the relationship between the parties arising therefrom.
Clause (2), no doubt, prescribes the mode and the quantum of
payment. But, the duration of payment is indefinite and
secondly the amount is indefinite depending upon the rise
and fall in the profits of the business. The payment is not
related to any lumpsum fixed as the purchase price. But on
the contrary it is directly related to and dependent upon
whether at all and what profits are made. Further, the
document is totally silent as to what is to happen to the
goodwill it A, or his partners, if he were to enter into a
partnership, cease to carry on the business in the name of
D.V. & Co. The transaction thus contains all the grounds
given in the case of Travance Sugars and Chemicals Ltd.,
upon which this Court concluded that such payments could not
be treated as capital disbursement, namely, an indefinite
period, absence of any expressed lumpsum and payment relat-
ing to profits and not being tied up with any fixed sum
agreed to as the purchase price_of the capital assets. [230
F-H; 232 B]
Travancore Sugars and Chemicals Ltd. v. C.I.T. (1966) 62
I.T. R. 566 applied.
(v) Quite Apart, Cl (6) itself contains indication of the
transaction not being an outright purchase of the goodwill.
If the transaction was an outright purchase of goodwill
there was no necessity of Cl. (6) providing for the
partnership which A would enter into or his assignee or
transferee having to pay the share so long as he or they
continued to carry on business in that name. [231 B]
Per Sikri, C.J. dissenting.
(i) Clause (2) of the dissolution deed says what it meant to
convey, that is, there is an agreement to sell and sale of
the goodwill of the partnership. The word,-, "as
consideration for and in full satisfaction of the purchase
price of the goodwill" cannot be watered down by any of the
subsequent clauses. Further, the deed executed by A and C
also recited that A had "bought" the goodwill in
consideration of his agreeing 10 pay a share of the profits.
It is difficult to go against the express wording of the
deed when there is no clear clause overriding these words.
[216 E]
(ii) A mode of payment of purchase price of any capital
asset cannot convert a Capital payment into a revenue
payment in the hands of the vendee. It may be that the mode
of payment may affect the character of the receipt in the
hands of the vendor. [218 H]
(iii) The grounds adopted by this Court in Travancore Sugars
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and (chemicals Ltd. cannot he regarded as conclusive in a
case where there can be no doubt that the capital asset has
been sold. [219 B-C]
The absence of a clause providing what is to happen if the
vendee of the goodwill ceases to carry on the business
further reinforces the conclusion that it was an out and out
sale. This clause was not inserted because it would be out
of place in a case of sale. [219 D]
(v) Clause (6) does not have any bearing on the question
under consideration. This clause has been inserted in order
to safeguard the interest of the vendor who was keen to see
that he would get as much as possible for the sale of the
goodwill. [219 F]
218
Therefore, on the facts, the goodwill was an asset of an
enduring nature. The fact that payment was to be made over
a number of years and the nature of a chartered accountant’s
business lead to this conclusion. [219 F]
JUDGMENT:
CIVIL APPELLATE JURISDICTION : Civil Appeals Nos. 1452 to
1455 of 1968.
Appeals from the judgment and order dated February 25, 1967
of the Bombay High Court in Income Tax Reference No. 49 of
1962.
M. C. Chagla, Bhuvanesh Kumari, J. B. Dadachanji, O. C.
Mathur and Ravinder Narain, for the appellant (in all the
appeals ).
N. D. Karkhanis, R. N. Sachthey and B. D. Sharma, for the
respondent (in all the appeals).
SIKRI C.J. delivered a dissenting opinion. The judgment of
SHELAT, KHANNA and MITTER, JJ. was delivered by SHELAT, J.
Sikri, CJ., I have read the draft of the judgment prepared
by Shelat J., but I regret I am unable to agree with his
conclusions. He has set out all the relevant facts and the
relevant documents and it is not necessary for me to burden
my judgment with them.
It seems to me that there is no difficulty in interpreting
clause 2 of the dissolution deed. It says what it meant to
convey, that is, there is an agreement to sell and sale of
the goodwill of the partnership which belonged to Padanisi
alone to Amratlal. It is difficult to water down the words
"As consideration for and in full satisfaction of the
purchase price of the goodwill" by any of the subsequent
clauses.
Reliance is placed on the, deed dated October 18, 1955,
executed by Amratlal and one Chandrakant V. Parikh. This
deed also recited that "the goodwill of the said business
belonged solely to the said Padamsi which he, the said
Amratlal, had ’bought’ in consideration of his agreeing to
pay a share of eight annas in the rupee to Padamsi". I find
it again difficult to go against the express wording of the
deed when there is no clear clause overriding those words.
I am not averse to discovering the substance of a
transaction but there is a limit to the extent I can
disregard the language in a commercial document. Reliance
is placed on clause 5 of this deed. I am unable to say that
this clause has the effect of converting a sale into a
licence. It is argued that the mode of payment of the
purchase price shows that it was not a purchase. I am
unable to see how a mode of payment of purchase price of any
capital asset can convert a capital payment into a revenue
payment in the hands of the vendee.
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219
It may be that the mode of payment may affect the character
of the receipt in the hands of the vendor but as far as the
vendee is concerned, I am unable to agree that the mode of
payment can convert what is obviously a capital payment or
expenditure into a revenue payment or expenditure. Reliance
was placed on the three grounds adopted by this Court in
Travancore Sugars & Chemicals Ltd. v. C.I.T.(1) viz.,
indefinite period, absence of any expressed lump sum, and
payment relating to profits and not being tied up with any
fixed sum agreed to as the purchase price of a capital
asset. I am unable to regard these grounds as conclusive in
a case where there can be no doubt that the capital asset
has been sold. If A sells his house to a company for its
office and stipulates that in full satisfaction of the
purchase price he ,,III receive annual payments relating to
profits without stipulating for a fixed sum, I doubt if
anybody will argue that the company can deduct the annual
payments as revenue expenditure. The fact that it is a sale
of a capital asset like goodwill does not make any
difference.
It was urged that it is not really an out and out sale of
goodwill because there is no clause providing what is to
happen if the vendee of the goodwill ceases to carry on the
business. To my mind. the absence of such a clause further
reinforces the concluSion that it was an out and out sale.
This clause was not inserted because it would be out of
place in a case of sale.
Reliance was also placed on clause 6 which has been set out
in detail in the judgment of Shelat J. In my view, this does
not have any bearing on the question under consideration.
It seems to me that this clause has been inserted in the
deed in order to safeguard the interest of the vendor, who
was keen to see that he would get as much as possible for
the sale of the goodwill. On the facts I am also of the
opinion that the goodwill was an asset of an enduring
nature. The very fact that payment was to be pride over a
number of years and, the nature of a chartered accountant’s
business lead to this conclusion.
In my view, it is a very ingenious attempt to avoid payment
of tax by making it appear somehow that the payment of pur-
chase money may be treated as payment of a royalty. In the
view I take of the deed it is not necessary to discuss the
numerous cases referred to by Shelat J. In my opinion, the
High Court came to the correct conclusion and the appeals
should be dismissed with costs.
Shelat, J. Prior to November 1948, one Padamsi Haridas
carried on his profession as a chartered accountant in the
name
(1) [1966] 62 I.T.R. 566.
220
of Devidas Vithaldas and Co. By a deed of partnership, dated
November 30, 1948, he took one Amratlal Parikh as a partner,
reserving, however, to himself all the rights and interests
in the goodwill of that business.
On January 2, 1951, he retired from the said partnership.
Cl. (1) of the Deed of Dissolution executed on that occasion
provided that the said partnership shall be deemed to have
been dissolved as from December 31, 1950, but the business
shall, as from that date, be carried on in the said name by
the said Amratlal alone. Cl. (2) of the said deed ran as
follows :
"2. The goodwill of the late partnership
belonged to the said Padamsi alone. He has
agreed to sell the same to the said Amratlal.
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As consideration for and in full satisfaction
of the purchase price of the goodwill of the
said late partnership the said Amratlal shall-
(a) pay to the said Padamsi for and during the
terms of his natural life a share of eight
annas in the rupee in the net profits of the
said business or profession which the said
Amratlal shall hereafter carry on in the said
name of Devidas Vithaldas & Co.,
(b) on and after the death of the said
Padamsi, pay to Bai Premlata, the wife of the
said Padamsi, (if she be then surviving), for
;and during the term of her natural life a
share of eight annas in the rupee in the net
profits of the said business or profession
which the said Amratlal shall hereafter carry
on in the name of Devidas Vithaldas & Co., and
(c) on and after the death of the said Padamsi
as well as his said wife Bai Premlata, pay to
Subhas the son of the said Padamsi for and
during the term of his natural life a share of
eight annas in the rupee in the net profits of
the said business or profession which the said
Amratlal shall hereafter carry on in the name
of Devidas Vithaldas & Co.9"
Cl. (3) provided that nothing contained in the deed shall
constitute or be deemed to constitute any future partnership
between the parties to the deed or between the said Amratlal
and the said Bai Premlata, or the said Subhas in respect of
the business to be carried on by Amratlal in the name of
Devidas Vithaldas & Co. Cl. (4) declared that accounts had
been made up ’between the parties, and that neither party
had any claim against the other except as provided in said
clause (2). By cl. (5) it was made clear that the said
Amratlal shall henceforth remain liable for all
221
the obligations and liabilities which might be incurred in
respect of the said business to be carried on in the name of
Devidas Vithaldas & Co., and he shall accordingly indemnify
the said Padamsi against all actions, claims, demands,
costs, charges and expenses whatsoever in respect of the
same or in any other manner relating to the premises.
Lastly, cl. (6) provided that in the event of Amratlal
transferring or assigning his said business to any person or
persons, or carrying on the said business in partnership
with some other person or persons, or remaining otherwise
interested or concerned directly or indirectly in the
business or profession of chartered accountants by
whomsoever carried on in the name of Devidas Vithaldas &
Co., or any other name resembling or similar thereto, or in
the event of any of the heirs or legal representatives or
nominees of Amratlal carrying on the said business or
profession in the name of Devidas Vithaldas & Co., then in
any such events they and "so long as any such business be
carried on in the name style and firm of Devidas VithaIdas &
Co. or any other name resembling or similar thereto, the
assignees of the said Amratlal and/or the said Amratlal
and/or any such other person or persons as aforesaid
carrying on such business under the name style and firm of
Devidas Vithaldas & Co. shall as aforesaid pay to the said
Padamsi or his said wife Bai Premlata or his said son Subhas
for and during the terms of their respective lives the said
eight annas share in the rupee in the net profits of any
such business as is hereinbefore directed to be paid by the
said Amratlal under clause 2 hereof ". The clause next pro-
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vided that "the said Amratlal shall not assign or transfer
or otherwise dispose of the said business or the goodwill
thereof or bequeath the same to any person whomsoever nor
enter into any partnership or other arrangement with any
other person or persons for carrying on the said business in
the said name-except with a condition that the provisions of
this Agreement shall be accepted by such person or persons
or his legatees or successors or legal representatives, and
with a further condition that any such person or persons or
successors or legatees or legal representatives shall
forthwith after being interested in any such business and
whenever required by the said Padamsi or by his wife Bai
Premlata or his said son Subhas, as the case may be, enter
into an agreement with any of the last three named persons,
as the case may be, similar to this agreement". By his
letter dated October 13, 1955, Padamsi agreed to reduce the
said share of eight annas in a rupee to five annas four
pies.
Amratlal carried on the said business in the name of Devidas
Vitbaldas & Co. as the sole proprietor thereof till October
17, 1955. Payments made by him during this period under
cls. (2) and (6) of the said deed of dissolution were added
back in his
222
assessments as capital payments. On October 18, 1955, he
entered into partnership with one Chandrakant V. Parikh.
The deed of partnership executed then by him and the said
Chandrakant Parikh recited that the said Amratlal till then
was carrying on the business in the name of Devidas
Vithaldas & Co., that the goodwill of the said business
belonged solely to the said Padamsi which he, the said
Amratlal, had "bought" in consideration of his agreeing to
pay a share of eight annas in the rupee to Padamsi, and
after him his wife and then his son as aforesaid. Cl. (5)
of the deed then provided :
"The parties hereto shall pay 0/5/4 share in
profits in a rupee as and by way of purchase
price of goodwill of the said firm to the said
Shri Padamsi Haridas or to Ms wife or to his
son as stated in detail hereinbefore, instead
of Re. 0/8/0 share in a rupee as agreed by the
party of the First Part and Shri Padamsi
Haridas. The said Shri Padamsi Har
idas has
agreed to this reduction in his share mutually
with Shri Amratlal Kashandas Parikh and Shri
Chandrakant V. Parikh. After the said share
of 0/5/4 in a rupee is paid up as stated above
the balance of the profit and loss of the firm
shall be divided in two equal proportions
between the parties of the First and the
Second Part."
The firm constituted under this deed paid to Bai Premlata on
and after the death of Padmsi various amounts during the
years 1955-1959 under the said covenants. The firm claimed
that those amounts should be deducted in its assessments for
those years on the ground that its income to the extent of
those payments had been diverted as a result of the
overriding title created by cl. (5 of the said deed of
partnership. Assessments for the relevant years showed that
the amounts paid to Bai Premlata were assessed as income in
her assessments, so that, if the deductions claimed by the
firm were not admitted the same amounts would be assessed
twice over, first in the hands of Bai Premlata and then in
the assessments of the firm.
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The Income Tax Officer, and in appeal the A.A.C., rejected
the claim for deductions holding that the said payments were
capital and not revenue payments, and that the transaction
evidenced by the said deed of dissolution was one of
outright sale of the goodwill and the payments made
thereunder were part of the purchase price.
On an appeal to the Tribunal, the Tribunal rejected the con-
tention of the Revenue that the transaction was a sale of
the goodwill in terms following :
"It is no doubt true that clause 2 of the
agreement refers to sale of goodwill and the
agreed payments as
223
constituting full satisfaction of the purchase
consideration. If the payments are stopped, it
is not stated that there will be any right of
action for any definite quantified and
liquidated amount. It would mean that with
the stoppage of payments the assessee will
only lose the right to its contact with the
clientele and opportunity to earn profits,
thereafter. These considerations only go to
show that in the peculiar circumstances of the
case the agreement is virtually a licence
granted for user of the goodwill upon payment
of one-third of the net profits derived for
such user--."
In this view the Tribunal held that the payments constituted
only a fee or rent for the use of the goodwill so long as it
was used and accordingly they were in the nature, of revenue
expenditure.
On a reference to the High Court, the High Court held that
"On the face of the document, therefore, we
cannot accept the contention that i
t was a
document merely granting a licence to use the
goodwill or a mere transfer of the right of
user thereof. It was an outright sale of an
asset of Devidas Vithaldas & Co. namely the
goodwill which till then belonged to Padamsi
and in which he had reserved his exclusive
right at the time when lie entered into
partnership with Amratlal."
In this view, the High Court answered the questions referred
to it in favour of the Revenue. It was true, the High Court
observed, that the Revenue had in the assessments of Bai
Premlata taken the view that "Padamsi had not sold his
right, title and interest in the goodwill and merely
allowed the use of it for a number of years and since the
payment was for the user of the goodwill, it could clearly
be a revenue receipt in the hands of the assessee". But it
added that "this was an incorrect view to take upon the
facts and circumstances that have been placed before us in
the present case and upon the terms of the document dated
2nd January 1951. The order clearly shows that the document
dated 2nd January, 1951 was misconstrued". It is against
this view that these appeals have been filed.
The question upon which they must turn is as to whether the
payments in question made in pursuance of the transaction
incorporated in the deed, dated January 2, 1951, were in the
nature of revenue or capital expenditure. If they are of
the former type. they would obviously be admissible
deductions under s. 10(2) of the Income Tax Act, 1922. That
question, in its turn, depends upon the true nature of the
transaction as embodied in the said deed, that is, whether
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it was a sale of goodwill or a licence in 2--LS887SupCI/72
224
consideration of Amratlal and/or his assignees or
transferees paying the aforesaid share until he or they used
the said name.
As has been observed in a number of decisions, it is not
always easy to distinguish whether an agreement is for the
payment of price in stipulated instalments or for making
annual payments in the nature of income, that there is no
single test of universal application for a solution of the
question, and that therefore, the Court has to look not only
into the document relating to the transaction, but also the
surrounding circumstances to decide its true nature, the
name which the parties give to it being of little
consequence. This, of-course, does not mean that the legal
character of the transaction which is the source of the re-
ceipt in question can be ignored and substituted by what the
Taxing Authority considers the substance of the matter. The
assessing authority is undoubtedly entitled and is, indeed,
bound to determine the true legal relationship resulting
from a transaction. If the parties have chosen to conceal,
by a device, the true legal relation, it is open to it to
unravel such device and to ascertain the true nature of the
relationship. If the transaction is embodied in a document,
the liability to tax depends upon the meaning and content of
the language used in it in accordance with the ordinary
rules of construction.(1)
In distinguishing between capital and revenue expenditure,
the courts have applied in different cases different tests. Nonet
heless, it is recognised that none of them by itself
is conclusive, and the determination one way or the other
has to be made on the facts and circumstances of each case.
One of the tests so applied is whether the expenditure in
question was for bringing into existence an asset or an
advantage of "an enduring nature". (2 ) and is made "once
and for all", meaning thereby an expenditure made once and
for all for procuring an enduring benefit. It may be
payable not necessarily all 1 at once but even by
instalments as against a recurrent expenditure in the nature
of operational expenses. (See Assam Bengal Cement Co. Ltd.
V. CIT(3). The question in such cases would be, is the
expenditure the assessee’s working expenses laid out as
-part of the process of profit earning or a capital outlay
necessary for the acquisition of a property or of rights of
a Permanent character, the Po-,session of which is a
condition of carrying on the trade.(4) But the expressions,
’enduring benefit’. and ’rights of a permanent
(1) C.I.T.v.Kharwar,[1969] 72 I.T.R.603
(2) Athertion v British Insulated And Helsby Cables Ltd, 10
T C 155
(3) 27 I T R 34 , 46
(4) Robert Addle and sons, Colllieres Ltd., v. Commissioners
of Inland Revenue. 8 T C 671.
225
nature,’, are only descriptive and not definitive and are
relative in meaning, not synonymous with perpetual or
everlasting. For instance, an expenditure incurred. in
common with other companies producing copper to bring down
production so as to prevent a steep fall in the prices was
construed to mean for one of them to be out of production
for 12 months only and not for good. On such construction,
it was held that to call such an expenditure a capital
expenditure would be contradiction in terms, for, it was not
and was not intended to be one for acquiring a right of an
enduring benefit or as an accretion to the capital or income
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earning structure of the business.(1) C.I.T., West Bengal v.
Coal Shipment (P) Ltd.,(2) an agreement was arrived at
between two companies exporting coal to Burma. The assessee
company agreed thereunder to pay, in consideration of the
other company prebearing from exporting and procuring coal
for its export by the assessee company, five annas per ton
(subsequently raised to Rs. 1-5-0 per ton). The amounts so
paid to the other company were taxed in ’the hands of that
company. The respondent-company claimed them as admissible
business expenditure for the assessment years in question.
The Revenue, on the other hand, claimed that the payments
were for acquiring monopoly and were therefore not allowable
as revenue expenditure. This, Court upheld the assessee’s
contention that the expenditures were, not for acquiring the
monopoly, but were made to make the business more facile and
profitable, that they were made as a temporary measure and
not for deriving an advance of an enduring character.
Observing that the agreement between the two companies was
not for any fixed term and could be terminated at any time
at the volition of any of the parties, it was held that
although an enduring benefit need not be of an everlasting
character, it should not at the same time be transitory or
ephemeral, so that it can be terminated at any time at the
volitior of either of the parties. Payments to ward off
competition would constitute capital expenditure, provided
the objection is to derive an advantage by eliminating the
competition over some length or time but such a result would
not follow if there is no certainty of duration for such an
advantage and the same could be put an and to at any time.
’Pius, what the extent of durability or permanence should be
depends on the facts of each case.
Payments made by a lessee of a limestone quarry to the Gov-
ernment, who were the lessors, in consideration of a
covenant which eliminated competition in the lessee’s field
of operations for twenty years, which was the lease period,
were held to be capital expenditure for acquiring an
enduring benefit to the
(1) Commissioner,s : of Taxes v. Nchango Consolidated
Coppermine,s Ltd., [1965] 58 I.T.R. 241.
(2) Civil Appeals Ncs. 1494 t 1498 to 1971 deed on October,
14, 1971.
226
lessee.(1) On the other hand, registration of trade-marks
under the Trade Marks Act, 1940, valid for a period of seven
years only, on the expiry of which it had to be renewed by
paying fresh fees, was held not to bring any enduring
benefit, and therefore, the fees paid for registration were
not capital but revenue expenditure.(2) Registration is only
a mode of ensuring the exclusive right in a trademark, and
not the acquisition of the trade-mark itself, which would be
an acquisition of a capital asset. Such a distinction was
made in a case where expenditure was for the renewal of a
licence, which was held to be a payment made as purchase
price of a monopoly for the duration of the licence, which
was only for twelve months. The thing that was paid for, it
was said, was a permanent quality, that is, the monopoly,
although its Permanence being conditioned by the renewal of
the terms under which,the licence was granted was
shortlived. Such an expenditure was treated as of that
class to which a premium on the grant of a lease belong
which admittedly is not deductible.-, (see Henriksen v.
Grafton Hotel Ltd.(3) In Strick v. Regent Oil Co. Ltd. (4 )
Lord Reid, however, limited the decision in Henriksen’s
case(3) to its own special facts and expressed his disagree-
ment with it if it was to be held to have laid down any
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general proposition. The expression ’enduring advantage’
is, thus a relative term, not enduring in the sense of its
being permanent, but is sufficiently durable depending upon
the nature of the terms upon which it can be acquired. So
also the expression ’once and for all’, which does not mean
payment at one time of the whole amount, but includes
payment of a lump sum, as distict from recurrent,
distributed in periodic instalments.
The other test sometimes applied is payment when it is
referable to fixed capital or capital assets as against
payment referable to circulating capital or stock-in-trade.
But this test also is not capable of being treated as of
uniform application. Price paid for the acquisition of a
capital asset may take sometimes the form of payments of a
revenue character. The simpliest example is interest paid
on the unpaid purchase price of capital asset. Though in
relation to and referable to acquisition of a capital asset,
it is nonetheless a revenue disbursement. On the other
hand, in Assam Bengal Cement Co. v. C.I.T.(1) where the
payment in ,question was for eliminating competition, the
test of the expenditure having been incurred for and
referable to a capital asset was applied.
Acquisition of the goodwill of the business is, without
doubt, acquisition of a capital asset, and therefore, its
purchase price
(1) 27 I.T. R. 34, 46.
(2) C I T v Finlay Mills, [1951] 20 1,T,R, 475.
(3) 24 T C 453
(4) 43 T C 1, 38
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would be capital expenditure. It would not make any
difference whether it is paid in a lump sum at one time or
in instalments distributed over a definite period. (see In
Re Ramjidas Jain & Co.(1) and Kuppuswami v. C.I.T.(2) Where,
however, the transaction is not for acquisition of the
goodwill, but for the right to use it, the expenditure would
be revenue expenditure.
Illustrative of such cases is the one in Ogden v. Medway
Cinemas Ltd., (3) where the respondent-company acquired by
assignment the rights of the assignor under an underlease,
by which he became the lessee of the cinema hall, together
with the fixtures, fittings and furniture, at a yearly rent.
There was also ,a supplemental deed by which he was granted
the goodwill of the cinema business on payment of pound
5001- per annum. The supplemental deed was to run
concurrently with the underlease, that is for 13 years, and
was to cease if the underlease was terminated. The deed
also contained an option for the purchase of the head lease
and the goodwill for pound 3,5001. The payment of pound
500/- per annum under the supplemental deed was held to be
admissible deduction. At page 695 of the report, Finlay,
I., pointed out that though the deed used the expression
’grant of goodwill for a period’ there was no sum mentioned
as being the payment for that, followed by distribution of
that sum in instalments, "but the thing is expressed to be
for a payment of pound 500 per annum" without reference to
any lump sum followed by a splitting up into annual
payments. "The substance of the matter here seems to me to
be this-and I think it is supported by the actual language
used, in particular by the expression provision contained
later for the purchase in certain circumstances of the
goodwill-that this is a revenue payment for the use during a
certain period of certain valuable things and rights." As
Lord Halsbury put it in a case where a lump sum was
expressly provided for but was payable by instalments, there
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is an antecedent debt and the instalments are paid in
liquidation of that debt. (see, The Secretary of State for
India v. Scoble. (4 )
Another case, illustrative of such a test, is in Jones v.
Commissioner of Inland Revenue,(") where there was a sale of
property for a lump sum of pound. 750, pound 300 out of
which were payable by three equal instalments, and the
balance of E. 450 payable by a royalty. The whole of pound
750 was treated as a capital sum, but there was a further
clause "to pay by way of additional consideration a further
clause of 10% upon the invoice price of all machines
constructed under the said inventions and sold during the
period of ten years." In respect of this latter
(1) [1945] I T R 430.
(3) 18 T C 691.
(5) 7 T C 310.
(2) [1954] 25 I T R 349.
(4) [1903] A C 199.
228
sum, it was held that since it was dependent on the volume
0f business, which rose and fell with the chances of the
business, it was income and not capital, although it was
actually referable to the purchase price. In Commissioners
of Inland Revenue v. Ramsay,(1) the assessee purchased a
dental practice for a primary price of pound. 15,000. That
was to be satisfied first by an immediate payment of pound.
5,000 and as to the balance of pound 10,000) by payment each
year, for ten years, of a sum equivalent to 25% of the net
profits of the practice for each year. Such annual payment
obviously might vary from time to time depending upon the
quantum of business and the profits, Nevertheless, the price
of E. 15,000 was not otiose, nor the balance of E. 10,000
after the initial payment of pound 5,000. The only thing
that was stipulated by the parties was that the vendor was
satisfied with receiving 25% of the net profits each year
for the period of years, even if the actual payment turned
’out on the whole to be more or less than S- 15,000. As
Lord Wright said, the figure of E. 15,000 "permeates the
whole of ’the contract and upon which the whole; contract
depends. That being so, I think that the pound 886 in
question (one of the sums equivalent to 25% of the not
profits) was a sum in the nature of capital, and therefore,
it was not competent for the Respondent to deduct it in
returning his total income". That the sum of E. 15,000 was
the lump sum purchase price was also made clear by Lord
Greene when he said that a payment less than that amount
could be made only," if clause (4) of that agreement came
into operation, that is, if the assessee continued his
practice for the whole of the period of ten years. If he
were to cease to practise, say after seven years. he would
be liable to pay the whole of the balance of pound 15,000
then remaining due. The transaction was thus viewed as a
purchase of the ’business for a fixed amount, payable in ten
years by annual instalments, which by the mode of payment,
agreed to between the parties, might at the end turn out to
be more or less than the agreed purchase price of E. 15,000.
Unlike Ramsay’s case,(1) in Vithaldas Thakordas and Co. v.
C.I.T., ( 2 ) there was no fixed lump sum, nor a definite-
period during which payments were to be made. One Vithaldas
Thakordas, who during his life-time carried on bullion
business in the name of Vithaldas Thakordas & Co., died in
1930 leaving him surviving his widow Bai Tarabai. Under an
arrangement made by the said Tarabai, first with five and
later on with four persons, the name of Vithaldas Thakordas
& Co. was used by (those persons carrying on their own
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business in partnership. The partnership deed provided that
in consideration of Bai Tarabai "having agreed to allow the
partnership to use the name of Vithaldas Thakordas & Co. for
the purposes of partnership", the partnership would pay out
of the net profits an amount equivalent to
(1) 20 T C 79
(2) [1946] I T R 822.
229
two annas in the rupee of the net profits. It also provided
that after payment of the said amount out of the net
profits, the balance of not profits would be divided
amongst the partners according to their respective shares.
No term was fixed for tile duration of the use of the
goodwill. Evidently, the right to use the name would cease
when the partnership ceased to pay the amount of two annas
in the rupee in the partnership’s net profits. On a
question whether the payment was an admissible deduction,
,the High Court of Bombay, relying on Ogden v. Medway
Cinemas Ltd.(1) held that the payment was a revenue
expenditure, the transaction between the partnership and the
said Bai Tarabai being not a purchase of the capital asset.
It is true that the words used in the document were such as
one would find in a document of a licence. But, as already
stated, it is not form but the substance of the transaction
that matters. Besides, the decision did not rest on those
words but on what truly the nature of the transaction was
and the analogy it bore with that in Ogden v. Medway Cinemas
Ltd.(1)
A case of a similar nature is also to be found in Travancore
Sugars and Chemicals Ltd. v. C.I.T. (2). There the assessee
company was floated to take over the assets of three
undertakings run by Travancore Government, a sugar
manufacturing concern. a distillery and a tincture factory.
The first was to be purchased for Rs. 3.25 lacs, the second
on a joint valuation of parties, and the third on the book
value of the assets Cl. (7) of the agreement provided that
apart from the cash consideration the Government would be
entitled to 20% of the annual net profits subject to a
maximum of Rs. 40,000 after providing for depreciation and
the remuneration payable to the company’s treasurers and
secretaries. The question was whether a sum of Rs. 42,480
paid in the previous year in question was a capital or a
revenue expenditure. Reversing the High Court’s judgment,
which held it to be a capital disbursement, this Court held
that it was a revenue expenditure and gave for its decision
three reasons, namely, (a) that the payment was for an
indefinite period, (b) that it was related to annual profits
which flowed from the trading activities and had no relation
to the capital value of the assets, and (c) that the payment
was not related to, nor tied in any way to any fixed sum
agreed between the parties as part of the purchase price of
the three undertakings. These were also the three
considerations applied by Lord Greene, M. R. in
Commissioners of Inland Revenue v. 36/49 Holdings Ltd.(3)
The question whether the disbursements in question partake
the character of one or The other mainly depends upon the
construction of the document of January 2, 1951 and the true
nature
(1) 18 T C 691
(3) 25 T C 173, 183
(2) (1966) 62 I T R 566.
230
of the transaction embodied therein. Cl. (2) of the
document, no doubt, uses expressions, such as "agreed to
sell" and "the purchase price of the goodwill". These
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expressions, however, are, as repeatedly stated in a number
of cases, not determinative of the exact nature of the
transaction or the relationship between the parties arising
therefrom. Though cl. (2) uses expressions which on a
superficial view might appear to indicate a sale of the
goodwill, neither that nor any other clause mentions what
its purchase price was. The document is not one of those
where the price is expressed at a lump sum, and is made
payable by specific instalments within a specified period.
In some cases, it may even be possible that parties might
agree to a lump sum as the price and yet, as in Ramsay’s
case,(1) agree that such sum should be payable but of the
profits at a certain percentage, where the purchaser is not
in a position to pay the price at a time or even by
instalments, except at a particular rate from out of the
profits of the business taken over by him. But in such a
case the payment, even if out of the profits, is tied up
with a lump sum, that is, with the purchase price agreed to
between the parties and which assumes the character of a
fixed debt. Cl. (2) clearly does not fix such a price nor
mention a lump sum in respect of which annual payments as
provided therein are to be made.
The clause, no doubt, prescribes the mode and the quantum of
the payment, that is, a share of five annas four vies in the
rupee in the net profits of the business, payable during the
lifetime of Padamsi and after him during the lifetime of his
wife Bai Premlata if she were to survive him, and then to
their son during his lifetime. Two things, however, may at
once be observed, firstly, that the duration of payment is
indefinite, unlike Ramsay’s case (1) and secondly the amount
is indefinite, depending as it does upon the rise and fall
in the profits of the business. Obviously, the payment is
not related to any lump sum fixed as the purchase price. On
the contrary, it is directly related to and dependent upon
whether at all and what profits are made. Further, the
document is totally silent as to what is to hppen to the
goodwill if Amratlal Parikh or his partners, if he were to
enter into a partnership, cease to carry on the business in
the name of Devidas Vithaldas & Co. or at all. It is silent
as to whether the ,goodwill would remain with him and/or his
partners, or whether it would revert to Padamsi or his
heirs. The transaction thus contains all the grounds given
in the case of Travancore Sugars and Chemicals Ltd.(2) upon
which this Court concluded there that such payments could
not be treated as capital disbursements, namely, an
indefinite period, absence of any expressed lump sum, and
Payment relating to profits and not being tied up with any
fixed sum agreed to as the purchase price of a capital
asset.
(1) 20 T C 79.
(2) 62 I.T.R. 566.
231
Quite apart from these considerations, cl. (6) itself
contains indications of the transaction not being an
outright purchase of the goodwill. It will be recalled that
that clause provides that in the event of Amratlal
transferring or assigning his business to any one else or
entering into partnership or otherwise remaining interested
in the said business, by whomsoever carried on in the name
of Devidas Vithaldas & Co., then in any such events and "
so long as any such business be carried on in the name,
style and firm of Devidas Vithaldas & Co. or any other name
resembling or similar thereto", the assignees of Amratlal
and/or any such other person or persons as aforesaid,
carrying on the business in the said name, shall pay the
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said share in the profits to Padamsi, after him to his widow
and after her to his son. The clause thus indicates that
the payment is to be made so long as the business is carried
on in the name of Devidas Vithaldas & Co. and not otherwise.
The clause further provides that the said Amratlal shall not
assign or transfer or otherwise dispose of the said business
or the goodwill thereof (meaning thereby the business
carried on in the said name) except upon a condition that
such an assignee or transferee shall enter into a similar
agreement with Padamsi or his wife or his said son, as the
case may be, whensoever required to do so. When Amratlal
took Chandrakant Parikh as his Partner, it was in pursuance
of this covenant that the deed of partnership between them
expressly provided for the payment of 01514 in a rupee in
the net profits and further provided that it would be after
such payment was made that the partners could divide the
balance left as their shares of the profits.
If the transaction embodied in the deed, dated January 2,
1951 was an outright purchase of goodwill, there was no
necessity of cl. (6) in that deed providing for the
partnership which Amratlal would enter into in the future or
his assignee or transferee having to pay the said share so
long as he or they continued to carry on business in the
said name. It is also inconceiveable that if Padamsi was
selling the goodwill, he would enter into an agreement which
provided no fixed purchase price, no specific period during
which the purchaser would be liable to pay it except an
indefinite period, i.e., until the business was carried on
in the said name, leaving to the volition of the other party
to use the said name or not or to cease to do so at any
time. If the transaction was intended to be an outright
sale of a capital asset, the deed incorporating it would
have contained a fixed purchase price and even if such a
fixed purchase price were to be payable not at once but by
instalments, such payments would be relatable to and tied up
with such a lump sum. Even if such instalments were to be
payable out of the profits of the business, such instalments
would be relatable to the price, and for a period until it
was satisfied and not to the profits which would fluctuate
from year to year. In
232
such a case, even if the purchase price is payable by
instalments and out of profits, the document would contain
both a fixed purchase price and a definite period during
which such price would have to be liquidated.
On the facts of the case, the conclusions is inescapable,
even apart from the ratio in the Travancore Sugars and
Chemicals’ case(1) being applicable, that the transaction
was, as held by the Tribunal, a licence and not a sale of
the goodwill. The disbursements in question, therefore,
were in the nature of royalty and must be treated as
admissible deductions. In this view, it does not become
necessary to go into the question whether cl. (6) in the
deed, dated January 2, 1951 and cl. (5) in the deed, dated
October 18, 1951 contained overriding provisions by reason
of which payments ill question could not form part of the
assessable profits of the firm,
The appeals are, in this view, allowed with costs, both here
and in the High Court. The costs, ’however, will be only
one set of costs.
ORDER
In view of the decision of the majority, the appeals are
allowed with costs in this Court and, in the High Court.
One set of costs.
(1) 62 I T R 566.
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