Firm's Payment to Mrs. Tarabai for Goodwill Use Deemed Revenue Expenditure

The court held that the payment made to Mrs. Tarabai by the assessee firm was not an appropriation of profits but a necessary expenditure for the business, specifically for the use of goodwill. The court concluded that the payment was a revenue expenditure and therefore admissible for deduction under Section 10(2)(xii) of the Indian Income-tax Act, 1939.

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Issues Involved:
1. Whether the payment of Rs. 5,059 made by the assessee firm to Mrs. Tarabai was rightly held to be an appropriation of profits.
2. If the sum paid to Mrs. Tarabai was an item of expenditure, whether it was a revenue expenditure and admissible for deduction under Section 10(2)(xii) of the Indian Income-tax Act, 1939.

Detailed Analysis:

Issue 1: Appropriation of Profits
The primary issue is whether the payment of Rs. 5,059 to Mrs. Tarabai was an appropriation of profits. The court examined the nature of the agreement between Bai Tarabai and the partnership firm. The partnership deed and a letter of agreement indicated that Bai Tarabai allowed the use of the goodwill of "Vithaldas Thakordas & Co." for a consideration of receiving two annas in the rupee of the net profits of the firm. The court noted that the payment was made for the use of goodwill, which is essential for the business. Therefore, it was concluded that the payment to Bai Tarabai was not an appropriation of profits but a necessary expenditure for the business.

Issue 2: Revenue Expenditure and Deduction under Section 10(2)(xii)
The second issue was whether the sum paid to Bai Tarabai was a revenue expenditure and admissible for deduction under Section 10(2)(xii) of the Indian Income-tax Act, 1939. The court analyzed whether the payment was in the nature of capital or revenue expenditure. It was concluded that the expenditure was not in the nature of capital expenditure because the partnership did not acquire any permanent asset; instead, it paid a fee for the use of goodwill, which is considered a revenue expenditure.

The court also addressed whether the payment was made wholly and exclusively for the purpose of the business. It was determined that the payment was indeed for the purpose of earning profits, as the goodwill was essential for attracting customers and generating revenue. The court referred to various case laws, including Ogden v. Medway Cinemas Ltd. and Union Cold Storage Co., Ltd. v. Adamson, to support its conclusion that the payment for goodwill is a necessary revenue expense.

The court distinguished this case from others where payments were considered appropriations of profits, emphasizing that the payment to Bai Tarabai was made before the profits were ascertained and was necessary for the business operation. Therefore, the sum paid to Bai Tarabai was deemed a revenue expenditure and admissible for deduction under Section 10(2)(xii).

Conclusion
The court answered the first question in the negative, indicating that the payment was not an appropriation of profits. The second question was answered in the affirmative, confirming that the sum paid to Bai Tarabai was a revenue expenditure and admissible for deduction under Section 10(2)(xii) of the Indian Income-tax Act, 1939.

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