Use of goodwill and business name: periodic payments treated as revenue expenditure, not appropriation of profits or capital outlay.

Payment made under a business arrangement for the continued use of a former proprietor's goodwill and trading name was treated as consideration for a commercial advantage, not as a mere distribution of profits. Because the payment reduced profits before real taxable profits were computed, it was deductible business expenditure. The arrangement did not bring into existence a permanent asset; the periodic fee for use of goodwill was revenue in character and incurred wholly and exclusively to conduct the business. The payment was therefore not capital outlay and was deductible under the income-tax provision.

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Issues: (i) Whether the payment made to the widow of the former proprietor for use of the business name and goodwill was an appropriation of profits or deductible business expenditure. (ii) Whether the payment was capital expenditure or revenue expenditure laid out wholly and exclusively for the purposes of the business.

Issue (i): Whether the payment made to the widow of the former proprietor for use of the business name and goodwill was an appropriation of profits or deductible business expenditure.

Analysis: The payment was made under a business arrangement for continued use of the goodwill and business name. It was fixed as a share of net profits, but the substance of the arrangement showed that it was consideration for a commercial advantage essential to carrying on the business. The Court distinguished cases where a payment is merely a distribution of profits after they have been ascertained and held that the present payment reduced the profits before the real taxable profits were computed.

Conclusion: The payment was not a mere appropriation of profits and was deductible business expenditure.

Issue (ii): Whether the payment was capital expenditure or revenue expenditure laid out wholly and exclusively for the purposes of the business.

Analysis: The partnership acquired no permanent asset by the arrangement. The payment was periodic consideration for the use of goodwill and the trading name, not a lump sum for acquisition of a capital asset. The Court held that a fee paid for the use of goodwill is revenue in character, and that the expenditure was incurred to obtain and retain a commercial advantage in the conduct of the business.

Conclusion: The payment was revenue expenditure and was laid out wholly and exclusively for the purposes of the business.

Final Conclusion: The reference was answered in favour of the assessee, holding that the payment was deductible under the relevant income-tax provision and was not an appropriation of profits or capital outlay.

Ratio Decidendi: A payment made as consideration for the use of goodwill or a business name, which does not bring into existence a permanent asset and is incurred to facilitate the conduct of the business, is revenue expenditure deductible before taxable profits are computed and is not a mere distribution of profits.

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