Goodwill payments under a dissolution deed may be revenue deductions where the arrangement is a licence, not an outright sale.

Payments under a dissolution deed for use of a business name and goodwill are treated according to the true substance of the arrangement, not its label. Where the deed fixes no lump-sum purchase price, makes payments depend on profits, leaves duration indefinite, and indicates that payments continue only while the business is carried on in the same name, the arrangement points to a licence to use goodwill rather than an outright sale. On that footing, the payments are revenue in nature and deductible in computing business income. The text also records a dissenting view that the deed reflected an absolute sale of goodwill, with the payments representing capital expenditure.

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Issues: Whether the payments made under the dissolution deed for the use of the business name and goodwill were capital payments forming part of the purchase price of goodwill or revenue payments deductible in computing business income.

Analysis: The majority held that the deed did not evidence an outright sale of goodwill for a fixed purchase price payable by instalments. The document fixed no lump sum, prescribed payments dependent on profits, made the duration of payment indefinite, and was silent about reversion of the goodwill if the business ceased. Clause 6 also indicated that the payments were to continue only so long as the business was carried on in the same name, which was inconsistent with an absolute transfer of goodwill. Applying the distinction between capital acquisition and payments for the right to use an asset, and following the principle that the true nature of the transaction must be gathered from the document and surrounding circumstances, the majority treated the arrangement as one conferring a licence to use the goodwill rather than a sale of the asset.

Conclusion: The payments were revenue in nature and allowable as deductions, so the appeals succeeded.

Dissenting Opinion: Sikri C.J. held that the deed disclosed an outright sale of goodwill, that the profit-linked payments were only the mode of discharging the purchase price, and that the payments were capital expenditure not deductible in the assessee's hands.

Ratio Decidendi: Where a transaction relating to goodwill does not stipulate a fixed purchase price and requires payments that are indefinite in duration and linked to profits, the payments are to be treated as consideration for a licence to use the goodwill and not as capital instalments of an outright sale.

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