Goodwill payments as revenue expenditure when linked to profits and use rights, not a lump sum purchase price.

Payments made under dissolution and partnership deeds for use of goodwill were treated as revenue expenditure deductible in computing business income, because the arrangements did not fix any lump sum purchase price or definite period for liquidation of a debt. The payments depended on a fluctuating share of profits and continued only while the business was carried on in the firm name. The surrounding covenants, including restrictions on assignment and the requirement for similar terms on transfer, showed a licence to use the goodwill rather than an outright transfer of a capital asset. A dissent would have treated the arrangement as a sale of goodwill and the payments as capital consideration.

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Issues: Whether the payments made under the dissolution and partnership deeds for use of the goodwill were capital expenditure as part of the purchase price of goodwill, or revenue expenditure deductible in computing business income.

Analysis: The payment clause did not fix any lump sum purchase price for the goodwill, nor any definite period for liquidation of a debt. The payments were linked to a fluctuating share of profits and were to continue only so long as the business was carried on in the firm name. The surrounding covenants, including the restrictions on assignment and the requirement of similar arrangements on transfer, showed that the arrangement was for the use of the goodwill and not an outright transfer of that capital asset. On that construction, the payments were in the nature of royalty or business expenditure and were allowable deductions.

Conclusion: The payments were revenue expenditure and deductible in the assessment of the firm, not capital expenditure.

Dissenting Opinion: Sikri C.J. held that the document effected an outright sale of goodwill, that the mode of payment could not change the capital character of the consideration, and that the payments were part of the purchase price and therefore not deductible.

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