TaxTMI 
TaxTMI 
1972 (1) TMI 5
X X X X Extracts X X X X
X X X X Extracts X X X X
....ged to the said Padamsi alone. He has agreed to sell the same to the said Amratlal. 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 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 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." Claus....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 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 Subbas, 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 Vithaldas & Co. as the sole proprietor thereof till October 17, 1955. Payments made by him during this period under clauses (2) and (6) of the said deed of dissolution were added back in his assessments as capital payments. On October 18, 1955, he entered into partnership with o....
X X X X Extracts X X X X
X X X X Extracts X X X X
....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 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 it was a document merely granting a licence to use the goodwill or a mere transfer of the right of user thereo....
X X X X Extracts X X X X
X X X X Extracts X X X X
....iders 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 . In distinguishing between capital and revenue expenditure, the courts have applied in different cases different tests. Nonetheless, it is recognized 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 ", 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 at once but even by instalments as against a recurrent e....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he same time be transitory or ephemeral, so that it can be terminated at any time at the volition of either of the parties. Payments to ward off competition would constitute capital expenditure, provided the object is to derive an advantage by eliminating the competition over some length of 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 end to at any time. Thus, 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 Government, 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 lessee. 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. Registration is only a mode ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... difference whether it is paid in a lump sum at one time or in instalments distributed over a definite period. (See In re Ramjidas Jaini & Co. and Kuppuswami v. Commissioner of Income-tax). Where, however, the transaction is not one 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., where the respondent-company acquired by assignment the rights of the assignor under an under-lease, by which he became the lessee of the cinema hall, together with the fixtures, fittings and furniture, at an yearly rent. There was also a supplemental deed by which he was granted the goodwill of the cinema business on payment of pound 500 per annum. The supplemental deed was to run concurrently with the under-lease, that is, for 13 years, and was to cease if the under-lease was terminated. The deed also contained an option for the purchase of the head-lease and the goodwill for pound 3,500. The payment of pound 500 per annum under the supplemental deed was held to be an admissible deduction. At page 695 of the report, Finlay J. pointed out that, though the deed used the expre....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ear for the period of ten years even if the actual payment turned out on the whole to be more or less than pound 15,000. As Lord Wright said, the figure of pound 15,000 to "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 net 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 pound 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 p....
X X X X Extracts X X X X
X X X X Extracts X X X X
....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 up, 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. The question whether the disbursements in question partake of the character of one or the other mainly depends upon the constru....
X X X X Extracts X X X X
X X X X Extracts X X X X
....o 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 Chemical Ltd., 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. Quite apart from these considerations, clause (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 any such business be carried on in the name, style and firm of Devidas Vithaldas & Co. or any other name resembling or similar....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rofits which would fluctuate from year to year. In 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 conclusion is inescapable, even apart from the ratio in the Travancore Sugars and Chemicals' case 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 clause (6) in the deed, dated January 2, 1951, and clause (5) in the deed, dated October 18, 1951, contained overriding provisions by reason of which payments in 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. SIKRI C.J.--I have read the draft of the judgment prepared by Shelat J. but I regret I am unable to agree with his conclusions. He....