1995 (12) TMI 28 - HC - Income Tax

Accounting Year, Assessment Year, Business Expenditure, Mercantile System, Private Trust, Revenue Expenditure

Issues Involved:
1. Whether the Tribunal was right in law in holding that the royalty paid for the use of the trademark and goodwill is not allowable as a deduction.
2. Whether the payment of a commission on a settlement during this accounting year is not a proper deduction in computing the income of this year.

Detailed Analysis:

Issue 1: Deduction of Royalty Paid for Use of Trademark and Goodwill

The assessee, a registered firm, claimed a deduction of Rs. 2,00,000 paid to a family trust for the use of trademark and goodwill. The Income-tax Officer disallowed this deduction, stating that the goodwill was an asset of the firm, and the partners had no right to deal with it except at the time of dissolution. The Appellate Assistant Commissioner and the Income-tax Appellate Tribunal upheld this view, adding that goodwill cannot be evaluated in monetary terms while the firm continues to operate.

The High Court analyzed the legal principles governing partnership property and the transfer of assets. It referred to the Supreme Court's decision in Addanki Narayanappa v. Bhaskara Krishnappa, which held that partners cannot alienate partnership assets without reference to the firm. However, the High Court distinguished this case, noting that all partners had executed the transfer deed, and no immovable property was involved, making the registration requirement irrelevant.

The Court emphasized that goodwill is a transferable asset under Section 14 of the Partnership Act and can be transferred if all partners agree. It also noted that the absence of express words indicating the deed was executed on behalf of the firm does not invalidate the transfer, as the intention to bind the firm was implied.

The High Court rejected the Revenue's argument that the transfer was without consideration, stating that the transfer was made to ensure the goodwill was not affected by future disputes among partners, which constitutes sufficient consideration. Alternatively, the transfer could be regarded as a gift to the family trust.

The Court also addressed the Tribunal's additional reasoning that the expenditure was capital in nature, noting that this was not a ground raised by the Income-tax Officer or the Commissioner (Appeals). The Court found that the lump sum payment had an integral connection with the business and was not an enduring asset.

Conclusion for Issue 1:
The High Court concluded that the Tribunal erred in disallowing the deduction for the royalty paid for the use of the trademark and goodwill. The first question was answered in favor of the assessee and against the Revenue.

Issue 2: Deduction of Commission Payment

The assessee claimed a deduction for commission paid to an agent during the relevant assessment year. The Tribunal disallowed this deduction, stating that the assessee followed the mercantile system of accounting, and the expenditure related to a previous assessment year (1985-86). The Appellate Commissioner and the Tribunal found no dispute regarding the rate of commission payable during the year the goods were supplied.

Conclusion for Issue 2:
The High Court upheld the Tribunal's decision, agreeing that the commission payment did not qualify for deduction in the relevant assessment year. The second question was answered in favor of the Revenue and against the assessee.

Disposition:
The reference case was disposed of with no costs.

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