1989 (9) TMI 138 - AT - Income Tax

Summary

Issues Involved:
1. Deductibility of payments for the use of goodwill as a business expenditure.
2. Ownership and contribution towards goodwill.
3. Contradictory decisions by different benches of the Tribunal.
4. Interpretation of partnership deeds and agreements.

Detailed Analysis:

1. Deductibility of Payments for the Use of Goodwill as a Business Expenditure:
The primary issue revolved around whether the payment of Rs. 30,000 per annum to Shri Parmanand Patel for the use of goodwill should be considered a revenue expenditure. The Tribunal relied on the Supreme Court decisions in *Devidas Vithaldas & Co. v. CIT* and *Travancore Sugars & Chemicals Ltd. v. CIT*, which distinguished between payments for the acquisition of goodwill (capital expenditure) and payments for the use of goodwill (revenue expenditure). The Tribunal concluded that the payment made by the assessee was for the use of the goodwill and thus should be classified as a revenue expenditure, allowing it as a deductible business expense.

2. Ownership and Contribution Towards Goodwill:
The Tribunal examined whether Shri Parmanand Patel had any entitlement to the goodwill of the firm. The argument from the Departmental Representative was that Patel did not contribute towards the goodwill of the firm and thus was not entitled to any payment for its use. However, the Tribunal found that the firm had significant goodwill due to its long-standing business, extensive turnover, and profitability. The Tribunal rejected the Department's argument, stating that it is not necessary for a partner to contribute towards the goodwill to be entitled to share in it or receive payment for its use, as long as the partnership deed stipulates such terms.

3. Contradictory Decisions by Different Benches of the Tribunal:
The Tribunal noted that there were contradictory decisions from different benches regarding the same issue. Initially, the Tribunal had allowed the deduction for the assessment years 1970-71 to 1974-75. However, for the assessment year 1975-76, a different bench disallowed the payment, leading to inconsistency. The matter was referred to a larger bench due to these contradictory decisions. The larger bench reaffirmed the initial decision, allowing the deduction, and emphasized the importance of consistency in judicial decisions.

4. Interpretation of Partnership Deeds and Agreements:
The Tribunal closely examined the partnership deeds and agreements to determine the nature of the payments. The deeds indicated that the goodwill was exclusively owned by Shri Parmanand Patel, and he was entitled to a payment for its use. The Tribunal found that the various partnership agreements and the memorandum of agreement clearly stipulated the payment for the use of goodwill, thus supporting the assessee's claim for deduction.

Conclusion:
The Tribunal concluded that the payment made to Shri Parmanand Patel for the use of goodwill was a revenue expenditure and therefore deductible. The Tribunal rejected the Department's objections regarding the non-contribution towards goodwill and upheld the assessee's claim. The appeals were allowed, and the disallowances made by the CIT (Appeals) were deleted.