1972 (1) TMI 5 - SC - Income Tax

Revenue Expenditure - partnership - goodwill was an asset of an enduring nature- it is a very ingenious attempt to avoid payment of tax by making it appear somehow that the payment of purchase money may be treated as payment of a royalty - The payments were in the nature of royalty and had to be treated as admissible deductions - Assessee s appeal allowed

Summary

Issues Involved:
1. Nature of payments made under the deed of dissolution: capital or revenue expenditure.
2. Determination of whether the transaction was a sale of goodwill or a licence for its use.
3. Interpretation of the clauses in the deed of dissolution and partnership agreements.
4. Impact of the mode of payment on the character of the expenditure.

Detailed Analysis:

1. Nature of Payments: Capital or Revenue Expenditure

The Supreme Court had to determine whether the payments made by Amratlal to Padamsi, his wife, and son under the deed of dissolution were capital or revenue expenditures. The Income-tax Officer and Appellate Assistant Commissioner considered these payments as capital payments, while the Tribunal viewed them as revenue expenditures, treating them as fees or rent for the use of goodwill.

Key Points:
- Capital Expenditure: Acquisition of a capital asset, such as goodwill, typically involves capital expenditure, which is not deductible as revenue expenditure.
- Revenue Expenditure: Payments for the use of an asset, such as a licence fee, are considered revenue expenditures and are deductible.

2. Sale of Goodwill vs. Licence for Use

The core issue was whether the transaction constituted an outright sale of goodwill or merely a licence to use the goodwill.

Key Points:
- Tribunal's View: The Tribunal rejected the notion of an outright sale, interpreting the agreement as a licence to use the goodwill, with payments constituting a fee for such use.
- High Court's View: The High Court viewed the transaction as an outright sale of goodwill, with the payments being part of the purchase price.

3. Interpretation of Clauses in the Deed

The interpretation of specific clauses in the deed of dissolution and subsequent partnership agreements was crucial to determining the nature of the transaction.

Key Clauses:
- Clause (2): Describes the sale of goodwill and the payment terms, which are linked to the net profits of the business.
- Clause (6): Indicates that payments are to be made as long as the business is carried on in the name of Devidas Vithaldas & Co., suggesting a licence rather than a sale.

Supreme Court's Analysis:
- Indefinite Duration: The indefinite duration of payments and their dependence on business profits suggested a licence rather than a sale.
- Absence of Lump Sum: The absence of a fixed purchase price and the reliance on profits for payments supported the view of a licence.

4. Mode of Payment and Character of Expenditure

The mode of payment, whether as a lump sum or periodic payments, was analyzed to determine its impact on the nature of the expenditure.

Key Points:
- Revenue Payments: Payments tied to business profits and made over an indefinite period are typically considered revenue expenditures.
- Capital Payments: A fixed lump sum paid either at once or in instalments over a specified period would indicate a capital expenditure.

Supreme Court's Conclusion:
- The payments were linked to the profits and had no fixed purchase price, indicating a licence for the use of goodwill.
- The payments were, therefore, revenue expenditures and deductible under section 10(2) of the Income-tax Act, 1922.

Separate Judgment by SIKRI C.J.

Disagreement with Majority:
- SIKRI C.J. disagreed with the majority, viewing the transaction as an outright sale of goodwill.
- Key Points:
- The language of the deed clearly indicated a sale.
- The mode of payment does not alter the nature of the transaction from a sale to a licence.
- The absence of a clause on cessation of business reinforced the sale interpretation.

Conclusion:
- SIKRI C.J. believed the High Court's decision was correct and that the payments were capital expenditures, not deductible as revenue expenditures.

Final Order:
- The majority allowed the appeals, treating the payments as revenue expenditures and deductible, with costs awarded in the Supreme Court and High Court.