1967 (2) TMI 23 - HC - Income Tax

One of the partner of a firm retired and sold goodwill. There was covenant by purchaser to pay a share of profits to retiring accountant for life and to his widow and son after his death - this amount was paid under covenant by new firm - amount paid by partner under covenant against goodwill was not business expenditure

Summary

Issues Involved:
1. Whether the sums of Rs. 14,653, Rs. 14,560, Rs. 17,412, and Rs. 16,528 constitute part of the assessee's income for the assessment years 1957-58 to 1960-61, respectively.
2. If the answer is affirmative, whether these sums are deductible in the aforesaid assessments.

Detailed Analysis:

Issue 1: Constituting Part of Assessee's Income
The primary issue is whether the amounts paid to the heirs of Padamsi, specifically Mrs. Premlata Padamsi Haridas, constitute part of the assessee's income for the assessment years 1957-58 to 1960-61. The assessee, a firm named Messrs. Devidas Vithaldas & Co., argued that these payments were revenue expenditure and should be deductible. The department, however, treated them as capital expenditure, considering them as payments for the purchase of goodwill.

The court examined the agreement dated 2nd January 1951, between Padamsi and Amratlal, which stated that the goodwill of the firm belonged to Padamsi and was sold to Amratlal. The consideration for this sale was a share of eight annas in the rupee in the net profits of the business, payable to Padamsi and his heirs. The court noted that the agreement explicitly described the transaction as a sale and the payments as the purchase price of the goodwill. Therefore, these payments were considered capital expenditure for acquiring a capital asset, namely, the goodwill. The court emphasized that the nature of the transaction, as evidenced by the agreement, indicated an outright sale of the goodwill, making the payments part of the assessee's income.

Issue 2: Deductibility of the Sums
The second issue was whether the sums paid to Padamsi's heirs were deductible in the assessments. The court examined the nature of the payments, determining that they were not revenue expenditure but capital expenditure. The court referred to various precedents, including Vithaldas Thakordas & Co. v. Commissioner of Income-tax, Commissioner of Income-tax v. P. N. Ethiraj, and Travancore Sugars & Chemicals Ltd. v. Commissioner of Income-tax, to distinguish between capital and revenue expenditure.

The court concluded that the payments were made towards the acquisition of a capital asset, the goodwill, and thus could not be treated as deductible revenue expenditure. The court also addressed the argument that the payments were to be deducted from the profits before they reached the assessee, stating that the agreement did not support this contention. The court noted that the payments were linked to the net profits but were not to be deducted before the profits were received by the assessee.

Finally, the court addressed the point raised by Mr. Kolah regarding the department's different view in the assessment of Mrs. Premlata's income. The court stated that a wrong order by the Tribunal could not preclude it from taking the correct view based on the documents, facts, and circumstances presented.

Conclusion:
The court answered the first question in the affirmative, stating that the sums constituted part of the assessee's income. The second question was answered in the negative, indicating that the sums were not deductible in the assessments. The assessee was ordered to pay the costs of the Commissioner.