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TMI Blog1972 (1) TMI 5X X X X Extracts X X X X X X X X Extracts X X X X ..... lution executed on that occasion provided that the said partnership shall be deemed to have been dissolved as from December 31, 1950, but the business shall, as from that date, be carried on in the said name by the said Amratlal alone. Clause (2) of the said deed ran as follows ; " 2. The goodwill of the late partnership belonged 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the said eight annas share in the rupee in the net profits of any such business as in hereinbefore directed to be paid by the said Amratlal under clause 2 hereof . . ." The clause next provided that " the said Amratlal shall not assign or transfer or otherwise dispose of the said business or the goodwill thereof or bequeath the same 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. Amra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the said payments were capital and not revenue payments, and that the transaction evidenced by the said deed of dissolution was one of outright sale of the goodwill and the payments made thereunder were part of the purchase price. On an appeal to the Tribunal, the Tribunal rejected the contention of the revenue that the transaction 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... relating to the transaction, but also the surrounding circumstances to decide its true nature, the name which the parties give to it being of little consequence. This, of course, does not mean that the legal character of the transaction which is the source of the receipt in question can be ignored and substituted by what the taxing authority considers 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... made as a temporary measure and not for deriving an advantage of an enduring character. Observing that the agreement between the two companies was not for any fixed term and could be terminated at any time at the volition of any of the parties, it was held that, although an enduring benefit need not be of an everlasting character, it should not at the 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 les ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me-tax, where the payment in question was for eliminating competition, the test of the expenditure having been incurred for and referable to a capital asset was applied. Acquisition of the goodwill of the business is, without doubt, acquisition of a capital asset, and, therefore, its purchase price would be capital expenditure. It would not make any 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, fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt obviously might vary from time to time depending upon the quantum of business and the profits. Nevertheless, the price of pound 15,000 was not otiose, nor the balance of pound 10,000 after the initial payment of pound 5,000. The only thing that was stipulated by the parties was that the vendor was satisfied with receiving 25% of the net profits each year 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ioner of Income-tax. There the assessee-company was floated to take over the assets of three undertakings run by the Travancore Government, a sugar manufacturing concern, a distillery and a tincture factory. The first was to be purchased for Rs. 3.25 lakhs, the second on a joint valuation of parties, and the third on the book value of the assets. Clause (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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... usiness. Obviously, the payment is not related to any lump sum fixed as the purchase price. On the contrary, it is directly related to and dependent upon whether at all and what profits are made. Further, the document is totally silent as to what is to happen to the goodwill if Amratlal Parikh or his partners, if he were to enter into a partnership, cease to 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 transferr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urchase price and even if such a fixed purchase price were to be payable not at once but by instalments, such payments would be relatable to and tied up with such a lump sum. Even if such instalments were to be payable out of the profits of the business, such instalments would be relatable to the price, and for a period until it was satisfied and not to the profits 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 rea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. I am unable to regard these grounds as conclusive in a case where there can be no doubt that the capital asset has been sold. If A sells his house to a company for its office and stipulates that in full satisfaction of the purchase price he will receive annual payments relating to profits without stipulating for a fixed sum, I doubt if anybody will argue that the company can deduct the annual payments as revenue expenditure. The fact that it is a sale of a capital asset like goodwill does not make any difference. It was argued that it is not really an out and out sale of goodwill because there is no clause providing what is to happen if the vendee of the goodwill ceases to carry on the business. To my mind, the absence of such a clause further reinforces the conclusion that it was an out and out sale. This clause was not inserted because it would be out of place in a case of sale. Reliance was also placed on clause (6) which has been set out in detail in the judgment of Shelat J. In my view, this does not have any bearing on the question under ..... X X X X Extracts X X X X X X X X Extracts X X X X
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