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TMI Blog1987 (2) TMI 14X X X X Extracts X X X X X X X X Extracts X X X X ..... to be business expenditure and, therefore, granted allowance of the said amount of Rs. 80,000 under section 37(1) of the Act. At the instance of the Revenue, the Tribunal made a reference under section 256(1) for the opinion of this court on the following question: " Whether, on the facts and in the circumstances of the case, the Tribunal was justified in allowing Rs. 80,000 as revenue expenditure for the assessment year 1974-75 ?" The facts as set out have not been disputed. To be more precise, it would be profitable to extract the relevant clauses of the deed of dissolution to resolve the dispute satisfactorily. Clauses (3), (4), (5), (7), (11) (12) and (13) of the deed of dissolution are relevant for the purpose of deciding the question in issue. The outgoing partners are described as first party and the remaining five partners as second party. The clauses are as follows: " (3) The parties of the first part, in consideration of the terms contained herein, relinquish all their rights and interest in the said firm and all sums of money, accounts, proceedings, claims and businesses, manufactures, products, stock-in-trade and assets. The parties of the first part also relinqui ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he goods, the parties of the first part agree to have in addition to the existing colour scheme and design, the bust photo of Motilalji on the label of Shanti Mixture Zarda. This inclusion of the bust photo on the Shanti Mixture Zarda shall be brought about within one year from the date of this deed. The parties of the first part are entitled to continue dealing in the said products, viz., Shanti Mixture Zarda, Shanti Quiwam, Shanti Pan Masala, mentioned in this clause as before without any let or hindrance by the parties of the second part. The parties of the second part are expressly forbidden from manufacturing or selling any produce under the name ' SHANTI '. The parties of the second part are also expressly forbidden from using the word 'ZAFRANI' along with the word ' KASHMIRI ' in relation to Zarda now or for any future product. The parties of the second part specifically agree that they have no objection whatsoever to the parties of the first part manufacturing and selling any product like Quiwam, Pan Masala, Zarda and other cosmetics under the name 'SHANTI' or any other name except in the names mentioned in clause (13) of this deed in respect of which the parties of the sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... therefore, it is a revenue expenditure. Sri M. Suryanarayana Murthy, learned standing counsel for the Revenue, has distinguished the decision and contended that the ratio therein is inapplicable to the facts in this case. On the facts of this case, the expenditure is capital in nature. The decision in General Auto Parts v. CIT[1981] 128 ITR 519 (Delhi) was pressed into service. Sri Y. Ratnakar, learned counsel for the assessee, has traversed varied grounds to support the finding recorded by the Tribunal. In the first instance, it is contended that in clause (7) of the dissolution deed, though the consideration was said to be for the goodwill, it is not specifically stated whether it is for acquisition of the goodwill or its user. When the outgoing partners have agreed to receive the consideration to part with their share in the goodwill, it will be only for the continued use of the goodwill and it is a revenue receipt. That is how the parties have understood. The entry in the accounts would show that the partners have treated this as a revenue expenditure and this evidence of conduct is also a relevant fact. It is also contended that when the value of the goodwill is ranging b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rgeable under the head " Profits and gains of business or profession ". Therefore, capital expenditure is expressly excluded from according allowance under section 37(1). We have, therefore, to see whether the amount in dispute is a revenue expenditure. Section 4 of the Indian Partnership Act (IX of 1932), for short, " the Partnership Act ", defines a partnership thus : " ` Partnership ' is the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all." The partners are tenants-in-common. Under section 14, goodwill of the business is the property of the partnership and would be subject to the contract between the partners. Section 43 contemplates dissolution of partnership at will by any partner giving notice in writing to all the other partners of his intention to dissolve the firm with effect from the date mentioned in the notice as the date of dissolution or, if no date is so mentioned, as from the date of the communication of the notice. The mode of dissolution under section 42 is not necessary to extract. Under section 55(1), on dissolution of the firm, the goodwill shall, subject to contract between the par ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the custom which he has parted with; it would be a fraud on the contract to do so." Desai in Law of Partnership in India, fifth edition, at page 247, states: " The rights of the parties as regards goodwill are to be acquired in accordance with the contract between them, if any, in respect of the same." Thus, it is clear that in a partnership, every partner has title to and is entitled to an interest in the goodwill. Under section 14, goodwill is an asset of the firm. Section 55(1) lays down the rule that the goodwill of the firm, subject to the contract between the partners, on dissolution, in settling the accounts of the firm, is to be included in the assets of the firm and shall be sold either separately or along with other property of the firm and the outgoing partner thereafter, shall not carry on the business in the name of the old name nor solicit old customers. Mukerji on " Indian Partnership Act ", third edition, at page 483, says that , e Goodwill is generally valued at so many years' purchase of the amount of profits and these annual profits are generally calculated on an average of three years. The effectiveness of the possible or probable competition should be one ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r rights in the goodwill or for the use thereof by the other partners. As held by the Supreme Court in Devidas Vithaldas' case [1972] 84 ITR 277 (SC), the legal character of the transaction which is the source of the receipt in question cannot be ignored and substituted by what the taxing authorities consider as the substance of the matter. The assessing authority is undoubtedly entitled and is indeed bound to determine the true legal relationship resulting from the transaction. If the parties have chosen to conceal by a device the true legal relations, it is open to the Revenue 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. Therefore, we have to look to the terms of the contract between the parties as to what is the true nature and effect of the terms embodied in the dissolution deed. As seen in clause (3), the retiring partners have relinquished all their rights and interest in the firm and also in the other assets; in clause (4), they relinquished their rights in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... outgoing partners completely relinquished all their rights, title and interest not only in the stock-in-trade, the licences, trade marks, shops, branches, etc., but also in the goodwill as well. As a result, they completely snapped off the pre-existing relationship as partners and the remaining partners paid Rs. 80,000 as consideration for goodwill and a new partnership was admittedly constituted with the remaining partners. The outgoing partners, in turn, received Rs. 80,000 towards their respective shares in the goodwill, obviously in full quit, It is also of importance to note that the business which was hitherto being carried on by the partners was not retained by the assessee in entirety. Certain trades which were being carried on as mentioned in clauses (11) to (13) were allotted and permitted to be used by the outgoing partners and certain trades were retained by the continuing partners. As seen, the goodwill in the dissolved firm is a common asset of all the partners. Unless the continuing partners acquire the right, title and interest from the outgoing partners of their share in the goodwill, they have no exclusive right to use the goodwill of the dissolved firm. Therefor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... made on the distribution of the assets of the firm, which was dissolved on the retirement of the two partners, to acquire the right, title and interest of the retiring partners by the continuing partners, the payments were of capital nature and were not deductible from the income of the firm. Thus considered, we hold that the outgoing partners received Rs. 80,000 as consideration for relinquishing their share of right, title and interest in the goodwill of the dissolved firm. The consideration paid therefor, in our considered view, was to acquire a capital asset and so was capital expenditure. When the payment was made, it was not incidental to the carrying on of the business but was incidental to the reconstitution of the business by the remaining partners in their new partnership. It is no doubt true, as contended by Sri Ratnakar, that if there is any defect in the title or impediment to the enjoyment of business and the expenditure is incurred (only) to perfect the title or to cure the defect, the expenditure incurred in that regard would be revenue expenditure. The ratio in that regard laid down in Dalmia Jain Co.'s case [1971] 81 ITR 754 (SC) and Ghansham Singh's case [19 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the relinquishment of the right, title and interest by the outgoing partners and an acquisition thereof by the continuing partners is a capital asset. The further contention of Sri Ratnakar is that the value of the goodwill varies between Rs. 9 and Rs. 15 lakhs and the consideration received is only Rs. 80,000 ; therefore, the inadequacy of consideration also is a pointer to point out that the goodwill was permitted to be used by the outgoing partners and that consideration was only for the user lacks force. There is no principle of law that for the validity of a contract, the consideration must invariably be adequate ; it is always open to the parties to agree for a lesser consideration due to varied reasons and enter into a binding contract. Unless the person executing the contract, with a view to rescind the contract, himself pleads and proves either undue influence, coercion or fraud played on him in effecting the contract, the contract is always binding on the parties. It is nobody's case. Therefore, the inadequacy of consideration by itself is not a circumstance to show that what was conveyed is not relinquishment of the pre-existing right, title and interest, but for user. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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