Case: Devidas Vithaldas and Co Vs. Commissioner of Income Tax, Bombay

be made. 19.The clause, no doubt, prescribes the mode and the quantum of the payment, that is, a share of five annas four pies in the rupee in the net profits of the business, payable during the lifetime of Padamsi and after him during the lifetime of his wife Bai Premlata if she were to survive him, and then to their son during his lifetime. Two things, however, may at once be observed, firstly, that the duration of payment is indefinite, unlike Ramsays case, (1936) 20 Tax Cas 80 and secondly, the amount is indefinite, depending as it does upon the rise and fall in the profits of the business. 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 and 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 transactiond thus contains all the grounds given in the case of Travancore Sugars and Chemicals Ltd., 62 ITR 566 = (AIR 1967 SC 477 ), 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. 20. 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 transferring or assigning his business to any one else or entering into partnership or otherwise remaining interested in the said business, by whomsoever carried on in the name of Devidas Vithaldas and Co., then in any such events and "so long as any such business be carried on in the name, style and firm of Devidas Vithaldas and Co. or any other name resembling or similar thereto", the assignees of Amratlal and/or any such other person or persons as aforesaid, carrying on the business in the said name, shall pay the said share in the profits to Padamsi, after him to his widow and after her to his son. The clause thus indicates that the payment is to be made so long as the business is carried on in the name of Devidas Vithaldas and Co. and not otherwise. The clause further provides that the said Amratlal shall not assign or transfer or otherwise dispose of the said business or the goodwill thereto meaning thereby the business carried on in the said name except upon a condition that such an assignee or transferee shall enter into a similar agreement with Padamsi or his wife or his said son, as the case may be, whomsoever required to do so. When Amratlal took Chandrakant Parikh as his partner, it was in pursuance of this covenant that the deed of partnership between them expressly provided for the paydment of 0/5/4 in a rupee in the net profits and further provided that it would be after such payment was made that the parties could divide the balance left as their shares of the profits. 21. If the transaction embodied in the deed, dated January 2, 1951 was an outright purchase of goodwill, there was no necessity of clause (6) in that deed providing for the partnership which Amratlal would enter into in the future or his assignee or transferee having to pay the said share so long as he or they continued to carry on business in the said name. It is also inconceivable that if Padamsi was selling the goodwill, he would enter into an agreement which provided no fixed purchase price, no specific period during which the purchaser would be liable to pay it except an indefidnite period, i.e., until the business was carried on in the said name, leaving to the volition of the other party to use the said name or not or to cease to do so at any time. If the transaction was intended to be an outright sale of a capital asset, the deed incorporating it would have contained a fixed purchase 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 ndot 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 defidnite period during which such price would have to be liquidated. 22.On the facts of the case, the conclusion is inescapable, even apart from the ratio in the Travancore Sugars and Chemicals case, 62 ITR 566 = (AIR 1967 SC 477 ) 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 reason of which payments in questions could not form part of the assessable profits of the firm.

Decision (1 = appeal accepted, 0 = rejected): 1

Explanation:
1[ds]18. The question whether the disbursements in question partake the character of one or the other mainly depends upon the construction of the document of January 2, 1951 andthe true nature of the transaction embodied therein. Cl. (2) of the document, no doubt, uses expressions, such as "agreed to sell" and "the purchase price of the goodwill". These expressions, however, are as repeatedly stated in a number of cases, not determinative of the exact nature of the transaction or the relationship between the parties arising therefrom. Though clause (2) uses expressions which on a superficial view might appear to indicate a sale of the goodwill, neither that nor any other clause mentions what its purchase price was. The documents is not one of those where the price is expressed at a lump sum, and is made payable by specific instalments within a specified period. In some cases, it may even be possible that parties might agree to a lump sum as the price and yet, as in Ramsays case, (1936) 20 Tax Cas 80 agree that such sum should be payable out of the profits at a certain percentage where the purchaser is not in a position to pay the price at a time or even by instalments, except at a particular rate from out of the profits of the business taken over by him. But in such a case the payment, even if out of the profits, is tied up with a lump sum, that is, with the purchase price agreed to between the parties and which assumes the character of a fixed debt, cl. (2) clearly does not fix such a price nor mentions a lump sum in respect of which annual payments as provided therein are to be made19.The clause, no doubt, prescribes the mode and the quantum of the payment, that is, a share of five annas four pies in the rupee in the net profits of the business, payable during the lifetime of Padamsi and after him during the lifetime of his wife Bai Premlata if she were to survive him, and then to their son during his lifetime. Two things, however, may at once be observed, firstly, that the duration of payment is indefinite, unlike Ramsays case, (1936) 20 Tax Cas 80 and secondly, the amount is indefinite, depending as it does upon the rise and fall in the profits of the business. 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 and 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 transactiond thus contains all the grounds given in the case of Travancore Sugars and Chemicals Ltd., 62 ITR 566   = (AIR 1967 SC 477  ), 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 asset20. 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 transferring or assigning his business to any one else or entering into partnership or otherwise remaining interested in the said business, by whomsoever carried on in the name of Devidas Vithaldas and Co., then in any such events and "so long as any such business be carried on in the name, style and firm of Devidas Vithaldas and Co. or any other name resembling or similar thereto", the assignees of Amratlal and/or any such other person or persons as aforesaid, carrying on the business in the said name, shall pay the said share in the profits to Padamsi, after him to his widow and after her to his son. The clause thus indicates that the payment is to be made so long as the business is carried on in the name of Devidas Vithaldas and Co. and not otherwise. The clause further provides that the said Amratlal shall not assign or transfer or otherwise dispose of the said business or the goodwill thereto meaning thereby the business carried on in the said name except upon a condition that such an assignee or transferee shall enter into a similar agreement with Padamsi or his wife or his said son, as the case may be, whomsoever required to do so. When Amratlal took Chandrakant Parikh as his partner, it was in pursuance of this covenant that the deed of partnership between them expressly provided for the paydment of 0/5/4 in a rupee in the net profits and further provided that it would be after such payment was made that the parties could divide the balance left as their shares of the profits21. If the transaction embodied in the deed, dated January 2, 1951 was an outright purchase of goodwill, there was no necessity of clause (6) in that deed providing for the partnership which Amratlal would enter into in the future or his assignee or transferee having to pay the said share so long as he or they continued to carry on business in the said name. It is also inconceivable that if Padamsi was selling the goodwill, he would enter into an agreement which provided no fixed purchase price, no specific period during which the purchaser would be liable to pay it except an indefidnite period, i.e., until the business was carried on in the said name, leaving to the volition of the other party to use the said name or not or to cease to do so at any time. If the transaction was intended to be an outright sale of a capital asset, the deed incorporating it would have contained a fixed purchase 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 ndot 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 defidnite period during which such price would have to be liquidated22.On the facts of the case, the conclusion is inescapable, even apart from the ratio in the Travancore Sugars and Chemicals case, 62 ITR 566   = (AIR 1967 SC 477  ) 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 reason of which payments in questions could not form part of the assessable profits of the firm.