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

1. Prior to November 1948, one Padamsi Haridas carried on his profession as a chartered accountant in the name of Devidas Vithaldas and Co. By a deed of partnership, dated November 30, 1948, he took one Amratlal Parikh as a partner, reserving, however, to himself all the rights and interests in the goodwill of that business.          2. On January 2, 1951, he retired from the said partnership. Clause (1) of the Deed of Dissolution 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. Cl. (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 name 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 Amritlal 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 and 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 and Co. and          (c) on and after the death of the said Padamsi as well as his said wife Bai Premlata, pay to Subhas the son of 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 name of Devidas Vithaldas and Co."Clause (3) provided that nothing contained in the deed shall constitute or be deemed to constitute any future partnership between the parties to the deed or between the said Amratlal and the said Bai Premlata or the said Subhas in respect of the business to be carried on by Amratlal in the name of Devidas Vithaldas and Co. Clause (4) declared that accounts had been made up between the parties, and that neither party had any claim against the other except as provided in said clause (2). By Cl. (5) it was made clear that the said Amratlal shall henceforth remain liable for all the obligations and liabilities which might be incurred in respect of the said business to be carried on in the name of Devidas Vithaldas and Co., and he shall accordingly indemnify the said Padamsi against all actions, claims, demands, costs, charges and expenses whatsoever in respect of the same or in any other manner relating to the premises. Lastly, clause (6) provided that in the event of Amratlal transferring or assigning his said business to any person or persons, or carrying on the said business in partnership with some other person or persons or remaining otherwise interested or concerned directly or indirectly in the business or profession of chartered accountants by whomsoever carried on in the name of Devidas Vithaldas and Co., or any other name resembling or similar thereto, or in the event of any of the heirs or legal representatives or nominees of Amratlal carrying on the said business or profession in the name of Devidas Vithaldas and Co., then in any such events they 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 the said Amritlal and/or the said Amritlal and/or any such other person or persons as aforesaid carrying on such business under the name style and firm of Devidas Vithaldas and Co. shall as aforesaid pay to the said Padamsi or his said wife Bai Premlata or his said son Subhas for and during the terms of their respective lives 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 Cl. 2 hereto..........". 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 provision 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 Subhas as the case may be, enter into an agreement with any of the last three named 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.          3. Amratlal carried on the said business in the name of Devidas Vithaldas and Co. as the sole proprietor thereof till October 17, 1955. Payments made by him during this period under Cls. (2) and (6) of the said deed of dissolution were added back in his assessments as capital payments. On October 18, 1955, he entered into partnership with one Chandrakant V. Parikh. The deed of Partnership executed then by him and the said Chandrakant Parikh recited that the said Amratlal till then was carrying on the business in the name of Devidas Vithaldas and Co., that the goodwill of the said business belonged solely to the said Padamsi which he, the said Amratlal, had "bought" in consideration of his agreeing to pay a share of eight annas in the rupee to Padamsi, and after him his wife and then his son as aforesaid. Clause (5) of the deed then provided :-"The parties hereto shall pay 0/5/4 share in profits in a rupee as and by way of purchase price of goodwill of the said firm to the said Shri Padamsi Haridas or to his wife or to his son as stated in detail hereinbefore, instead of Re. 0/8/0 share in a rupee as agreed by the party of the First Part and Shri Padamsi Haridas. The said Shri Padamsi Haridas has agreed to this reduction in his share mutually with Shri Amratlal Kashandas Parikh and Shri Chandrakant V. Parekh. After the said share of 0/5/4 in a rupee is paid up as stated above the balance of the profit and loss of the firm shall be divided in two equal proportions between the parties of the First and the Second Part"4. The firm constituted under this deed paid to Bai Premlata on and after the death of Padamsi various amounts during the years 1955-1959 under the said covenants. The firm claimed that those amounts should be deducted in its assessments for those years on the ground that its income to the extent of those payments had been diverted as a result of the overriding title created by clause (5) of the said deed of partnership. assessments for the relevant years showed that the amounts paid to Bai Premlata were assessed as income in her assessments, so that, if the deductions claimed by the firm were not admitted the same amounts would be assessed twice over, first in the hands of Bai Premlata and then in the assessments of the firm.          5. The Income-tax Officer, and in appeal the A. A. C., rejected the claim for deductions holding that 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.          6. 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 so long as it was used and accordingly they were in the nature of revenue expenditure.          7. On a reference to the High Court, the High Court held that :-"On the face of the document, therefore, we cannot accept the contention that it was a document merely granting that it was a document merely granting a licence to use the goodwill or a mere transfer of the right of user thereof. It was an outright sale of an asset of Devidas Vithaldas and Co. namely the goodwill which till then belonged to Padamsi and in which he had reserved his exclusives right at the time when he entered into partnership with Amratlal"In this view, the High Court answered the questions referred to it in favour of the Revenue. It was true, the High Court observed, that the Revenue had in the assessments of Bai Premlata taken the view that "Padamsi had not sold his right, title and interest in the goodwill and merely allowed the use of it for a number of years and since the payment was for the user of the goodwill, it could clearly be a revenue receipt in the hands of the assessee". But it added that "this was an incorrect view to take upon the facts and circumstances that have been placed before us in the present case and upon the terms of the document dated 2nd January 1951. The order clearly shows that the document dated 2nd January, 1951 was misconstrued". It is against this view that these appeals have been filed.

Reasoning:
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.