TMI Blog1989 (2) TMI 179X X X X Extracts X X X X X X X X Extracts X X X X ..... to the retiring partner treating it as capital expenditure. Hence the appeal by the assessee to the Tribunal. 2. By raising several grounds, the assessee urged that the CIT erred in his assumption and presumption and erroneously concluded that the payment of fees for user of the goodwill to the retiring partner was capital in nature and in view of the authority of the Supreme Court in the case of Devidas Vithaldas Co. v. CIT [1972] 84 ITR 277 and that of the Bombay High Court in the case of Vithaldas Thakordas Co. v. CIT [1946] 14 ITR 822, the fees paid for user of the goodwill should be allowed as business expenditure. 3. M/s Doshi Motors is a partnership firm which consisted of three partners as per deed of partnership dated 18-4-1963, viz., Shri Bhogilal Manilal Doshi, Smt. Madhukanta Kantilal Doshi and Smt. Kanchanben Manilal Doshi sharing profits or losses of the business equally. The partnership business consisted of dealing in motor spare-parts, tyres, tubes, motor oil etc. The partner Smt. Kanchanben Manilal Doshi (Smt. Kanchanben for short) is the mother of first partner Shri Bhogilal Manilal Doshi and mother-in-law of second partner Smt. Madhukanta Kantilal Doshi. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rship and from all clauses, covenants, agreements, matters or things in the said Indenture of Partnership dated 18th April, 1963. 6. In further pursuance of the said Agreement the retiring partner as beneficial owner hereby assign and release unto the said continuing partners their share in all property, assets, credits and effects of the said partnership and to hold the same unto the continuing partners absolutely. 7. In order enable the continuing partners to act and receive the partnership assets and premises hereby assigned and also the said credits and effects of the said partnership the said retiring partner hereby irrevocably appoint the said continuing partners the true and lawful Attorney to ask, demand, sue, recover, receive and to sign and give full and effectual receipts and discharges for all and singular the debts/assets and effects of or due or owing or in anywise belonging to the partnership." From the extract, it would be seen that in consideration of the retiring partner allowing the continuing partners to use the goodwill, the name of the partnership, tenancy rights of the premises of the partnership business, the continuing partners agreed to pay Rs. 12,00 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that the payment to the retiring partners who agreed to allow the company to use the goodwill, name of the partnership, tenancy rights, quota rights, licences etc. based on gross sales by way of fees every year termed as "royalty" was allowable as revenue expenditure. 7. The learned departmental representative, on the other hand supported the revisional order of the CIT and submitted that goodwill is an asset and therefore the fees paid for acquisition of goodwill was capital in nature. He has also filed a statement showing the computation of goodwill for this business according to which the purchase price of the goodwill for one year has been arrived at, at Rs. 36,000 on the basis of average profits earned for the previous three years and adjusting the element of interest at 18 per cent and salary to two partners. 8. We have duly considered the rival submissions and the record. Prima facie, the assessment made by the ITO inasmuch as he proceeded to compute the total income with reference to the net profits of Rs. 92,504 as shown in the profit and loss account filed by the assessee for the year ending 31-3-1983 clearly shows that the ITO has not applied his mind on the issue, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of a return which was apparently in order but called for further enquiry. It pointed out that it was the duty of the ITO to ascertain the truth of the facts stated in the return when the circumstances of the case were such as to provoke an enquiry. The word "erroneous" in sec. 263 would contemplate such inaction on the part of the ITO which would make the assessment passed in such circumstances as "erroneous" so as to call for revisional order by the CIT. 9. As regards the principle of natural justice, the CIT has duly issued show cause notice and after taking into account written submissions and the contentions he held that the decisions relied upon by the assessee's counsel were not applicable and thereby came to the conclusion that it was a case of acquisition of the goodwill and not user of the goodwill. 10. Now we shall consider the merits of the case with reference to the relevant case laws. In the case of Devidas Vithaldas Co. admittedly one Shri Padamsi Haridas carried on his profession as a Chartered Accountant in the name of Devidas Vithaldas Co. and in a partnership with one Amratlal Parikh evidenced by a deed of partnership dated 30-11-1948 reserved to himse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt for consideration. Therefore, we agree with the CIT that the ratio of the Supreme Court in the case of Devidas Vithaldas Co. was not applicable to the assessee's case as the facts could be distinguished with the facts of the assessee's case. 12. Coming to the case of Bombay High Court in the case of Vithaldas Thakordas Co. it is seen that one Vithaldas Thakordas was carrying on his bullion business in Bombay under the style of M/s Vithaldas Thakordas Co. as a proprietary concern. After his death, the business was taken over by four persons who continued the business in partnership. With the consent of widow of Vithaldas Thakordas, the trade name of her late husband was adopted by the partnership and in consideration agreed to make her an annual payment equivalent to a two-anna share in the net profits without her being liable for any losses of the firm. The claim of deduction was rejected by the authorities and the Tribunal as appropriation of profits after they were earned by the partnership. The Bombay High Court held that by paying two-annas' share in the net profit of the partnership, he did not acquire any asset, but paid only a fee or rent for the use of the goodwi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or deciding the issue, it is seen that in consideration of retiring partner agreeing to allow the use of goodwill, name of the partnership, tenancy rights of premises etc. the remaining partners had agreed to pay Rs. 12,000 per annum out of profits by way of fees for a period of 5 years. As has already been pointed out earlier, there is no evidence to show the goodwill as belonging to the retiring partner as such. The use of the name of the business by continuing partners did not require agreement of the retiring partner, so to say. As regards tenancy rights of the premises, we have specifically asked the learned counsel of the assessee to produce evidence to show that the tenancy rights were obtained in the name of the retiring partner Smt. Kanchanben and therefore, she has allowed remaining partners to continue such rights. Though the amount was agreed to be paid out of the profits of the business, it was to be paid whether the firm made profits or incurred losses and whether the partnership was continued by the remaining two partners or by admitting new partners into it. Therefore, the liability to pay the amount to the retiring partner was also admitted to be paid by the firm i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee, the partnership deed clearly provides for closing of the accounts on the date of retirement for ascertainment of amount due to the retiring partner or as per dissolution if the partnership was agreed to be dissolved on the date of retirement. Thus, there was a provision in the deed of partnership and an obligation cast on the partners to close the books of account to ascertain the share due to the retiring partner on as per accounts or on the basis of dissolution of partnership. Despite the provision in the deed of partnership, no accounts were taken by the partnership nor a dissolution deed was drawn up in order to ascertain the amount due to the retiring partner including a share in the net partnership assets as contemplated in sec. 48 of the Partnership Act. On the contrary, a lump sum amount is stated to have been agreed to be paid to the retiring partner, i.e. at the rate of Rs. 12,000 per annum for a period of 5 years and thereafter at the rate of Rs. 1,000 per annum in perpetuity, though the deed of partnership is said to be at will. Even these staggered instalments of payment were meant to depend on not the duration of the partnership, but on the ground that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s to look not only into the document 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." From the above observation, it is clear that if there is concealment, by device, of the true legal relation, it is open to the assessing authority to unravel such device and to ascertain the true nature of the relationship. In the case of the assessee, the retiring partner is none other than the mother and mother-in-law of the remaining partners and she was admittedly a sleeping partner in the business. Keeping in view the close relationship existing between th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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