TMI Blog1967 (2) TMI 23X X X X Extracts X X X X X X X X Extracts X X X X ..... vidas Vithaldas Co. He took into partnership with him one A. K. Parikh, but at the time when this partnership was entered into, Padamsi reserved to himself the right to the entire goodwill of the business. Padamsi and Parikh continued their partnership till 31st December, 1950, on which date Padamsi retired leaving Parikh to carry on the business. On 2nd January, 1951, an agreement was entered into whereby Padamsi reserved to himself certain rights. As we have said, the goodwill belonged entirely to Padamsi until he retired. The agreement made on 2nd January, 1951, provided that the partnership of Devidas Vithaldas Co. between Padamsi and Parikh was to be dissolved and the goodwill of the partnership was thereafter to belong to Amratlal. The terms upon which this transfer of the goodwill took place are stated in paragraph 2 of the agreement of the 2nd January, 1951. We will presently advert to the provisions of that paragraph. The agreement also provided that, if Amratlal were to take into partnership with him any new partner, Amratlal must provide in the new partnership agreement for the payments to Padamsi and his heirs for the amounts stipulated in paragraph 2 of the agreeme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se of the goodwill so long as it was used by the firm of Devidas Vithaldas Co. and, therefore, the payments were in the nature of a revenue expenditure. In addition, therefore, to the question whether the payments made in the relevant years were in the nature of a revenue expenditure so far as the assessee was concerned, or were merely payments made to acquire a capital asset, Mr. Kolah on behalf of the assessee has raised a second point. He has urged that having regard to the terms of the agreement between Amratlal and Padamsi dated 2nd January, 1951, and the deed of partnership between Amratlal and Chandrakant V. Parikh dated 18th October, 1955, the stipulations were such that the amounts due under the first agreement and payable to the heirs of Padamsi were amounts to be deducted from the profits of the new partnership itself and that, therefore, there was created an overriding right or title in the heirs of Padamsi to deduct the profits in the hands of the new partnership with the result that it could not be said that the total profits were really income of the assessee, but the real income of the assessee was his share of the profits of the partnership less the amount paya ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ess or profession which the said Amratlal shall hereafter carry on in the name of Devidas Vithaldas Co." In clause 3 there is a recital to the effect that although the payments mentioned in clause 2 have to be made by Amratlal or his transferees or assigns to Padamsi or his wife and heirs, still "nothing contained in this agreement shall constitute or be deemed to constitute any further partnership between the parties hereto or between the said Amratlal and Bai Premlata, wife of the said Padamsi, or between the said Amratlal and the said Subhas in respect of the business to be carried on". Thus, after the provision transferring the goodwill to the name of Amratlal, it was the intention of the erstwhile partner that they shall be completely separated in business and although the payments stipulated in clause 2 had to be made, it would thereafter be purely the business of Amratlal. In clause 4 a further important provision has been made. Clause 4 recites : " The accounts of the partnership have been made up between the parties hereto upto the said 31st day of December, 1950, and neither party has now any claim against the other in respect of the assets and liabilities of the sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cital "As consideration for and in full satisfaction of the purchase price of the goodwill ......." The transaction is referred to as a sale. The consideration is referred to as the purchase price of the goodwill. We do not say that this circumstance is decisive but it is certainly an important circumstance to be taken into account. Next, what is the consideration provided for ? The manner in which clause 2 is couched indicates that the consideration consists of three parts mentioned in sub-clauses (a), (b) and (c) of clause 2. First, that Padamsi should be paid "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"; secondly, that on and after the death of the said Padamsi, his wife Premlata should be paid the same amount and thirdly, that after the life time of Padamsi and his wife, Premlata, the same amount should be paid to Padamsi's son, Subash. The subsequent clauses of the agreement clearly show that the parties were anxious to indicate that thereafter Padamsi and his heirs would have absolutely no interest in the goodwill but that their only interest was in the payments to be made under sub-c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nterpretation of the agreement, for in the first place there is absolutely no mention in the agreement that the goodwill shall revert in the event of Amratlal and/or his partners, transferees or assigns not continuing to use the name of Devidas Vithaldas Co. At the most it can be said that the document is silent upon that question, but, in our opinion, coupled with the provisions of clause 2 which clearly and categorically say that the goodwill has been sold and the purchase price of it was to be paid upon certain terms, the document could not possibly have said anything to the contrary, namely, that the goodwill could thereafter ever revert to Padamsi and his representatives. Further, having regard to the provisions of clause 6, it is, in our opinion, quite clear that the document cannot possibly be construed to mean that the goodwill was only temporarily assigned or transferred or that it was only the use of the goodwill that was assigned to Amratlal. On the face of the document, therefore, we cannot accept the contention 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 D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expenditure. By paying a two annas share in the net profit the partnership did not acquire any asset. It paid a fee or rent for the use of the goodwill and that can only be a revenue expenditure. If the partnership had acquired the goodwill by paying a lump sum, undoubtedly that would have been a capital expenditure ; or even if instead of paying a lump sum it had paid the amount fixed for the goodwill by certain instalments, each instalment would have been in the nature of a capital expenditure. But in this case, as the partnership did not acquire anything in the nature of a permanent asset, the payment to Bai Tarabai is not a capital but a revenue expenditure. " (The underlining is ours.) The alternative case which the learned Chief Justice postulated in the passage quoted above is precisely the case we have in hand and the Chief Justice made it clear that if the partnership had acquired the goodwill by paying a lump sum, "or even if instead of paying a lump sum it had paid the amount fixed for the goodwill by certain instalments", each instalment would have been in the nature of a capital expenditure. In the present case, therefore, the payments made under sub-clauses (a), (b) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sible cases, and I shall not attempt to lay down any such rule. " After referring to several other cases on the same principle at page 45 it is observed as follows: " If the expenditure is made for acquiring or bringing into existence an asset or advantage for the enduring benefit of the business it is properly attributable to capital and is of the nature of capital expenditure. If on the other hand it is made not for the purpose of bringing into existence any such asset or advantage but for running the business or working it with a view to produce the profits it is a revenue expenditure. If any such asset or advantage for the enduring benefit of the business is thus acquired or brought into existence it would be immaterial whether the source of the payment was the capital or the income of the concern or whether the payment was made once and for all or was made periodically. The aim and object of the expenditure would determine the character of the expenditure whether it is a capital expenditure or a revenue expenditure. The source or the manner of the payment would then be of no consequence." (The underlining is ours.) Now we have said enough, we think, to show what was the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... circumstances and to decide "what is the real nature of the transaction from the commercial point of view". No single test of universal application can be discovered for a solution of the question and the name which the parties may give to the transaction which is the source of the receipt and the characterisation of the receipt by them are of little consequence. The court has to ascertain the true nature and character of the transaction from the covenants of the agreement tested in the light of surrounding circumstances. Having said this, the Supreme Court proceeded to consider the several facts and circumstances as they appeared from the record and having considered the same came to the conclusion that the payment of the sum of Rs. 42,480 under clause 7 of the agreement was in the nature of revenue expenditure. Thus that case had several peculiar features which were special to it and which we do not find present in the case before us. In the first place, the assessee-company was floated with the idea of taking over all the assets of the undertakings run by the Government of Travancore and it had no other business. Secondly, it had paid a lump sum consideration in cash for certa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to the English decision, Jones v. Commissioners of Inland Revenue, at page 715, and quoted with approval the observation of Rowlatt J.: " The property was sold for a certain sum, and in addition the vendor took an annual sum which was dependent upon the volume of business done ; that to say, he took something which arose or fell with the chances of the business. When a man does that he takes an income; it is in the nature of income ....... Now, no doubt, as we have said, that extract from the English case could well apply to the facts in the Travancore Sugars case. There, as we have pointed out, for one of the three businesses acquired by the assessee-company an outright payment of Rs. 3,25,000 had been made and by contrast, the payment for other businesses was out of a share of the profits. That indicated a clear distinction being drawn by the parties between the payment being made for a particular class and payment being made out of revenue, namely, the profits of the business. In the present case the whole of the consideration is in terms described as the consideration for the sale of the goodwill and the entire consideration in sub-clauses (a), (b) and (c) of clause 2 is stat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ut, we have no doubt upon the facts of the present case that the amounts payable under sub-clauses (a), (b) and (c) of clause 2 of the agreement dated 2nd January, 1951, were amounts clearly paid as the purchase price of the goodwill which was a capital asset of Padamsi until the date of the agreement and which Amratlal purchased from Padamsi in consideration of the payments to be made under clause 2. The payments, therefore, made towards the acquisition of such capital assets would in the circumstances be clearly in the nature of expenditure to acquire that capital asset. It cannot in the circumstances be held to be in the nature of a revenue expenditure. Then we turn to the other point argued in the case, namely, that the expenditure was directly to be met out of the profits and therefore it did not constitute the income of the assessee at all in the first instance. The payments stipulated in sub-clauses (a), (b) and (c) of clause 2 were first to be deducted from the profits of the partnership between Amratlal and Chandrakant and then whatever was left was to be received by the two partners. Therefore, the profits which the assessee received from their business were profits min ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rds the payment and therefore before the profits became the income of the assessee it was disbursed to Padamsi and his heirs. We do not think that the provisions of clause 5 in the first place can at all affect the stipulation in the original agreement of 2nd January, 1951. Undoubtedly, in the original agreement between Padamsi and Amratlal, Amratlal had undertaken that in the event of his taking with himself a partner he would stipulate in the partnership agreement to be made that clause 2 of the agreement shall be observed and it was in pursuance of that stipulation in the original agreement that clause 5 was inserted in the deed of partnership, but we do not think therefore that the terms of clause 5 can assist to interpret the terms of clause 2 of the original agreement. What was the intention between the parties so far as the agreement between Padamsi and Amratlal is concerned has to be judged upon the provisions of that agreement and particularly the terms of clause 2 thereof and nothing that is said in clause 5 of the partnership agreement subsequently can alter that intention. As to that intention we have already said that clause 2 does not indicate that the payments were t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be made subsequently between the partners inter se that cannot affect the intention of the parties under the original agreement. The partners made that arrangement for their own convenience and it had no reference to Padamsi or his legal representatives. The decision in Ratilal B. Daftari v. Commissioner of Income-tax was next relied upon. That was a case where there was, so to say, a sub-partnership between one partner and strangers and the share which the partner received was divisible between him and those strangers who were his sub-partners. The partner had contributed Rs. 25,000 out of the capital of the partnership of Rs. 3,45,000 and his share of the profits was determined at Rs. 14,661. His contention was that the whole of this amount did not constitute his income, because the sub-partners were to take 3/5th out of the amount and only 2/5th belonged to him, namely, Rs. 5,864. It was held that having regard to the agreement between the partner and the sub-partners, the real income of the partner was only 2/5th which he himself was to receive. The rest was payable by him out of the profits to the sub-partners. It will be noticed that in this case the special feature was th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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