TMI Blog1946 (10) TMI 11X X X X Extracts X X X X X X X X Extracts X X X X ..... e, whether in the circumstances it was an item of revenue expenditure, and admissible for deduction under Section 10(2)(xii) of the Indian Income- tax Act, 1939 ? On the 1st of November, 1930, Mr. Vithaldas Thakordas died, leaving his widow, Bai Tarabai, him surviving. He had, during his lifetime, carried on in his own name a bullion business of which he was the proprietor, and upon his death under arrangements made by Bai Tarabai in the first instance with five persons and subsequently with four of them the name Vithaldas Thakordas was used by these persons in carrying on their own business in partnership. One of the four persons died and on the 25th of January, 1939, by a partnership deed of that date, the firm was reconstituted by the three survivors and a new arrangement was entered into by the new partnership with Bai Tarabai for the use of the name Vithaldas Thakordas. Whether the consideration, being the sum of Its. 5,059 paid by the new partnership to Bai Tarabai for the use of the name, is a deduction within the meaning of Section 10(2)(xii) of the Act must depend not only upon the construction of that sub-section but upon the nature of the arrangements entered in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d, and after stating the nature of their business the deed provides that the partnership should commence from the 27th January, 1939, and that the firm shall be Vithaldas Thakordas Co. Paragraphs 6 and 7 are as follows:- 6. In consideration of Bai Tarabai, widow of Vithaldas Thakordas, having agreed to allow the partnership to use the name of Vithaldas Thakordas for the purpose of the partnership, the partnership shall out of the net profits of the business pay to her the said Bai Tarabai in the first instance an amount equivalent to two annas in the rupee of the net profits. In ease the partnership suffers loss the said Bai Tarabai shall not be liable for any part thereof. 7. After payment of the amount as aforesaid to Bai Tarabai out of the net profits the balance of the net profit shall be divided between the partners in the following proportions:- (1)The said Jamnadas Monji shall be entitled to 0-7-0. (2)The said Maganlal Lalji shall be entitled to 0-3-9; and (3)The said Ratilal Chhabildas shall be entitled to 0-3-3 in the unit of 14 annas; and they shall in the like proportion bear all the losses. 8. Nothing in this agreement, shall constitute ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng 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 installments, each installment 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 case of Ogden v. Medway Cinemas, Ltd. [1934] 18 Tax Cas 651 is very similar to the one before us. There the assessee obtained the lease of a hall to be used as a cinema theatre, and by a supplemental deed executed on the same day the assessee was also permitted the use of the goodwill for an annual payment of 500. Mr. Justice Finley held that the payment of 500 was not the payment of the capital sum but was a necessary revenue expense of the assessee. The other and the more important question is whether the amount paid to Bai Tara ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d be allowed as a deduction. There was a provision in the agreement that the rent payable bore some relation to the profits earned by the company. The House of Lords held that the payments were not payable out of the profits or gains and that they were allowable deductions. Lord Macmillan was at pains in this case to explain the observations he had made in the Pondicherry s case (supra) to which I have referred and he was careful to observe that that particular observation applied to the facts found in that ease ; and Lord Maugham in the Indian Radio and cable Communications Company's case [1937] 5 ITR 270 , at p. 277, expressly stated that it was not universally true to say that a payment, the making of which was conditional on profits being earned, could not properly be described as an expenditure incurred for the purpose of earning such profits. He further observed that the difficulty mainly arose because the word profits was used in more than one sense. He points out that if a company makes a net profit of 10,000 and has then to pay 1,000 to directors or managers for services rendered 10,000 are only the apparent profits, but the real profits are 9,000. Therefore i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lso appreciated the difficulty of distinguishing cases which are for a payment of a share of profits simpliciter and a payment of remuneration which is deductible in truth before the profits divisible are ascertained; and he confesses that the line between these two classes of cases was very difficult to draw. The Master of the Rolls further made it clear that the observations of Lord Macmillan in the Pondicherry s case (supra) referred to profits in the sense of real net profits. This High Court, in Commissioner of Income-tax, Bombay v. C. Macdonald and Company [1935] 3 ITR 459 , applied the principle of the Pondicherry s case (supra). In that case the assessees as the managing agents of a company received the sum of ₹ 97,000. From this amount they paid ₹ 19,000 odd to third parties under certain agreements to pay them a proportion of the gross income and they claimed that in assessing their profits they were entitled to have a deduction of this sum of ₹ 19,000 odd from the amount of ₹ 97,000 received by them. The Court of Appeal (sic) rejected their contention. But it is to be noted that the learned Chief Justice, Sir John Beaumont, expressly points out ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etween the assessee company and the other company. It is impossible to contend that in the case before us the partnership is receiving a number of advantages from Bai Tarabai. The agreement between the firm and Bai Tarabai is a simple one and all that the partnership is doing is paying an amount fixed by reference to profits as a fee or charge for the use of the goodwill granted to it by Bai Tarabai. In our opinion it would not be correct to say that this agreement is in the nature of a joint adventure or a partnership. Finally it was argued by Mr. Setalvad that the amount paid by the partnership firm to Bai Tarabai is not an expenditure expended wholly and exclusively for the purposes of the business. It is urged that this amount was not paid for the purposes of producing profits in the conduct of the business, but was paid in order to acquire the right to conduct the business in the particular name. It is not possible to accept this contention. The name in which a business is carried on is an important factor and the reason why the partnership paid for the goodwill was in order to attract more customers and earn more profits. The observations in the judgment delivered by Lo ..... X X X X Extracts X X X X X X X X Extracts X X X X
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