TMI Blog1995 (12) TMI 28X X X X Extracts X X X X X X X X Extracts X X X X ..... nafter called "the assessee") is a registered firm. The said firm filed its returns of income for the assessment year 1987-88 and for the accounting period ending on March 31, 1987, showing a total income of Rs. 6,54,075. The Income-tax Officer, 'A' Ward, Tirupati, by his order dated March 3, 1988, determined the total income at Rs. 8,79,560. The assessee claimed that a sum of Rs. 2,00,000 was payable to the Srinivasula Reddy Family Trust towards goodwill of the business and the trademark and, accordingly, a sum of Rs. 2,00,000 was credited to the account of Srinivasula Reddy Family Trust on March 31, 1987, itself which was disputed by the Assessing Officer. Therefore, the grievance of the assessee is about the inclusion of a sum of Rs. 2,00,000 for purpose of assessing the firm's income. The claim of the assessee for deduction of the said sum arises in the following circumstances : Bhaktimala Beedi Factory was started by one Sri C. Srinivasula Reddy way back in 1940 and the trademark was registered in 1944 and in 1946 in the name of the partners of Bhaktimala Beedi Factory. After the family partition, a partnership was formed with effect from April 1, 1964, comprising Sri Srin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by the partners in any manner as they like at any time. The trademark and the goodwill being an asset of the partnership can be transferred to the family trust and the assessing authority cannot take exception to such a course under the impression that it is a device to avoid tax. It is also the contention of learned counsel for the petitioner that the assessee is entitled to reduce the tax liability by making suitable adjustments permissible under law. Sri S. R. Ashok, learned standing counsel for income-tax, submits that the family trust is only a device to evade tax. Inasmuch as there is no consideration for transfer of the goodwill and th e trademark in favour of the family trust, the same cannot be lawful. He further submits that the partners alone are parties to the trust deed and since the partnership firm is not a party to the document, the assets belonging to the partnership firm cannot be legally transferred in favour of the family trust, more so when all the beneficiaries are not partners of the firm. The Income-tax Officer relying on the observations of the Supreme Court in Addanki Narayanappa v. Bhaskara Krishnappa, AIR 1966 SC 1300 took the view that the partner ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd hence whether the said document of relinquishment was compulsorily registrable under section 17(1)(c) of the Registration Act and the Supreme Court answered the question in the negative. The said decision does not help the Revenue for more than one reason. Firstly, some partners alone executed the settlement deed while in the present case, all the partners have joined in the execution of the relinquishment deed ; and secondly, relinquishment of assets in immovable property is not involved in the present case as in the other case and moreover, the question of registration does not arise in this case as no part of the immovable property of the partnership firm is involved in the transfer. It may be pointed out that in a later case, reported in CIT v. Juggilal Kamalapat [1967] 63 ITR 292, the Supreme Court after noticing the earlier judgment, held the view that a relinquishment whether it relates to conveyance of immovable property or not, does not require registration. The observations of the Supreme Court in this regard are relevant and accordingly extracted (at page 298) : " The deed of relinquishment, in this case, was in respect of the individual interest of the three Singha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s joint ". In P. Ramachandra Reddiar v. CIT [1993] 200 ITR 161 (Ker) after referring to the decision in Narayanappa's case, AIR 1966 SC 1300, the Kerala High Court observed (at page 190) thus : " There cannot be any doubt that all the partners constituting the firm can transfer the assets. Therefore, when the firm 'Good Morning Stores', of which Ramachandra Reddiar and Arjuna Reddiar are the only partners, transferred one of its businesses with its assets, viz., 'Bright Dry Cleaners' to two ladies who are none other than the wives of the partners, it is to be held that there was a transfer indirectly by the two partners. The law looks to the partners. What is called the property of the firm is their property and what is called the liability of the firm is their debts. " In Ram Narain and Bros. v. CIT [1969] 73 ITR 423, the Allahabad High Court held that an item of immovable property belonging to a firm can be converted into their personal property by means of an instrument in writing and such instrument must be registered under section 17(1)(b) of the Registration Act. As in the instant case, there is no transfer of, immovable property, the question of registration does not a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ade to only three out of four partners and their minor children, there should have been some consideration and a contract without consideration is void. Learned counsel for the petitioner-assessee submits that there need not be monetary consideration and the fact that the goodwill was transferred to the family trust in order to ensure that the goodwill is not affected by future disputes amongst the partners (as recited in the deed itself) is sufficient consideration. Alternatively, it is contended that the transfer of partnership asset can be said to have been effected on account of natural love and affection between closely related parties and, therefore, it falls within the exception to section 25 of the Contract Act. We find considerable force in this argument. However, it is not necessary for us to deal with this aspect further because even if the transfer was made without consideration, it could still be regarded as a gift of goodwill to the family trust. Learned standing counsel for the Revenue lastly contended that the transaction is a clear case of tax evasion by adopting a devious method of executing a family trust by all the partners of the firm and so a game of hidden ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s in this reference case to hold that there was no lawful transfer of goodwill. The Tribunal gave an additional reason for disallowing the expenditure on the ground that this is a capital expenditure because lump sum payment results in the acquisition of an enduring asset by way of goodwill and, therefore, it is not an expenditure laid out for the purpose of business. This is not the ground on which the Income-tax Officer and the Commissioner (Appeals) disallowed the deduction. For the first time, the Tribunal expressed this view. It does not appear that the said contention was raised before the Tribunal on behalf of the Revenue. Learned counsel for the assessee relied upon the decision of the Supreme Court in Devidas Vithaldas and Co. v. CIT [1972] 84 ITR 277 and a Full Bench judgment of the Andhra Pradesh High Court in Praga Tools Ltd. v. CIT [1980] 123 ITR 773 and contended that the lump sum payment made was only for the right to use the goodwill and every year payment has to be made on percentage basis depending on the sales. It is, therefore, contended that the payment has integral connection with the business. It is also contended that the asset is not of an enduring nature ..... X X X X Extracts X X X X X X X X Extracts X X X X
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