TMI Blog1991 (2) TMI 105X X X X Extracts X X X X X X X X Extracts X X X X ..... ified ? 2. Whether, on the facts and in the circumstances of the case, the claim of the assessee to deduct a sum of Rs. 36,292 representing payment to Sri Parmanandbhai in computation of its business income is allowable ?" The assessee is a partnership firm. It had two partners : (1) Smt. Ujjambai, and (2) Shri Parmanandbhai Patel. Later, a third person, by name, Shravankumar, also joined the partnership. Parmanandbhai Patel became partner of the firm on June 21, 1961. He, however, withdrew from the partnership in September, 1963, as he wanted to contest the election of Member of Legislative Assembly which he ultimately won and became member of the council of Ministers. After relinquishing the office of Minister, Parmanandbhai Patel aga ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that Parmanandbhai left the firm for good to become a politician and not to indulge in business activity of the firm or in parallel business detrimental to the business of the firm. The Tribunal finally held: "Thus, on the totality of the circumstances, we hold that the payment made to Shri Parmanandbhai was not prompted by any commercial considerations and, as a matter of fact, it is on an extra-commercial consideration that the firm agreed to pay Shri Parmanandbhai Patel by way of share in the goodwill annually." The Tribunal, therefore, set aside the order of the Commissioner of Income -tax (Appeals) and restored that of the Income-tax Officer, disallowing the claim made by the assessee. It is under these circumstances that the afore ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and paid. Section 14 of the Partnership Act lays down that the "property of the firm" shall include the goodwill of the business. This, however, is subject to any contract between the partners. This when read with sections 29 and 53 of the Act, gives a clear indication that the goodwill of a partnership firm is as much a property as any other property and has a value. This property can even be bought and sold (section 53 of the Partnership Act). Not only this, such goodwill can be transferred by gift and in that event is chargeable to gift-tax. In CGT v. Chhotalal Mohanlal [1987] 166 ITR 124 (SC), there were three partners of a firm with seven annas, four annas and five annas share, respectively. One of the partners retired. Out of two rema ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and instead, to pay Rs. 50,000 per year in lieu of his share in that goodwill. It must, therefore, be held that this expenditure of Rs. 50,000 per year was incurred wholly and exclusively for the purposes of the business of the partnership. It now remains to be determined whether the expenditure so incurred was a revenue expenditure or a capital expenditure. This question, as laid down by the Supreme Court, in Devidas Vithaldas and Co. v. CIT [1972] 84 ITR 277, must depend upon the nature of the transaction itself. The majority view expressed therein (Sikri C. J. dissenting) is that it is not always easy to distinguish whether an agreement is for the payment of price in stipulated instalments or for making annual payments in the nature of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d no relation to the capital value of the assets ; and (c) the payment was not related to or tied up, in any way, to any fixed sum agreed between the parties as part of the purchase price of the three undertakings. Reference may also be made to a Division Bench decision of this court in CIT v. M. B. Umbrella Industries [1984] 145 ITR 292. In that case, the assessee-firm had income from the business of manufacture of umbrellas. The firm paid Rs. 25,001 towards "TANK" trade mark commission to an old firm which was manufacturing umbrellas with that trade name. The two firms agreed that the assessee-firm may use the trade mark for five years on payment of Rs. 25,001 to the old firm per year. It was held that the amount so paid was not a price p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... opined in the negative. That, in our opinion, may riot matter much. Apparently, Parmanandbhai had a definite share in the partnership. He contributed Rs. 3 lakhs as share capital in the partnership. There is no agreement to the contrary that, on his retirement or on dissolution of the partnership, he would not get any share in the goodwill, when regarding Smt. Ujjambai, another partner, there was an express agreement that she would not be entitled to any amount of share on her retirement, on account of her share in the goodwill. That being so, even if Parmanandbhai did not inherit anything from the erstwhile partner Smt. Jadavbai, he had interest in all the assets of the partnership including goodwill. The Income-tax Appellate Tribunal w ..... X X X X Extracts X X X X X X X X Extracts X X X X
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