TMI Blog1972 (1) TMI 116X X X X Extracts X X X X X X X X Extracts X X X X ..... oodwill by any of the subsequent clauses. Reliance is placed on the, deed dated October 18, 1955, executed by Amratlal and one Chandrakant V. Parikh. This deed also recited that the goodwill of the said business belonged solely to the said Padamsi which he, the said Amratlal, had 'bought' in consideration of his agreeing to pay a share of eight annas in the rupee to Padamsi . I find it again difficult to go against the express wording of the deed when there is no clear clause overriding those words. I am not averse to discovering the substance of a transaction but there is a limit to the extent I can disregard the language in a commercial document. Reliance is placed on clause 5 of this deed. I am unable to say that this clause has the effect of converting a sale into a licence. It is argued that the mode of payment of the purchase price shows that it was not a purchase. I am unable to see how a mode of payment of purchase price of any capital asset can convert a capital payment into a revenue payment in the hands of the vendee. It may be that the mode of payment may affect the character of the receipt in the hands of the vendor but as far as the vendee is concerned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... November 1948, one Padamsi Haridas carried on his profession as a chartered accountant in the name of Devidas Vithaldas and Co. By a deed of partnership, dated November 30, 1948, he took one Amratlal Parikh as a partner, reserving, however, to himself all the rights and interests in the goodwill of that business. On January 2, 1951, he retired from the said partnership. Cl. (1) of the Deed of Dissolution executed on that occasion provided that the said partnership shall be deemed to have been dissolved as from December 31, 1950, but the business shall, as from that date, be carried on in the said name by the said Amratlal alone. Cl. (2) of the said deed ran as follows : 2. The goodwill of the late partnership belonged to the said Padamsi alone. He has agreed to sell the same to the said Amratlal. As consideration for and in full satisfaction of the purchase price of the goodwill of the said late partnership the said Amratlal shall- (a) pay to the said Padamsi for and during the terms of his natural life a share of eight annas in the rupee in the net profits of the said business or profession which the said Amratlal shall hereafter carry on in the said name of Devidas Vith ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . or any other name resembling or similar thereto, the assignees of the said Amratlal and/or the said Amratlal and/or any such other person or persons as aforesaid carrying on such business under the name style and firm of Devidas Vithaldas Co. shall as aforesaid pay to the said Padamsi or his said wife Bai Premlata or his said son Subhas for and during the terms of their respective lives the said eight annas share in the rupee in the net profits of any such business as is hereinbefore directed to be paid by the said Amratlal under clause 2 hereof . The clause next pro- vided that the said Amratlal shall not assign or transfer or otherwise dispose of the said business or the goodwill thereof or bequeath the same to any person whomsoever nor enter into any partnership or other arrangement with any other person or persons for carrying on the said business in the said name-except with a condition that the provisions of this Agreement shall be accepted by such person or persons or his legatees or successors or legal representatives, and with a further condition that any such person or persons or successors or legatees or legal representatives shall forthwith after being interested ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to Bai Premlata were assessed as income in her assessments, so that, if the deductions claimed by the firm were not admitted the same amounts would be assessed twice over, first in the hands of Bai Premlata and then in the assessments of the firm. The Income Tax Officer, and in appeal the A.A.C., rejected the claim for deductions holding that the said payments were capital and not revenue payments, and that the transaction evidenced by the said deed of dissolution was one of outright sale of the goodwill and the payments made thereunder were part of the purchase price. On an appeal to the Tribunal, the Tribunal rejected the con- tention of the Revenue that the transaction was a sale of the goodwill in terms following : It is no doubt true that clause 2 of the agreement refers to sale of goodwill and the agreed payments as constituting full satisfaction of the purchase consideration. If the payments are stopped, it is not stated that there will be any right of action for any definite quantified and liquidated amount. It would mean that with the stoppage of payments the assessee will only lose the right to its contact with the clientele and opportunity to earn profits, thereaf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of decisions, 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 income, that there is no single test of universal application for a solution of the question, and that therefore, the Court has 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 re- ceipt 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. If the transaction is embodied in a document, the liability to tax depends upon the meaning and content of the language used in it in accordance with the ordinary rul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e other company prebearing from exporting and procuring coal for its export by the assessee company, five annas per ton (subsequently raised to ₹ 1-5-0 per ton). The amounts so paid to the other company were taxed in 'the hands of that company. The respondent-company claimed them as admissible business expenditure for the assessment years in question. The Revenue, on the other hand, claimed that the payments were for acquiring monopoly and were therefore not allowable as revenue expenditure. This, Court upheld the assessee's contention that the expenditures were, not for acquiring the monopoly, but were made to make the business more facile and profitable, that they were made as a temporary measure and not for deriving an advance of an enduring character. Observing that the agreement between the two companies was not for any fixed term and could be terminated at any time at the volition of any of the parties, it was held that although an enduring benefit need not be of an everlasting character, it should not at the same time be transitory or ephemeral, so that it can be terminated at any time at the volitior of either of the parties. Payments to ward off competition w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich does not mean payment at one time of the whole amount, but includes payment of a lump sum, as distict from recurrent, distributed in periodic instalments. The other test sometimes applied is payment when it is referable to fixed capital or capital assets as against payment referable to circulating capital or stock-in-trade. But this test also is not capable of being treated as of uniform application. Price paid for the acquisition of a capital asset may take sometimes the form of payments of a revenue character. The simpliest example is interest paid on the unpaid purchase price of capital asset. Though in relation to and referable to acquisition of a capital asset, it is nonetheless a revenue disbursement. On the other hand, in Assam Bengal Cement Co. v. C.I.T.(27 I.T. R. 34, 46) where the payment in ,question was for eliminating competition, the test of the expenditure having been incurred for and referable to a capital asset was applied. Acquisition of the goodwill of the business is, without doubt, acquisition of a capital asset, and therefore, its purchase price would be capital expenditure. It would not make any difference whether it is paid in a lump sum at one tim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... capital sum, but there was a further clause to pay by way of additional consideration a further clause of 10% upon the invoice price of all machines constructed under the said inventions and sold during the period of ten years. In respect of this latter sum, it was held that since it was dependent on the volume 0f business, which rose and fell with the chances of the business, it was income and not capital, although it was actually referable to the purchase price. In Commissioners of Inland Revenue v. Ramsay,(20 T C 79) the assessee purchased a dental practice for a primary price of pound. 15,000. That was to be satisfied first by an immediate payment of pound. 5,000 and as to the balance of pound 10,000) by payment each year, for ten years, of a sum equivalent to 25% of the net profits of the practice for each year. Such annual payment obviously might vary from time to time depending upon the quantum of business and the profits, Nevertheless, the price of E. 15,000 was not otiose, nor the balance of E. 10,000 after the initial payment of pound 5,000. The only thing that was stipulated by the parties was that the vendor was satisfied with receiving 25% of the net profits each ye ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en the partnership ceased to pay the amount of two annas in the rupee in the partnership's net profits. On a question whether the payment was an admissible deduction, ,the High Court of Bombay, relying on Ogden v. Medway Cinemas Ltd.(18 T C 691) held that the payment was a revenue expenditure, the transaction between the partnership and the said Bai Tarabai being not a purchase of the capital asset. It is true that the words used in the document were such as one would find in a document of a licence. But, as already stated, it is not form but the substance of the transaction that matters. Besides, the decision did not rest on those words but on what truly the nature of the transaction was and the analogy it bore with that in Ogden v. Medway Cinemas Ltd.(18 T C 691) A case of a similar nature is also to be found in Travancore Sugars and Chemicals Ltd. v. C.I.T. (25 T C 173, 183). There the assessee company was floated to take over the assets of three undertakings run by Travancore Government, a sugar manufacturing concern. a distillery and a tincture factory. The first was to be purchased for ₹ 3.25 lacs, the second on a joint valuation of parties, and the third on the boo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase the payment, even if out of the profits, is tied up with a lump sum, that is, with the purchase price agreed to between the parties and which assumes the character of a fixed debt. Cl. (2) clearly does not fix such a price nor mention a lump sum in respect of which annual payments as provided therein are to be made. The clause, no doubt, prescribes the mode and the quantum of the payment, that is, a share of five annas four vies in the rupee in the net profits of the business, payable during the lifetime of Padamsi and after him during the lifetime of his wife Bai Premlata if she were to survive him, and then to their son during his lifetime. Two things, however, may at once be observed, firstly, that the duration of payment is indefinite, unlike Ramsay's case (20 T C 79) and secondly the amount is indefinite, depending as it does upon the rise and fall in the profits of the business. Obviously, the payment is not related to any lump sum fixed as the purchase price. On the contrary, it is directly related to and dependent upon whether at all and what profits are made. Further, the document is totally silent as to what is to hppen to the goodwill if Amratlal Parikh or his ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... profits. If the transaction embodied in the deed, dated January 2, 1951 was an outright purchase of goodwill, there was no necessity of cl. (6) in that deed providing for the partnership which Amratlal would enter into in the future or his assignee or transferee having to pay the said share so long as he or they continued to carry on business in the said name. It is also inconceiveable that if Padamsi was selling the goodwill, he would enter into an agreement which provided no fixed purchase price, no specific period during which the purchaser would be liable to pay it except an indefinite period, i.e., until the business was carried on in the said name, leaving to the volition of the other party to use the said name or not or to cease to do so at any time. If the transaction was intended to be an outright sale of a capital asset, the deed incorporating it would have contained a fixed purchase price and even if such a fixed purchase price were to be payable not at once but by instalments, such payments would be relatable to and tied up with such a lump sum. Even if such instalments were to be payable out of the profits of the business, such instalments would be relatable to the pri ..... X X X X Extracts X X X X X X X X Extracts X X X X
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