ORDER
Vimal Gandhi, V.P.
This appeal by the assessee for the assessment year 1985-86 is directed against the order of the Commissioner (Appeals) upholding disallowance of Rs. 1 lakh claimed as a revenue deduction towards licence fees for use of goodwill.
2. The facts of the case are that the assessee-appellant is running a hotel and restaurant under the name Vishala which was acquired in pursuance of an agreement, dated 2-6-1983, between the assessee-firm and Surendra Patel Family Trust. Earlier to the agreement, the aforesaid trust was carrying on business under the name and style of Vishala. Even in the appellant partnership firm, the trust is one of the partners.
2.1. It is claimed by the assessee that the assessee had to pay a recurring expense of Rs. 1 lakh or 5 per cent of its sale, whichever is more, per year, for the use of goodwill and other assets of the trust under agreement, dated 2-6-1983. This payment is of revenue nature and, therefore, to be deducted while computing appellants income. In support of the claim, the assessee has placed reliance on terms and conditions of agreement, dated 2-6-1983, as also on decision of Honble Supreme Court in the case of Devidas Vithaldas & Co. v. CIT (1972) 84 ITR 277 (SC). The assessing officer held that what the assessee acquired under the agreement was a capital asset and the payment of Rs. 1 lakh in question was part of consideration for transfer of a capital asset and, therefore, a capital expenditure. The assets were acquired for an enduring benefit. Therefore, the payment made could not be allowed as business deduction. The learned Commissioner (Appeals) agreed with the above view although she wrongly held that matter was covered in favour of the revenue as per dissenting and minority decision of Justice Sikri, Chief Jutice (CA), in the case of Devidas Vithaldas & Co. (supra).
3. The assessee has brought the issue in appeal and it was vehemently contended on behalf of the assessee by Shri Soparkar that assessee had taken over running business of Vishala and Rs. 1 lakh or 5 per cent of sale (whichever is higher) was payable on the yearly basis for using goodwill and other assets of Vishala as per clause 6 of the agreement. It was compensation for “use” of a capital asset and, therefore, is a revenue deduction. Shri Soparkar also emphasised that beneficiaries of the trust have shown share of receipt of Rs. 1 lakh as revenue and as taxable income. It has been assessed accordingly. Shri Soparkar stated that majority view of Honble Supreme Court in the case of Devidas Vithaldas & Co. (supra) fully supported the case of the assessee. The facts in the present case were almost identical with the facts of Devidas Vithaldas & Co. It was further argued by Shri Soparkar that the trust would not have paid any tax on transfer of goodwill of Vishala in the light of decision of Honble Supreme Court in the case of CIT v. B.C. Srinivasa Shetty (1981) 128 ITR 294 (SC). Therefore, non-transfer of goodwill was not any purpose of tax avoidance. The licence to use goodwill for a consideration as clause 6 of the agreement was given to the appellant bona fide and in good faith. Shri Soparkar also emphasised that expenditure in question was an annual, indefinite payment, payable for an indefinite period and its quantum was dependent on turnover. The trust could even terminate the agreement. All the clauses of agreement read together clearly showed that it was a temporary arrangement for “use” of goodwill.
3.1. The learned Departmental Representative relied upon orders of revenue authorities. However, he conceded that the learned Commissioner (Appeals) was not correct in relying upon the minority decision. He pointed out that the learned Commissioner (Appeals) has given a finding that expenditure in question was capital independent of the above decision. The learned Departmental Representative argued that the majority view fully supported the case of the revenue.
4. We have given careful thought to the rival submissions of the parties. The assessee has placed strong reliance on majority decision of Honble Supreme Court in the case of Devidas Vithaldas & Co. (supra). In the said case, P, a chartered accountant, carried on his profession in the name of D.V. & Co. Through a deed of dissolution dated 2-1-1951, he agreed to sell his goodwill to A for the consideration that 8 annas (subsequently reduced to 5 annas 4 paise), in every rupee of net profit of the business carried in the name of D.V. & Co. would be paid to him and after his death, to his wife and son. On consideration of terms of the agreement, their Lordships held that annual consideration was being paid for “use” of goodwill and, therefore, payment made was a revenue expenditure. The goodwill was not transferred but a licence to use it was given by the transferor for a consideration and said consideration was deductible as a revenue expenditure.
4.1. Their Lordships of the Honble Supreme Court, as per majority decision, laid down the following propositions (summarised) which are to be considered for disposal of this appeal.
(i) That question whether expenditure is in nature of a revenue or capital would depend upon the nature of transaction as embedded in the agreement. It is to be determined whether it is sale of goodwill or a licence for use of goodwill or name of the assignor.
(ii) That it is not always easy to distinguish whether an agreement is for the payment of price in stipulated instalments or for making annual payment in the nature of income. The assessing authority is duty-bound to determine the true legal relationship resulting from a transaction.
4.2. One of the tests applied for determining whether expenditure in question is capital or revenue in character is to see whether it is bringing into existence an asset or an advantage of enduring nature. Even for procuring an advantage of enduring nature, consideration may be payable not necessarily all at once, but even by instalments as against a recurrent expenditure in the nature of operational expenses.
4.3. The other test sometimes applied is whether payment is referable to fixed capital or capital asset as against payment referable to circulating capital or stock-in-trade.
4.4. “Acquisition of 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 time or in instalments distributed over a definite period. [See Ramjidas Jaini & Co., In re (1945) 13 ITR 430 (Lah) and Kuppuswami v. CIT (1954) 25 ITR 349 (Mad)].”
4.5 Their Lordships after taking into account various clauses held that consideration was being paid for the use of goodwill. This was clear from clause 6 of the agreement which provided that in the event of transferee assigning his business to any one else or entering into a partnership or otherwise remaining interested in the said business by whomsoever carried on in the name of Devidas Vithaldas & Co. (hereinafter referred to as the D.V. & Co.) then in any such event, so long as any such business is carried on in the above or in resembling name, the assignee or such other person or persons as aforesaid shall pay share of profit to the assessee, his widow and after her, to his sons. The clause indicated clearly that goodwill was not assigned or transferred but only a licence was given.
4.6. In the light of the above discussion, we proceed to examine the terms and conditions of agreement dated 2-6-1983, between the parties. The assignor-trust is described as party of first part and the assessee as party of second part. Clauses 3 to 16 are relevant and are reproduced below :
“(3) That the said trust, the party of the First Part is carrying on business of restaurant and hotel in proprietorship, in the name and style of “Vishala” at Vasna Tolnaka, Sarkhej Road, Ahmedabad, since 27-3-1978.
(4) That the party of the first part shall handed over its running business of restaurant and hotel being carried on in the name and style of “Vishala” to the party of the second part, the said partnership to carry on and continue the said business on and from 1-6-1983.
(5) That the party of the first part not only hands over only running business but also its all movable and immovable assets and liability including goodwill thereof.
(6) That for the purpose of taking over all the assets and liability the balance-sheet as at 31-5-1983, has been drawn and prepared by the party of the first part, which has been accepted and carried over by the party of the second part on and from 1-6-1983 along with the running business known as “Vishala”.
(7) That the party of the first part shall do all the necessary acts to fulfil the agreement arrived at and shall not disturb the peaceful running, maintaining, continuing, possession and enjoyment of the said business now handed over to the party of the second part.
(8) That in consideration of whatever that has been handed to the party of the second part, more particularly discussed hereinbefore, the party of the second part shall pay a sum of Rs. 1,00,000 (Rupees one lakh only) or 5 per cent of sales, whichever is higher.
(9) That for the purpose of above referred sum calculation will be based on the basis of the accounting year followed by the party of the second part.
(10) That the sum so payable as calculated in the manner stated hereinabove, the same shall be distributed and paid to the following persons in the proportions stated before their respective names-
(1)
Shri Surendrakumar Chhaganlal Patel
5 per cent
(2)
Smt. Smitaben Surendrakumar Patel
20 per cent
(3)
Prachi Surendrakumar Patel
25 per cent
(4)
Deval Surendrakumar Patel
25 per cent
(5)
Astu Surendrakumar Patel
25 per cent
(11) That at the end of every accounting year on the basis of accounts maintained by the party of the second part, a sum shall be calculated at the end of every year and the same shall be credited to the accounts of the parties referred hereinbefore in the set proportions and they shall be permitted to withdraw against such sums either credited or to be credited as and when required.
(12) That in case of dispute regarding sum payable, the books of accounts maintained by the party of the second part shall be binding but the party to dispute shall have all rights to inspect, assess and get copies of the said books of accounts maintained by the party of the second part.
(13) That agreement shall remain in force till the party of the second part regularly pay the decided sum in the manner prescribed hereinbefore to the parties mentioned in clause 10 in the proportions set out against their respective names.
(14) That parties hereto of both the parts shall have a right to add, amend, alter or change any or more of the terms and conditions of this agreement as and when they declare only by reducing the same in writing with their mutual consent. If anyone of the desires to do so and the other party is not agreeable no such addition, amendment, alteration or change can be made.
(15) That the party of the second part, if so desires, may terminate this agreement, by giving three months clear notice in writing in advance and after completely and satisfactorily settling the accounts between the parties.
(16) That all disputes and questions whatsoever which may arise during the continuance or afterwards of this agreement the same be referred to a single arbitrator in case the parties agree upon one, be appointed by each party to the dispute or difference in accordance with the provisions of Indian Arbitration Act.”
It is clear from above that party of first part has handed over the running business of restaurant and hotel “Vishala” to the party of second part with all its movable and immovable assets and liabilities including goodwill thereof. The term “handed over” is required to be considered properly as it might indicate that handing over was a temporary phenomenon,. the running business was given on a licence. But such a construction when other terms are taken into account is not possible. It is transfer of running business with all assets and liabilities including goodwill. There is absolutely no clause in the agreement which would indicate that transferor on the happening of a particular event is entitled to get back the running business or any part thereof. The party of the first part has no right at all to terminate the agreement. The only dispute which the said party can raise is provided in clause 12 and the same can only be towards the “sum payable” to the said party as per accounts maintained by the party of the second part. In other words, the party of first part could dispute the working of the sum payable to the party of the second part and get it corrected under the terms of the agreement. Therefore, there is complete transfer of running business from party of first part to party of second part for a consideration as provided in clause 8 of the agreement. The consideration as provided in the above clause is the total consideration (addition to capital as per books) for all assets including building, furniture and other assets and goodwill. The right vested in the party of first part in noway affected the passing of the property from the said party to party of second part. The mere fact that consideration is to be paid annually or through instalment would not affect the transfer of asset and the running business which is clearly of capital nature. Even in the above referred to decision their Lordships have specifically held that an agreement for payment of price in stipulated instalments or for making annual payment would not make the claim an expenditure of revenue nature when it is price for acquiring capital assets. The assessee even claimed depreciation on the building and other assets transferred to it under the agreement for which consideration is provided as per clause 8 referred to above. This conduct on the part of the assessee clearly clinches the issue that a capital asset in the shape of running business of restaurant and hotel was transferred to the assessee under the agreement.
4.7. Shri Soparkar was not right in contending that payment is being made for use of goodwill or other assets. The payment stipulated in clause 8 is clear consideration for acquiring on permanent basis the running business of “Vishala” with all its assets movable and immovable including goodwill. It is clearly stipulated in agreement and there is nothing in any of the clauses to suggest that consideration is being paid for use of any asset. It is the price of the capital asset transferred by party of first part to the party of the second part. The agreement under consideration is very different from the agreement in Devidas Vithaldas & Co. (supra) where the assignor had retained with him the right to share profit so long as name of Devidas Vithaldas & Co. was used. The payment was clearly for use of name and goodwill. But party of the first part here has not retained any such or similar right with it and, therefore, no inference can be drawn from the agreement that the consideration as per clause (8) was for use of capital assets. The running business has been transferred for a consideration which is not paid once and for all but is to be paid through annual instalments.
4.8. The transferor trust has no right to terminate the contract but the transferee had a right to terminate the same. In other words, there is a clause giving the party of the second part a right to terminate the contract and stop annual payment. In that case lump sum amount of compensation as the said party would be entitled under the law in substitution for the amount provided in clause 8, would be payable by party of the second part to party of the first part. There is no provision to indicate that the running business transferred under the agreement, would in any event go back to party of first part. There is further no indication that goodwill or any part thereof remained with party of first part after the agreement in question came into operation. Clause (7) of the agreement also indicates the ownership of assets was transferred and not merely use of the assets. As noted earlier, the only right vested with party of first part is to get determined correctly on the basis of accounts maintained by party of second part, the annual sum payable to the party of first part. On building and other assets the assessee claimed depreciation as owner for the consideration paid as per clause (8) of the agreement. Having regard to the fact that amount in question is paid for acquiring an asset of enduring nature, the payment was rightly held to be of capital nature and not deductible.
4.9. In the light of above discussion, we uphold the order of learned Commissioner (Appeals).
5. In the result, assessees appeal is dismissed.