# DEVIDAS VI111ALDAS Ii: CO v. C.I.T., BOMBAY CITY Janμnry 28, 1972

- **Citation:** [1972] 3 S.C.R. 215
- **Court:** Supreme Court of India
- **Decided:** 1972
- **Case number:** Civil Appeals Nos. 1452 to 1455 of 1968
- **Bench:** S. M. S!Kri, M. Shelat, H. R. Khanna, G. K. MIT'.l'ER
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/devidas-vi111aldas-ii-co-v-c-i-t-bombay-city-jan-nry-28-1972-5523
- **Pages:** 18

## Headnote

215
Jm:ome-tax-Capital or Re.en""
ex1mtdltu~oodwill-D•ed of
·dissolution of partnership reciting "sale" of goodwUI In conslUratlon of
share in the profits--Payment not related to any lumINum fixed as purcluue price-Duration of payment Indefinite and amount indt!(initePayment made by vendee If admissible deduction a.J revenue expendi~.
P and
A carried on business as Chartered accountants in the .
name of D.V. & Co.. On P retiring from plrtnership a deed 6f dissOlution was executed which provided that the business would be carried on
by A.
By clause 2 of the deed, P, who owned the rights and in!emt
in the goodwill, "agreed to sell" the goodwill to A and "as consideration
for and in full satisfaction of the purchase price of the goodwill" A was
to ~y eight annas in the rupee in the net profits of the businoos payable .
dunng the life time of P and after him during, the life time 'of his wife
and then to their son during his life time. Clause 6 provided that in the
event of A entering into pal'tnership or transferring or assigning his busV
aell so long as the business was carried . on in the name of D.V. & Co.;
the p:irtnership, the assignee or the transferee was to pay the share in
the profits in the manner provided in cl. (2). A enla'ed into part:nttship
with C, the deed of partnership reciting that the goodwill of the busineoa
beloilged solely to P which A had "bought" in oonsideration of his agree.
ins to pay a share of eight annas in lhe rupee ond that the parties thereto
pay fh1' annas four pies share in the profits, by way of purchase price
of the goodwill "" agreed by P. The firm paid to P's wife, after the
death of P, various amounts during the years 1955-59. It clsimed that
those amounts should be deducted in its assessmenl9 for . those years.
Tho Income-tax Officer and the Appellate Assistant Commi'8loner rejected the claim holding that the payments were capital and not revenue
payments and the tnulsaction evidenced by the deed of dissolution was
one . ot outright sale. On appe9l, the Tribunal held that the payments
constituted only fee oi' rent for the use of the goodwill so long a.s
it
was used and accordingly they
were in the nature of revenue expenditure.
On reference the High Court answered in favour of the Revenue.
Allowing th~ appeal,
HELD : (Sikri CJ. Dissenting) On the facts of the ca.so the tranaaotion was a licence and not a sale of the goodwill; the disbursements in
question, therefore, were in the nature of royalty and must be treated as
admissible deduction. [232 BJ
(i) There · is no single test of universal
application for
deciding
the question whether an agreement is for payment of price in stlpufated
instalments or folr making annual payment in the nature of income and,
therefore, the Court has to look not only into the .document relating to
the transaction, but also !he surrounding circumstances to decide its true
nature, the n~me which the parties give to it being of little C'Onsequence.
216
SUPKEME COURT REPORTS
( 1972] 3 S.C.R.
This does not mean that the legal character of the transaction which is
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1he !\()urce of the receipt in question can be ignored and substituted by
what the taxing authority considers the substanc~ of the matter. [224 Bl
Travancore Sugars a11d C/Jemicc./s Ltd. vs. C.l.T., (1966) 62 J.T.R.
566, referred to.
(ii) One of the tests c·ourts have applied in distinguishing between
capital and revenue expenditure is whether the expenditure in question
was for bringing into .existence an asset or an advantage of uan enduring
nature'!, and is made "once and for all".
It may be payable not necess.arily '311 at once but even by instalments as against a recurrent expendiJure in the nature of operational expenses. The question in such cases
would be; is the expenditure the assessee's \\'orking expenditure laid out
3S· part of the process of profit earning or a capital outlay necessary for
the acquisition of a property dr rights of ~ permanent character the posse!Sion of which is a conditi

## Text

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DEVIDAS VI111ALDAS Ii: CO.
v.
C.I.T., BOMBAY CITY
Janμnry 28, 1972
[S. M. S!KRI, C.J., J, M. SHELAT, H. R. KHANNA AND
G. K. MIT'.l'ER, JJ .]
215
Jm:ome-tax-Capital or Re.en""
ex1mtdltu~oodwill-D•ed of
·dissolution of partnership reciting "sale" of goodwUI In conslUratlon of
share in the profits--Payment not related to any lumINum fixed as purcluue price-Duration of payment Indefinite and amount indt!(initePayment made by vendee If admissible deduction a.J revenue expendi~.
P and
A carried on business as Chartered accountants in the .
name of D.V. & Co.. On P retiring from plrtnership a deed 6f dissOlution was executed which provided that the business would be carried on
by A.
By clause 2 of the deed, P, who owned the rights and in!emt
in the goodwill, "agreed to sell" the goodwill to A and "as consideration
for and in full satisfaction of the purchase price of the goodwill" A was
to ~y eight annas in the rupee in the net profits of the businoos payable .
dunng the life time of P and after him during, the life time 'of his wife
and then to their son during his life time. Clause 6 provided that in the
event of A entering into pal'tnership or transferring or assigning his busV
aell so long as the business was carried . on in the name of D.V. & Co.;
the p:irtnership, the assignee or the transferee was to pay the share in
the profits in the manner provided in cl. (2). A enla'ed into part:nttship
with C, the deed of partnership reciting that the goodwill of the busineoa
beloilged solely to P which A had "bought" in oonsideration of his agree.
ins to pay a share of eight annas in lhe rupee ond that the parties thereto
pay fh1' annas four pies share in the profits, by way of purchase price
of the goodwill "" agreed by P. The firm paid to P's wife, after the
death of P, various amounts during the years 1955-59. It clsimed that
those amounts should be deducted in its assessmenl9 for . those years.
Tho Income-tax Officer and the Appellate Assistant Commi'8loner rejected the claim holding that the payments were capital and not revenue
payments and the tnulsaction evidenced by the deed of dissolution was
one . ot outright sale. On appe9l, the Tribunal held that the payments
constituted only fee oi' rent for the use of the goodwill so long a.s
it
was used and accordingly they
were in the nature of revenue expenditure.
On reference the High Court answered in favour of the Revenue.
Allowing th~ appeal,
HELD : (Sikri CJ. Dissenting) On the facts of the ca.so the tranaaotion was a licence and not a sale of the goodwill; the disbursements in
question, therefore, were in the nature of royalty and must be treated as
admissible deduction. [232 BJ
(i) There · is no single test of universal
application for
deciding
the question whether an agreement is for payment of price in stlpufated
instalments or folr making annual payment in the nature of income and,
therefore, the Court has to look not only into the .document relating to
the transaction, but also !he surrounding circumstances to decide its true
nature, the n~me which the parties give to it being of little C'Onsequence.
216
SUPKEME COURT REPORTS
( 1972] 3 S.C.R.
This does not mean that the legal character of the transaction which is
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1he !\()urce of the receipt in question can be ignored and substituted by
what the taxing authority considers the substanc~ of the matter. [224 Bl
Travancore Sugars a11d C/Jemicc./s Ltd. vs. C.l.T., (1966) 62 J.T.R.
566, referred to.
(ii) One of the tests c·ourts have applied in distinguishing between
capital and revenue expenditure is whether the expenditure in question
was for bringing into .existence an asset or an advantage of uan enduring
nature'!, and is made "once and for all".
It may be payable not necess.arily '311 at once but even by instalments as against a recurrent expendiJure in the nature of operational expenses. The question in such cases
would be; is the expenditure the assessee's \\'orking expenditure laid out
3S· part of the process of profit earning or a capital outlay necessary for
the acquisition of a property dr rights of ~ permanent character the posse!Sion of which is a condition of carrying on the trade. But the expressions "enduring benefit'\ and rights of a permanent character are only
descriptive_ and not definitive and are. relative in meaning, not synonymous
with 'perpetual' ct 'ever1'3.Sting'. The expression "enduring benefit" is thus
a relative term not enduring in the sense of its being permanent, but is
•ufticiently durable depending upon the nature of the tenns upon which
it can be acquired.
So also the the expression "once and for all" which
does not mean payment at one time of the whole amount but includes
payment of a luml""wn, as distinct from recurrent, distributed in periodic
instalments. [22 F]
Atherton v. British Insulated and Helsby Cables Ltd., 10 T.C. 155;
Auam Bengal Cement Co, Ltd. v. CI..T. 27 I.T.R. 34, 46; Robert Addle
and Sons' Collieries Ltd. v. Commissioner of Inland Revenue, 8 T.C. 671;
Commissio11er of Taxes v. Nchanga Consolidated Copper Mines Ltd.,
(1965) 58 J.T.R. 241; C.l.T. West Bengal v. Coal Shipment (P) Ltd.,
Civil Appeals Nos. 1494 to 1498 of 1971, decided on Octobel- 14, 1971;
C.l.T. v. Finlay Mills, (1951) 20 I.T.R. 475; Henriksen v. Grafton Hotel
Ltd.; 24 T.C. 453 and Strick v. Regent Oil Co. Ltd., 43 T.C. I, 38 referred
10.
The other test sometimes '3.pplied, is payment when it is refeli:able
'o fixed capita] or capital assets as against payment ~eferrable to circulating capital or stock-in-trade. This test also is not capable of being treated
as of unifonn application. [226 Fl
Assam Bengal Cement Co. Ltd. v. C.I.T., 27 J.T.R., 34, 46, referred
to.
(iii) Acquisition of the goodwill of a business is, without doubt acqui~
~ition of a capital asset, and therefore, its purcP:Jse price v•ould be capital
expenditure.
It \J.'ould not make any difference whether it is paid in a
!ump-sum at one time or in instalments distributed over a specific period.
Where, however, the transaction is n"t one for acquisition of the goodwill
but, for the right to use it. the expenditure \vould be a revenue expenditure. [226 HJ
Jn Re Ramjidas Jai11i & Co., (1945) J.T.R. 430; Kuppwwami Y.
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C.l.T. (1954) 25 I.T.R. 349; .Ogde11 v. Medway Cinemas Ltd., 18 T.C. 691;
The Secretary of State for India v. Scoble, [1903], A.C. 299; Jones v. Com1nissioner of Inland Rei·enue, 7 T.C. 310; Conzmissioner of Inland. Revenue
v. Ramsay, 20 T.C. 79; Vithaldas Thake.rdas and Co. v. C.1.T., (1946]
l.T.R. 822 an<! Trava11core Sugars and Chemicals Ltd. v. C.l.T., (1966)
~2 l.T.R. 566, referred to.
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DEVIDAS & CO. I', C.I.T.
217
(iv) In the present case even though Cl. (2) of the deed of dissolu·
tion uses expressions such "lS "agreed to sell" and ''the purchase price of
the goodwill," these expressions are not determinative of the exact nature
oi the transaction or the relationship between the parties arising therefrom.
Clause (2), no doubt, prescribes the mode and the quantum of payment.
But, the duration of payment is indefinite and secondly the amount is indefinite depending upon the rise ~nd fall in the profits of the business. The
payment is not related to any lumpsum fixed as the purchase price. But
on the contrary it is direqly related to and dependent upon whether at all
and \\'hat profits are made.
Further, the document is totally silent as to
what is to h~ppen to the goodwill if A, or his partners, if he were to enter
into a partnership, cease to carry on the business in the name of D.V. &
Co.
The transaction thus contains all the grounds given in the case of
'f'ravancore Sugars and Chentir11ls Ltd., upon which this Court concluded'
that such p'1yments could not be treated as capital disbursement, namely,
an indefinite period, absence of any expressed lumpsum and payment relating to profits and not being tied up with any fixed sum agree<l to as the
purchase price_ of the capital mets, [230 F-H; 232 Bl
Trava11<ore Sugars and C/lemirnls Ltd. v. C.I.T. (1966) 62 J. T. R. 566
applied.
(v) Quite ·~part, Cl (6) itself contains indication of the transaction
n_O! being an outright purchase of the goodwill. If the transaction was
an outright purchase of goodwill there was no neces.sity of Ct (6) provid·
ing for ·the partnership which A would enter into or his assignee or
transferee having to pay the share. so Jong as he or they continued to
carry on business in that name. (231 BJ
Per Sikri, C.J. dissenting.
(i) Clause (2) of the dissolution deed says what it meant to cbnvey,
that is, there is an agreement to sell and sale of the goodwill of the
p*1nership.
The words "as. consideration for and in full satisfaction of
the purchase price of the goodwill" cannot be ~tered down by any of
1he subsequent clauses.
Fur~hcr, the deed executed by A and C also
recited that A had "bought" 'the goodwill in consideration of his agreeing
10 pay a share of the profits.
It is difficult to go against the express
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wording of the deed when there j.., no clear clause overriding these wdrdS.
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(ii) A mo<lc of payment of purch-:isc price of any capital asset cannot
convert a c'apit:il payment into a revenue payment in the hands of the
vendec,
It may be 1hat the mode of payment may affect the character
of the receipt in the hands of the vendor. [218 H]
(iii) The grounds adopted by this Court in Travancore Sugars c.-nd
Chen1icals Ltd. cannot be ri:gardc<l a·'i conclusive in a case \.\'here there can
he no doubt that the capital asset ha< been sold. [219 B·C]
The ab~cncc of a clause providing what is to h~ppen if the vendee of
too .soodwrll ,ceases to carry on the h•~sincss further reinforces the con·
clus1on
~hat 1t· was -an out and out sale.
Thi'i clause was not inserted
~~c;ausc 1t would be out of place in a case of sale. [219 DJ
(v) C!ausc f6) does not have any bearing on the question under
consrdcrat1on.
Thrs clause has been inserted in order to safeguard the
rnter_est of the vendor who was keen to see that he would get ns much "'
possible for the sale of the goodwill. [219 Fl
2.18
SUPREME COURT REPORTS
[1972] 3 S.C.R
Therefore, on the facts, the goodwill was an asset of an endW'ing
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nature. ·The fact that payment was to be made over a number ot yO'.U'S
and the nature of a chartered accountant's business lead to this condusion. [219 FJ
CIVIL APPELLATE JURISDICTION : Civil Appeals Nos.
1452
to 1455 of 1968. ·
Appeals from the judgment and order dated February 25, 1967
of the Bombay High Court in Income Tax Reference No. 49 of
1962.
· · M. C. Chagla, Bhuva11t'Sh Kumari, J. B. Dadachanji, 0. C.
Mathur and Ravinder Narain, for the appellant (in all the appeals).
N. D. Karkhanis, R. N. Sachthey and B. D. Sharma, for the
respondent (in all the appeals).
·
SIKRI C.J. delivered a dissenting opinion. The Judgment of
SHELAT, KHANNA and MITTER~ JJ.-was delivered by SHELAT, J.
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Sikri, C.J., I have read the draft of the judgment prepared
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by Shelat J ., but I regret I am unable to agree with his conclusions.
He has set out all the relevant facts and the relevant documents
.and it is not necessary for me to burden my judgment with them.
It seems to me that there is 110 dif)iculty in interpreting clause
2 of the dissolution deed. It says what it meant to convey, that is,
E
there is an agreement to sell and sale of the goodwill of the partnership which belonged to Padamsi alone to Amratlal. It is dillicult to water down the words "As consideration for and fn full
sat.isfaction of the purchase price of the goodwill" by any of the
subsequent clauses.
Reliance is placed on the deed dated October
18,
1955, F
executed by Amratlal ancf1 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 G
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 H
payment of purchase price of any capital asset can convert a
capital payment into a revenue payment in the hands of the vendee.
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DEV!DAS & CO. v. C.l.T. (She/at, J,).
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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, I am unable to agree that the mode of payment can
convert what is obviously a capital payment or expenditure into a
revenue payment or expenditure.
Reliance was placed on the
three grounds adopted by this Court in Travancore Sugars
&:
Chemicals Ltd. v. C.I.T.( 1) viz., indefinite period, absence of
any expressed Jump sum, and payment relating to profits and not
being tied up witli any fixed sum agreed to as the purchase price
of a capital asset. I am unable to regard these grounds as coaclusive in a case where there can be no doubt that the capital
asset has been sold. If A sells his house to a company for its
office and stipulates that in full satisfaction of the purchase price
he will. receive annual payments relating to profits without stipulating for a fixed sum, 1 doubt if anybody will argue that the
company can peduct the annual payments as revenue expenditure.
The fact that it is a sale of a capital asset like goodwill does not
make any diffc:rence.
It was urged that it is not really an out and out sale of goodwill because there is no clause providing what is to happen if the
vendee of the goodwill ceases to carry on the business.
To my
mind. the absence of such a clause further reinforces the conclu-
. sion ihat it was an out and out sale. This clause was not inserted
because it would be out ·of place in a case of sale,
Reliance was hlso placed on clause 6 which has been set out
in detail in the judgment of Shelat J. In my view, this does not
have any bearing on the question under consideration. It seems
to me that this clause has been inserted in the deed in order to
safeguard the interest of the vendor, who was keen to see that he
would get as much as possible for the sale of the goodwill. On
the facts I am also of the opinion that the goodwill was an asset
of an enduring nature.
The very· fact that payment was to be
made over a number of years and. the nature.. of a chartered
accountant's business lead to this conclusion.
In my view, it is a very ingenious attempt to avoid payment
of tax by making it appear somehow that the payment of purchase money may be treated as payment of a royalty. In the
view I take of the deed it is not necessary to discuss the numerous
cases referred to by Shelat J.
In my opinion, the High Court
came to the correct conclusion and the appeals should be dismissed with costs.
Sltelat, J.
Prior to November 1948, one Padamsi Haridas
carried on his profession as a chartered accountant in the name
(I) [1966] 62 1.T.R. 566.
220
SUPREME COURT RF.PORTS
[1972) 3 S.C.R.
of Devidas Vithaldas and C.o.
By a deed of. partnership, dated
November 30, 1948, he took one Amratlal Parikh as a partner,
reserving, however, to himself ail 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 Padarnsi alone. He has agreed to sell the same
to the said Arnratlal.
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 Devida~ Vithaldas &
Co.,
(b) on and after the death of the said Padarnsi, pay t~
Bai Premlata, the wife of the said Padamsi, (if
she be then surviving), for ;md during the term of
her natural life a share of eight annas in the rupee
in the :net profits of the said business or profess10n
which the said Amratlal shall hereafter carry on in
the name of Devidas VithaJdas & Co., and
( c) on and after the death of the said Padamsi as well
as his said wife Bai Prem!ata, pay to Subhas the
son of the said Padamsi for and during the term of
his natural life a share of eight an:nas in the rupee
in the net profits of the said business or profession
which the said Amratlal shall hereafter carry on
in the name of Devidas Vithaldas & Co."
Q. ( 3) provided that nothing contained in the deed shall constitute or be deemed to constitute any future partnership between
the parties to the deed or. between the said Amratlal and the said
Bai Prem!ata, or the said Subhas in respect of the business to be
carried on by Amratlal in the name of Devidas Vithaldas & Co.
Cl. ( 4) declared that accounts had been made up between the
pa.'1ies, and 'that neither party had any claim against the other
except as provided in said clause (2). By cl. (5) it was made
clear that the said Amratlal shall henceforth remain liable for all
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DEV!DAS & CO. v. C.I.T. (She/at, /.)
221
the obligations a:nd liabilities. which might be incurred in res~t
of the said business to be carried on in the name of Devidas
Vithaldas & Co., and he shall accordingly indemnify the said
Padamsi against all actions, claims, demands, costs, charges and
expenses whatsoever in respect of the same or in any other manner
relating to the premises.
Lastly, cl. ( 6) provided that in the
event of Amratlal transferring or assigning his said business to
any person or persons, or ·carrying on the said business in partnership with some other person or persons, or remaining otherwise
interested or concerned directly or indirectly in the business or
profession of chartered accountants by whomsoever carried on in
the name of Devidas Vithaldas & Co., or any other name resembling or similar thereto, or in the event of any of the heirs or legal
representatives or nominees of Amratlal carrying on the said business or profession in the name of Devidas Vithaldas & Co., then
in any such,events they and "so long as any such business be
carried on in the name style and firm of Devidas Vithaldas &
Co. 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. shaJl
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 respec"
tive 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 provided that "the said Amratlal shaJl not assign or transfer or otherwise dispose of the said business or the goodwill thereof or bequeat]j 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 in any such business and whenever required by the said Padamsi or by his wife
Bai Prcmlata or his said son Subhas, as the case may be, enter
into an agreement with any of the last three named persons, as
the case may be, similar to this agreement".
By his letter dated
October 13, 1955, Padamsi agreed to reduce the said share of
eight annas in a rupee to five annas four pies.
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Amratlal carried on the said business in the name of Devidas
Vithaldas & Co. as the sole pr0prictor thereof till October 17,
1955. Payments made by him during this period under els. (2)
and ( 6) of the said deed of dissolution were added back in his
\
222
SUPREME COURT REPORTS
[1972] 3 S.C.R.
assessments as capital payments. On October 18, 1955, he entered into partnership with one Chandrakant V. Parikh. The deed
of partnership executed then by him and the said Chandrakant
Parikh recited that the said Amratlal till then was carrying on
the business in the name of Devidas Vithaldas & Co., that the
goodwill of the said business belonged solely to the said Padam!i
which he, the said Amratlal, had "bought" in consideration of his
;igreeing to pay a share of eight annas in the rupee to Padamsi,
and after him his wife and then his son as aforesaid.
Cl. ( 5) of
the deed then provided :
"The parties hereto shall pay 0/5/4 share in profits
in a rupee as and by way of purchase price of goodwill
of the said firm to the said Shri Padamsi Haridas or to
his wife or to his son as stated in detail hereinbefore,
instead of Re. 0/810 share in a rupee as agreed by the
party of the First Part and Shri Padamsi Haridas. The
said Shri Padamsi Haridas has agreed to this reduction
in his share mutually with Shri Amratlal Kashandas
Parikh and Shri Chandrakant V.
Parikh. After the
said sh ate of 0/ 5 / 4 in a rupee is paid up as stated above
the balance of the profit and loss of the firm shall be
divided in two equal proportions between the parties of
the First and the Second Part."
The firin constituted under this deed paid to Bai Prcmlata on
;1nd after the death of Padmsi various amounts during the years
1955-1959 under the said covenants.
The firm claimed that
those amounts should be deducted in its assessments for those years
on the ground that its income to the extent of those payments had
been diverted as a result of the overriding title created by cl. ( 5)
of the said d~ed of partnership.
Assessments
for the relevant
years showed that the amounts paid to Bai Premlata were assessed as income in her assessments. so that, if ~he deductions claimed
by the firm were not admitted the same amounts would be assessed twice over, first in the hm:ids of Bai Premlata and then in the
assessments of the firm.
The Income Tax Officer, and in appeal the A.A.C., re_jected
1hc claim for deduction.< holding that the said payments were
capital and not revenue payments, and that the
transaction
evidenced bv 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 contention of the Revenue that the transaction was a sale of the goodwill in terms following :
"ft is no doubt true that clause 2 of the agreement
refers to sale of goodwill and the agreed payments as
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DEVIDAS & CO. v. C.I.T. (She/at, J,)
223
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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 thereafter.
These considerations only
go to show that in the peculiar circumstances of the case
the agreement is virtually a licence granted for user of
the goodwill upon payment of one-third of the net profits
derived for such user -·-."
c In this view the Tribunal held that the payments constituted only
a fee or rent for the use of the goodwill so long as it was used
and accordingly they were in the nature of revenue expenditure.
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On a reference to the High Court, the High Court held that :
"On the face of the document, therefore, we cannot
accept the contention that it was a document merely
granting a licence to use the goodwill or a mere transfer
of the right of user thereof.
It was an outright sale of
an asset of Devidas Vitha!das & Co. namely the goodwill which till then belonged to Padamsi and in which
he had reserved his exclusive right at the time when he
enteRd into partnership with Amratlal."
In this view, the High Court answered the questions referred to
it in fa'f'Olll' of the"Revenue.
It was true, the High Court observed, that.the Revenue had in the assessments of Bai Pren!lata taken
the \'iew tht "Padamsi had not sold his right, title and i.nterest_in
the J!O(ld1rill and merely allowed the use of it for a number of years
F
and siiice the payment was for the user of the goodwill, lt could
clMY be a revenue receipt in the hands of the ·assessee". But it
added that '!this was an incorrect view to take upon the faotsl!nd
circumstallces that have been placed before us in the present case
and upllll clhe terms of the document dated 2nd January 1951.
TM ordei clearly shows that the document dated 2nd January,
1951 was misconstrued". It is against this view that these appeals
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have been filed.
The question upon which they must tum is as to whether the
payments in question made in pursuance of the transaction iru:orporated in the deed, dated January 2, 1951, were in the nature
of ttvenue or capital expenditure.
If they ·are of the fom1er type,
tblly woull obviously be admissible deductions under s. 10(2) of
H
the Income Tax Act, 1922.
That question, in its tum, depends
upon the true nature of the transaction as embodied in the· said
deed, that is, whether it was a sale of goodwill or a licence in
2-LS87SuJICJ/12
224
SUPREME COURT REPORTS
( 1972] 3 S.C.R.
consideration of Amratlal and/ or his assignees or transferees paying the aforesaid share until he or they used the said name.
As has been observed in a number of decisions, it is not
always easy to distinguish whether an agreement is for the pay·
ment of price in stipulated instalments or for making annual pay·
ments 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 rules of construction. (1)
In distinguishing between capital and revenue expenditure,
the courts have applied in different cases different tests.
Nonetheless, it i[ recognised that none of them by itself is conclusive,
and the determination one way or the other has to be made on
the facts and circumstances of each case.
One of the tests so applied is whether the expenditure in
question was for bringing into existence. an asset or an advantage
of "an enduring nature". (2 ) and is made "once and for all",
meaning thereby an expenditure made once and for all for procuring an enduring benefit. It may be payable not necessarily
all at once but even bv instalments as a11.ainst a recurren! expenditure in the nature of nnerational exoenses.
(See A •.vam Ben11a/
Cement Co. Ltd. v. ClT( 8 ). The question in such cases would be,
is the expenditure the assessee's workin11: exoenses laid out as oart
of the process of profit earnin2 or a caoital outlav nece•sarv for
the acauisition of a nrooerty or of rfoh•s of a oermanent character,
the possession of which is a condition of carrvine on the trade.(')
But the expressions, 'enduring: benefi!'. and 'ri~hts of a permanent
(1) C.l. T. v. Kharwar, [1969] 721.T.R. 603
(2)
Arherlion v l?riti.rh Tnsufated Nnd Helsby Cables Ltd, 10 TC 155
(3)27TTR 34, 46
(4) Robert Addle and Sons, Coll/ieres Ltd., v. Con1missioners of Tnland Revenue, 8 TC 671.
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DEVIDAS & co. v. C.J.T. (Shelat, J.)
225
llll:ture', are ouly descriotive aud not definitive and are relative
iu meaning, not synonymous with perpetual or everlasting.
For
instance, an expenditure incurred in common with other com·
pauies producing copper to bring down production so as to prevent a steep fall in the prices was construed to mean for one of
them to be out of production for J 2 months only and not for
good.
On such construction, it was held that to call such an
expenditure a capital expenditure would be contradiction in terms,
for, it was not and was not intended to ~ one for acquiring a
right of an enduring benefit ·or as an accretion to the capital or
income earni1u1; structure of 1h.~· business.(') CJ.T., West
Bengal v. Coal Shipment (P) Ltd.,(') an agreement was arrived at
between two· companies exporting coal to Burma.
The assessee
company agreed thereunder to pay, in considera!ion of the other
company prebearing f· om exportin~ and procuring coal for its
export by the asses5ee company, five annas per ton (subsequently
raised to Rs. 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 !he 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 temporacy measure and not for deriving an advance of an endurinr,
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. w that it can be terminated at any time at the volitior
of either of 'lhe parties. . Payments to ward off competition would
constitute capital expenditure, provided the objection is to derive
an advanta2e by eliminatin11 the comoetition over some length of
time but such a result would not follow if there is no certainty
of duration [or such an advantage and the same could be put an
end to at any time.
Thus, what the extent of durability
or
permanence should be depends on the facts of each case.
Payments maqe by a lessee of a limestone quarry to thr. Government, who were 'the· lessors, in con•ideration of a covenant
which eliminated competition in the lessee's field of operations
for twenty years, which was the lease period. were held to
be
capital expenditure for acquiring an enduring benefit to the
(I) Com1nl.uim1ers : of Taxe.1 v, Nc·ha11g"
Co,,.tolldated Cop11tr 1'.fi11c.1' Ltd ..
[19651 ~8 l.T.R. 241.
(2) Civil Appeals Nr.s. 149410 1498 10 1971,dccrt.•n Ociobcr. 14. 1971..
226
SUPllEME COURT REPORTS
[ 1972) 3 S.C.R.
lessee. ( 1)
On the other hand, registration of trade-!lllib under
the Trade Marks Act, 1940, valid for a period of -
years
only, on the expiry of which it had to be renewed 9y paying.
fresh fees, was held not to bring any enduring benefit, and therefore, the fees paid for registration were not capital but reven11e
expenditure.(')
Registration is only a mode of ellSllTin& the
exclusive right in a trademark, and not the acquisition of the
trade-mark itself, which would be an acquisition of a capital
asset. Such a distinction was made in a case where expenditure
was for the renewal of a licence, which was held to be a payment
made as purchase price of a monopoly for the duration of the
licence, which was only for twelve months.
The 1thing that was
paid for, it was said, was a permanent quality, that is, the monopoly, although its permanence being conditioned by the renewal
of the terms under which the licence was granted was shortlivcd.
Such an expenditure was treated as of that class to which a preriiium
on the grant of a lease belong which admittedly is not deductible,
(see Henriksen v. Grafton Hotel Ltd.(8 ) In Strick v. Regent Oil
Co. Ltd. (') Lord Reid, however, limited the decision in Henriksen' s C41'e (') to its own special facts and expressed his disagreemem with it if it was to be held to have laid down any general
proposition.
The expression 'enduring advantage' is, thus a
relative term, not endurin11: in the sense of its being permanent,
but is sufficiently durable depending upon the nature of the terms
upon which it can be acquired. So also the expression •once and
for all', which does not mean 'payment at one time of the whole
am011Dt, but includes payment of a lump swn, as distict from recurrent, distributed in periodic instalments.
The other test sometimes applied is payment when it is referable to fixed c_apital or capital assets as against paymen! referab1e
to circulating capital or stock-in-trade.
But this test also is not
capable ol. being treated as of uniform application. Price pald for
the acquisition of a capital asset may take sometimes the form of
payments of a revenue character. The slmpliest 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 band, in
Assam Bengal Cement Co. v. C.l.T.( 1) where the paynwnt in
question was for elimina!ing competition, the test of the expenditure having been incurred for and referable to a capital uaet was
aJJPlicd.
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Acquisition of the goodwill. of the business is, without doubt,
acquisition of a · capital asset, and therefore, its purchase price · H
(I) 27 I.T.R. 34, 46.
(2) CIT v Finlay Mil/1, [19,J] 20 I,T,R, 47'.
(3) 24 TC
453
(4) 43 TC I, 38
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DEVIDAS & CO. v. C,I.T. (She~t, J.)
227
would be capital expenditure. It would not make any difference
whether it is paid in a Jump sum at one time or in instalments distributed over a definite period. (see In Re Ramjidas Jain & Co.(')
and Kuppuswami v. C.I.T.( 2 ) . Where, however, the transaction
is not for acquisition of the goodwill, but for the right to use it,
the expenditure would be revenue expenditure.
IIIustra!ive of such cases is the one in Ogden v. Medway
Cinemas Ltd.,(8 ) where the respondent-company acquired
by
assignment the rights of the assignor under an underlease,
by
which he became the lessee of the cinema hall, together with the
fixtures, fittings and furniture, at a yearly rent.
There was also
a supplemental deed by which he was granted the goodwill of
the cinema business on payment of £ 5001- per annum.
The
supplemental deed was to run concurrently with the underlease,
that is for 13 years, and was to cease if the underlease was terminated. The deed also contained an option for the purchase of
the head lease and the goodwill for £. 3,500/. The payment of
£ 500/ • per annum under the supplemental deed was held to be
admiWble deduction.
At page 695 of the report, Finlay, ].,
pointed out that though the deed used the expression 'grant of
1';oodwill for a period' there was no sum mentioned as being the
payment for that, followed by dis!ribution of that sum in instal·
ments, "but the thing is eXJ>ressed to be for a payment of £ 500
per annum" without reference to any lump sum followed by a
splitting up into annual payments.
"The substance of the matter
here seems to me to be this-and I think it is supported by the
actual language used, in particular by the expression provision
contained later for the purchase in certaiq circumstances of the
goodwill-that this is a revenue payment for the use during .a
certain period of certain valuable things and rights." As Lord
Halsbury put it in a case where a lump sum was expressly provided for but was payable by instalments, there is an aRteceqent
debt and the instalments are paid in liquidation of that debt. (see·
The Secretary of State for India v. Scoble.(')
'
'
Another _case, illustrative of such a test, is in Jones v. Commissioner of Inland Revenue,(') where there was a sale of property for a lump sum of £, 750, £. 300 out of which were
payable by three equal instalments, and the balance of £. 450
payable by a .royalty. The whole of £. 750 was treated as a
capital sum, but there was a fur!her clause "to pay by way of
additio.nal 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 ol this latter
(I) [194SJ!TR 430,
(2) [1954)25ITR349
(3) 18 TC 691.
(4) [1903] AC 299.
(S) 7 TC 310.
228
SUPRB1>¥! COURT RllPO&TS
(1912] 3 S.C.L
sllll!, it was .held that since it wa's dependent on· the· volume of
_busmes~, which rose and fell with the chances of' the business,
It was mcome and not capital, although it was actually referable
to the purchase price.
In Commissioners of Inland Revenue v.
R~msay,(') the assessee purchased a dental practice for a primary
P.nce of £. 15,000. That was to ·be satisfie<j firstby an immediate payment of £. 5,000 and as to the 'Wtlance of £. 10,000
by payment each year, for ten years, of a silni equivalent ro 25%
of the net profits of the practice for each ·year:
Such annual
payment obviously mie:ht vaiy from time !o time depending u11oi1
the quantum of business and the profits,
N~erthelcss Ille price
A
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of £. 15,000 was not otiose, nor me balarice of £. 10,000 after
the initial payment of £. 5,000. The only thing that was stipulated by the parties was that the vendor was satisfied with receiY·
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}ng 25% of the net profits"Mth year forthe'perioo·of :rears, evert
If the actual payment tiltned out on the whole to ·be· more :or
less than £ 15,000.
A~ Looi. Wright' ~id, the "1igure. of
£. 15,000 "pennea)es"ihe whole of lthe contract· lind> upon• which
the wh\,le colrtract clepel)ds. 'That being 'so, ,I think'tha! lhe
£'. 886 iri queS'!ion (one of the sums e'quivalent to'?5%ll'lf • .ttie
net profits) 'l'.'as a 'Sum in the nature 'of capi:lll, and' theret~e, it
wit~ not competent for the Responde11t' t<> deduct it in· returning.
hill',ttit~J income". That the-sunt<of £!'15;-000 ·"'35 'the lamp.
suni .Piirchase prici.l was also,made'dear by Ldtd 'Greeile when
He said iliat a payment !es~ than that·nmount could be· made on~
if clause t 4) of that agreement came into operation, :that is;· if
thil' asse9See c0ntinued his practice for the whole cl the 'J>Criod. of
ten years: If he ·were to cease to ·practise, say af!er seven years.
be would b& liable tel pay the whole of the balance of £,, 15,000
then' remaining due. . The transaction was t!Jus viewed as a purchase of the business tor a fixed amount, payable in ten years
by iUlnual instalments, which bly the mode of payment, agreed
to between the parties, might at the end tum out to be more. or
less than the agreed purchase price of £. 15,000. Unlike Ramsay's case,(!) .in Vithaldas Thakordas' and Co.