Delhi H.C : Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the payment of Rs. 35,000 in respect of asst. yr. 1976-77 represented capital expenditure and not payment as hire charges ?

Counsel Appeared

None, for the Applicant : R.C. Pandey with Ajay Jha & Ms. Prem Lata Bansal, for the Respondent

JUDGMENT

ARIJIT PASAYAT, C.J. :

At the instance of the assessee, the Tribunal Delhi, Benches ‘B’ and ‘C’ (IT Ref. No. 20 of 1980 by Delhi Bench- B and IT Ref. No. 325 of 1980 by Delhi Bench-C) has referred the following questions, under s. 256(1) of the IT Act, 1961 (‘the Act’), for opinion of this Court : IT Ref. No. 20 of 1980

“1. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the payment of Rs. 35,000 in respect of asst. yr. 1976-77 represented capital expenditure and not payment as hire charges ?

2. Whether, on the facts and in the circumstances of the case, the payment of Rs. 35,000 made by the assessee to the family of the deceased was an admissible deduction in computing the income of the assessee for the asst. yr. 1976-77 ?”

IT Ref. No. 325 of 1980

“1. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the payment of Rs. 16,521 in respect of the asst. yr. 1977-78 represented capital expenditure and not payment as hire charges ?

2. Whether, on the facts and in the circumstances of the case, the payment of Rs. 16,521 made by the assessee to the family of the deceased was an admissible deduction in computing the income of the assessee for the asst. yr. 1977-78 ?”

IT Ref. No. 20 of 1980 relates to the asst. yr. 1976-77 and IT Ref. No. 325 of 1980 relates to the asst. yr. 1977-78.

2. Brief reference to the factual aspects would suffice : Shri J.M. Mehra, one of the partners of the assessee-firm named Mehra Khanna & Co. was practising as a Chartered Accountant. The firm was evidenced by a deed of partnership dt. 1st Nov., 1944, and Shri Kala Ram Khanna was the other partner. Clause 12(b) of the deed of partnership provided that goodwill of the firm is property of both the partners in equal shares and in the event of death of one of the partners, the other partner would carry on the profession on payment of remuneration and/or hire charges for the use of the deceased partner’s share in the goodwill of the firm, to his legal heirs. On 2nd Sept.,

1968, Shri Kala Ram Khanna expired and in pursuance of the aforesaid clause, Shri J.M. Mehra entered into agreement dt. 13th Sept., 1968, with legal heirs of Kala Ram Khanna, according to which it was agreed that for the use of half share of the goodwill of the deceased by the assessee, legal heirs of the deceased were to be paid, for a period of nine years 25 per cent of the net profits of the business, and thereafter for another three years 15 per cent of the net profits. After that, the goodwill of the business was to become the sole property of Shri J.M. Mehra unless any of the sons of the deceased Kala Ram Khanna qualified as a Chartered Accountant during the period of 12 years as noted above and joined Shri J.M. Mehra as partner. Till 31st March, 1973 net profits of the firm by way of hire charges for the use of half share of the goodwill was claimed as revenue expenditure. The same was allowed as claimed. Till the end of March, 1973, none of the sons of the deceased Kala Ram Khanna had qualified as Chartered Accountant. Therefore, it was considered necessary to modify the existing arrangement with regard to the deceased’s share of goodwill. On 3rd April, 1973, a fresh agreement was entered into by Shri J.M. Mehra with legal heirs of the deceased and under this agreement it was provided that he will pay to the other parties as sum of Rs. 1 lakh in consideration of the other party relinquishing their right and title to the goodwill.

The amount was to be paid in three instalments of Rs. 33,000, Rs. 33,000 and Rs. 34,000, payable on or before 31st March, 1974, 31st March, 1975 and 31st March, 1976, respectively. It was also agreed that the other party shall have no claim, right title or interest in the name of the firm M/s Mehra Khanna & Co., or its successors or any of the clients or its assets and liabilities including the business premises. In the assessment for the years 1974- 75 and 1975-76, amounts paid were claimed as revenue expenditure. Said amounts were Rs. 33,111 and Rs. 15,367 in the asst. yrs. 1974-75 and 1975-76, respectively. The AO was of the view that while payments annually made under the agreement dt. 13th Sept., 1968, represented hire charges for the use of goodwill and were admissible as revenue expenditure, the payments under the agreement dt. 3rd April, 1973, were payments for the acquisition of the asset itself and, therefore, were capital in nature. Accordingly, claim as revenue expenditure was disallowed. In appeal, the AAC agreed with the AO’s view that lump sum payment was a payment on capital account made for the purpose of acquiring half share of the goodwill and disallowance was confirmed. The assessee took the matter in further appeal before the Tribunal. Disallowance of the aforesaid sums of Rs. 33,111 and Rs. 15,367 for the two assessment years was confirmed by the Tribunal. During the asst. yr. 1976-77, Shri J.M. Mehra entered into agreement with Mr. Vinay Mehra and Shri J.P. Goyal for carrying on profession as M/s Mehra Khanna & Co., the present assessee. It paid Rs. 35,000 in respect of goodwill to the legal heirs of the deceased as it had done in the preceding year and claimed the same as revenue expenditure. The ITO disallowed the claim. It was ultimately affirmed by the Tribunal. So far as 1977-78 is concerned, the difference between the agreed sum to be paid as third instalment and the amount actually paid in 1976-77 was claimed as deduction. Adopting the view taken for earlier years it was held that the amount was capital in nature. On being moved for reference it appears that for all the concerned years references have been made.

We have heard the learned counsel for the Revenue. There is no appearance on behalf of the assessee in spite of service of notice.

The crucial question is whether the amount in question was a revenue expenditure or a capital expenditure. For adjudicating that issue it shall be necessary to take note of the basic features of goodwill. It denotes the benefits arising from connections and reputation. A variety of elements goes into its making and its composition varies in different trades and in different business in the same trade and while one element may preponderate in one business, another may dominate in another business. Its value may fluctuate from one moment to another depending on changes in the reputation of the business. It is affected by everything relating to the business, the personality and business rectitude of the owners, the nature and character of the business, its name and reputation, its location, its impact on the contemporary market, the prevailing socio-economic ecology, introduction to old customers and agreed absence of competition. There can be no account in value of the factors producing it. It is also impossible to predicate the moment of its birth. Its benefit in the business varies with the nature of business and also from one business to another. This position was succinctly stated by the apex Court in CIT vs. B.C. Srinivasa Setty (1981) 21 CTR (SC) 138 : (1981) 128 ITR 294 (SC) : TC 20R.148.

The goodwill of a business means every affirmative advantage that has been acquired in carrying on the business, whether connected with the premises of the business or its name or style and everything connected with or carrying with it the benefit of the business. [ See Crutwell vs. Lye (1810) 17 Ves. 335]. Goodwill would include the probability that the old customers will resort to the old place. But generally speaking it means much more than that. Often it happens that goodwill is the very substance and life of the business, without which the business would yield little or no fruit. It is the attractive force which brings in customers. In Rustom Cavasjee Cooper vs. Union of India AIR 1970 SC 564 it was described as the value of the attraction to the customers arising from the name and reputation for skill, integrity, efficient business management or effective service.

In Devidas Vithaldas & Co. vs. CIT (1972) 84 ITR 277 (SC) : TC 17R.597, it was observed that acquisition of the goodwill of business is without doubt acquisition of capital asset and, therefore, its purchase price is capital expenditure. It would not make any difference whether it is paid in lump sum at one time or in instalments, distributed over a definite period. If the principles indicated in Devidas Vithaldas & Co.’s case (supra) are kept in view, the only test to be applied to the facts of the present case is to see whether the payment was made for acquisition of the goodwill or for the right to use it. The factual position highlighted would go to show that the payment was for acquisition of goodwill. That being the position, the Tribunal was justified in its conclusion that the amount in question was capital in nature and the obvious answer to the first question in each case is in the affirmative in favour of the Revenue and against the assessee. In view the above answer, second question in each case becomes really of academic interest and need not be answered.

The references stand disposed of accordingly.

[Citation : 250 ITR 436]