Commissioner of Income Tax vs Khemchand Motilal Jain

A.K. Mathur, C.J.—This is a reference u/s 256(2) of the income tax Act, 1961 (''the Act''), at the instance of the revenue and the following question of law has been raised for answer of this Court: Whether, on the facts and in the circumstances of the cases, the Tribunal was right in holding that the sum of Rs. 22,91,728 and Rs. 22,66,746 paid by the company to the co-owners of the trademark and partners of the erstwhile firm in lieu of trademark and goodwill which is being used by the company for its business was a revenue expenditure ?

Respondent is a newly formed private company brought into existence with effect from 1-1-1982.

It has taken over the business of the firm Khemchand Motilal Jain. This firm was dissolved on 31-12-1981. It is engaged in the manufacture of bidis. For the assessment years 1986-87 and 1987-88, the assessee had paid a sum of Rs. 22,91,728 and Rs. 24,66,746 to the erstwhile partners of the dissolved firm. This amount was claimed by way of royalty to the partners at the rate of 10 paise per thousand bidis. The assessees, in their profit and loss account, claimed this amount as revenue expenditure. The assessee had also claimed the same deduction in the earlier years. This payment was made by the assessee to the erstwhile partners in lieu of trademark and goodwill which the assessee was using for doing the business.

The Assessing Officer, while completing the assessment, observed that since the assessee had used the same trademark for continuing the business, it has received good reputation in the market and the amount paid towards its use cannot be treated as revenue expenditure, but it is a capital expenditure.

On appeal, the Commissioner (Appeals) confirmed the view taken by the Assessing Officer. Thereafter the Tribunal allowed the appeal, set aside the order of the Commissioner (Appeals) and relying on the decision given in case of Commissioner of Income Tax Vs. M.B. Umbrella Industries, held that the price paid amounts to revenue expenditure and liable to be deducted in computing the total income of the assessee. Against this order, the revenue approached the Tribunal for stating the case, but the application was rejected on the ground that this case is covered by the decision of this Court in M.B. Umbrella Industries'' case (supra). Hence, the revenue approached this Court u/s 256(2), for calling statement of the case.

We have heard the learned counsel for the parties and perused the record. The above decision squarely covers the present case. It has been held by this Court that under an agreement with another firm, the assessee was allowed to use the trademark for 5 years on payment of compensation and the agreement amounted to licence to use the trade mark and the payment was in the nature of royalty. The trademark used by the assessee was not the price paid for acquisition of capital asset or goodwill or trademark and the amount paid for the exploitation of trade mark was an allowable revenue expenditure. This view has been further re-affirmed by another decision of this Court in case of Mohanlal Hargovinddas Vs. Commissioner of Income Tax, . In this case, the Division Bench, relying on the M.B. Umbrella Industries ''case (supra), has extended the principle to cases where there is an agreement without circumscribed by any time-limit. In this case, the agreement was for an indefinite period without any limitation of time and it had no relation with the capital value of asset.

Therefore, the Division Bench, in case of Mohanlal Hargovinddas (supra) held that the amount paid in lieu of share of goodwill or trademark, was revenue expenditure. Since this has been the consistent view of this Court, the Tribunal rejected the application of the revenue. There is no reason to take a different view.

The reference application is dismissed.