S. Kuppuswami vs Commr. of Income Tax, Madras

Satyanarayana Rao, J.—The question raised in this reference is a very short one and does not present much difficulty. The question is:

"Whether the payment of Rs. 5000 by the assessee to Mr. Sambamurthi, was capital expenditure." The assessee was a registered accountant. He was employed by one Mr. Sambamurthi who was also doing similar business at Karaikudi. After some time, the assessee was taken as a working partner of the Karaikudi branch where he worked till 31st March 1946.

On 1st April 1946, under an agreement, evidenced by a letter addressed by the assessee Lo Mr. Sambamurthi and dated 28th May 1947, the assessee became the owner of the Karaikudi branch, The letter which evidences the agreement between Sambamurthi and the assessee states that the Karaikudi office became the sole concern of the assessee with effect from 1st April 1946 and that the goodwill was to be returned at half the net profits (book profits) of the Karaikudi office for the three years ending with 31st March 1949, to be limited to Rs. 5000 for each of the three years, if half the profits in any year exceeds Rs. 5000, and to be the actual amount if half the profits is below Rs. 5000. The third clause in the letter is very important. It states that no case of the Karaikudi office is to be taken by Sambamurthi without the consent of the assessee and without in office being opened by Sambamurthi at Madras and without repayment of half the fee collected for such case during the period the (consideration for the) goodwill has been paid by the assessee to Sambamurthi.

Sambamurthi, in pursuance of this agreement, received a sum of Rs. 5000 from the assessee. The assessee claimed that this sum of Rs. 5000 should be deducted as a revenue expenditure, while the department and the Appellate Tribunal held that it was a capital expenditure. The test to be applied in such cases is to find out whether the assessee became the owner of the goodwill or was merely a user of the goodwill in consideration of a lump sum payment, or a share of the profits, or an amount to be paid in instalments. In the former case, it will be capital expenditure while in the latter it would be a revenue expenditure. The judgment of the Bombay High Court in ''Vithaldas Thakordas & Co v. Commr. of Income Tax, Bombay'', AIR 1957 Bom 302 (A), is very instructive. On the facts in that case it was held that the assessee only had the user of the goodwill and did not become the owner and therefore, the share of the profits paid to the widow of the previous owner of the goodwill was in the nature of a revenue expenditure. Tile test to be applied in order to determine whether, in similar circumstances, the expenditure, is a capital expenditure or a revenue expenditure is adverted to at p. 303 of the judgment. As pointed out by the learned Judge, Chagla J. (as he then was),

"If the partnership had acquired the goodwill by paying a lump sum, undoubtedly that would, have been a capital expenditure; or even if instead of paying a lump sum it had paid the amount fixed for the goodwill by certain instalments, each instalment would have been in the nature of a capital expenditure. But in this case, as the partnership did not acquire anything in the nature of a permanent asset, the payment to Bai Tarabai is not a capital but a revenue expenditure."

In our opinion, the present case falls under the former category as the terms of the agreement embodied in the letter clearly establish that what was acquired by the assessee was not merely the user of the name but the goodwill itself in consideration of paying the amount in three instalments. The expenditure, therefore, has been rightly held to be capital expenditure and the question referred to us must therefore be answered in the affirmative and against the assessee. As the assessee has failed, he must pay the costs of the respondent, Rs. 250.