1. The two question that have been referred for our decision are as follows :
'1. Whether the aforesaid sums of Rs. 14,653, Rs. 14,560, Rs. 17,412 and Rs. 16,528 constitute part of the assessee's income of the assessment year 1957-58 to 1960-61, respectively
2. If the answer is in the affirmative, whether the said sums are deductible in the aforesaid assessments ?'
2. The assessee is a firm, Messrs. Devidas Vithaldas & Co. The facts upon which the reference arises are as follows :
Padamsi Haridas was a chartered accountant and he was carrying on his business under the name and style of Devidas Vithaldas & Co. He took into partnership with him one A. K. Parikh, but at the time when this partnership was entered into, Padamsi reserved to himself the right to the entire goodwill of the business. Padamsi and Parikh continued their partnership till 31st December, 1950, on which date Padamsi retired leaving Parikh to carry on the business. On 2nd January, 1951 an agreement was entered into whereby Padamsi reserved to himself certain rights. As we have said, the goodwill belonged entirely to Padamsi until he retired. The agreement made on 2nd January, 1951 provided that the partnership of Devidas Vithaldas & Co. between Padamsi and Parikh was to be dissolved and the goodwill of the partnership was thereafter to belong to Amratlal. The terms upon which this transfer of the goodwill took place are state in paragraph 2 of the agreement of the 2nd January, 1951. We will presently advert to the provisions of that paragraph. The agreement also provided that, if Amratlal were to take into partnership with him any new partner, Amratlal must provide in the new partnership with him any new partnership agreement for the payments to Padamsi and his heirs for the amounts stipulated in paragraph 2 of the agreement of 2nd January, 1951.
On 18th October, 1955, Amratlal Parikh took one Chandrakant v. Parikh, another chartered accountant, as his partner and carried on business under the name and style of Devidas Vithaldas & Co. As a result, the amounts due and payable under the agreement of 2nd January, 1951, had to be paid to Padamsi and his heirs. It is not in dispute that in the relevant assessment years representing the relevant previous years, as indicated below, the amounts mentioned in the third column were paid to Padamsi's heirs. ----------------------------------------------------------------------Previous year Assessment year AmountRs.18-10-55 to 31-10-56 1957-58 14,653Calendar year 1957 1958-59 14,560do. 1958 1959-60 17,412do. 1959 1960-61 16,528----------------------------------------------------------------------
3. The assessee claimed that these amounts paid to the wife of Padamsi, Mrs. Premlata Padamsi Haridas, were amounts which were in the nature of revenue expenditure and, therefore, they were entitled to be taken into account as expenditure incurred in the business. The department has, however, held them to be payments in the nature of capital expenditure and assessed the assessee. In appeal the Tribunal has, however, reversed the decision of the department.
4. The view which the Appellate Assistant Commissioner took was that by the agreement between Amratlal Parikh and Padamsi, the latter had sold the goodwill to Parikh and, therefore, whatever were the payments made represented the consideration for the purchase of the goodwill and though no doubt he stipulated for the payments in the form of a regular income for himself, his wife and son, it did not automatically follow that the payments should be allowed as a revenue expenditure to the assessee. The payments were for the purchase of the goodwill and could only be treated as capital expenditure. In appeal, the Income-tax Appellate Tribunal has reversed this decision. The reasoning by which they came to the conclusion that the amounts paid to Mrs. Premlata Padamsi were in the nature of a revenue expenditure, does not appear to be very clear. But the conclusion was that the payments were in the nature of a fee or rent for the use of the goodwill so long as it was used by the firm of Devidas Vithaldas & Co. and, therefore, the payments were in the nature of a revenue expenditure.
5. In addition, therefore, to the question whether the payments made in the relevant years were in the nature of a revenue expenditure so far as the assessee was concerned, or were merely payments made to acquire a capital asset, Mr. Kolah on behalf of the assessee has raised a second point. He has urged that having regard to the terms of the agreement between Amratlal and Padamsi dated 2nd January, 1951, and the deed of partnership between Amratlal and Chandrakant V. Parikh dated 18th October, 1955, the stipulations were such that the amounts due under the first agreement and payable to the heirs of Padamsi were amounts to be deducted from the profits of the new partnership itself and that, therefore, there was created an overriding right or title in the heirs of Padamsi to deduct the profits in the hands of the new partnership with the result that it could not be said that the total profits were really income of the assessee, but the real income of the assessee was his share of the profits of the partnership less the amount payable under the agreement of 2nd January, 1951. This point does not appear to have been discussed in the order of the Tribunal, but it does appear to have been raised before the Tribunal as will appear from paragraph 3 of their order. Since of course the Tribunal took the view that the payments were in the nature of a revenue expenditure made by the assessee, they need not have proceeded to consider the second point raised.
6. Now, in order to determine whether the payments made by the firm to the heirs of Padamsi were in the nature of a revenue expenditure or payments made for the acquisition of a capital asset, it is necessary first of all to turn to the provisions of the agreement made between Padamsi and Amratlal when the firm of Devidas Vithaldas & Co. was dissolved. After reciting in paragraph 1 that the firm is dissolved and from 31st December 1950, the business shall be carried on in the name of Amratlal alone, clause 2 provides for the disposition of the goodwill which till that date indisputable belonged to Padamsi alone. As we have said, when Padamsi had first entered into partnership with Amratlal he had expressly kept that asset of the firm, namely, the goodwill for himself. Now clause 2 of the agreement of 2nd January, 1951, provides as follows :
'The goodwill of the late partnership belonged to the said Padamsi alone. He has agreed to sell the same to the said Amratlal. 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 term 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 name of Devidas Vithaldas & Co.
(b) on and after the death of the said Padamsi, pay to Bai Premlata, the wife of the said Padamsi, (if she be then surviving), for and during the term of the 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 name of Devidas Vithaldas & Co. and
(c) on and after the death of the said Padamsi as well as his said wife Bai Premlata, pay to Subhas the son of the said Padamsi for the during the term 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 name of Devidas Vithaldas & Co.'
7. In clause 3 there is a recital to the effect that although the payments mentioned in clause 2 have to be made by Amratlal or his transfers or assigns to Padamsi or his wife and heirs, still 'nothing contained in this agreement shall constitute or be deemed to constitute any further partnership between the parties hereto or between the said Amratlal and Bai Premlata, wife of the said Padamsi, or between the said Amratlal and the said Subhas in respect of the business to be carried on'. Thus, after the provision transferring the goodwill to the name of Amratlal, it was the intention of the erstwhile partner that they shall be completely separated in business and although the payments stipulated in clause 2 had to be made, it would thereafter be purely the business of Amratlal.
8. In clause 4 a further important provision has been made. Clause 4 recites : 'The accounts of the partnership have been made up between the parties hereto upto the said 31st day of December, 1950, and neither party has now any claim against the other in respect of the assets liabilities of the said late partnership except as provided in the foregoing clause 2 hereof'. It is clear from the provisions of clause 4 that after the dissolution of the partnership between Padamsi and Amratlal, Padamsi had given up all his claims in respect of the assets of Devidas Vithaldas & Co. including the goodwill. We will presently advert to the contentions of Mr. Kolah to the contrary.
9. Clause 6 of the agreement provides that by whomsoever the business of Devidas Vithaldas & Co. may be carried on, in the event of Amratlal transferring or assigning the business, either singly or jointly with others, but so long as the business is carried on in the name of Devidas Vithaldas & Co.'or any other name resembling or similar thereto, the assignees of 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. ' shall continue to make the payments stipulated in clause 2. It was also stipulated that Amratlal shall not assign or transfer or otherwise dispose of the said business or the goodwill or bequeath the same to any person nor enter into any partnership or other arrangement in regard to the said business 'except with a condition that the provisions of this agreement shall be accepted by such person or persons or their legatees or successors or legal representatives whatsoever'. A provision was also made that whenever the heirs of Padamsi required a separate agreement in that behalf, such a separate agreement would be entitled into by the transferees or assigns of Amratlal.
10. Now, though a number of decision have been cited on either side to indicate whether the amounts paid to Mrs. Premlata Padamsi in the relevant years were in the nature of payments to acquire a capital asset, or merely revenue expenditure, it is settled law that the determination will turn upon the facts and circumstances of each case, and so we turn to examine first of all independently of the decided cases what the facts and circumstances here indicate.
11. The recital in clause 2 of the agreement of 2nd January, 1951, is, in our opinion, as clear as it could possibly be. The recital says that the goodwill of 'the late partnership' belonged to the said Padamsi alone and that 'he has agreed to sell the same to the said Amratlal. ' The words used are 'to sell' and this is further reinforced by the subsequent recital 'As consideration for and in full satisfaction of the purchase price of the goodwill..... ' The transaction is referred to as a sale. The consideration is referred to as the purchase price of the goodwill. We do not say that this circumstances is decisive but it is certainly an important circumstance to be taken into account. Next, that is the consideration provided for The manner in which clause 2 is couched indicates that the consideration consists of three parts mentioned in sub-clause (a), (b) and (c) of clause 2. First, that Padamsi should be paid 'for and during the term of his natural life a share of eight annas in the rupee in the net profits of the said business or profession'; secondly, that on and after the death of the said Padamsi, his wife Premlata should be paid the same amount and thirdly, that after the life time of padamsi and his wife, premlata, the same amount should be paid to Padamsi's son, Subash.
12. The subsequent clauses of the agreement clearly show that the parties were anxious to indicate that thereafter Padamsi and his heirs would have absolutely no interest in the goodwill but that their only interest was in the payments to be made under sub-clauses (a), (b) and (c) of clause 2 of the agreement. A possible contention that, because the payments stipulated in clause 2 were being made, a partnership had arisen between the parties or between Amratlal and Premlata or between Amratlal and Subash is repelled by the opening words of the clause 3 'nothing contained in this agreement shall constitute or be deemed to constitute any further partnership..... '.
13. Further, in paragraph 4 any possible doubt is further removed by the recital '... neither party has now any claim against the other in respect of the assets and liabilities of the said late partnership except as provided in the foregoing clause 2 hereof'. It seems to us that nothing could be more categorical than the statement that Padamsi and his heirs, inter alia, will have no claim against Amratlal and other with whom he may enter into agreement in respect of the assets of Devidas Vithaldas & Co. The assets of the 'late partnership' of course included the goodwill and, therefore, this recital amounts to saying that Padamsi and his heirs shall have no claim against Amratlal and others with whom he may further enter into agreement in regard to the goodwill.
14. Much emphasis was placed by Mr. Kolah on the provisions of clause 6 and he pointed out that this clause must be read in conjunction with the opening words of clause 2. Clause 6, he urged, placed an obligation upon Amratlal that he shall not assign or transfer or otherwise dispose of the business or the goodwill or even bequeath the same of any person nor enter into any partnership or other arrangement with any other person or persons for carrying on the said business, except 'with the condition that the provisions of this agreement shall be accepted by such person or persons'. Mr. Kolah, therefore, urged that the provision of the agreement were that the amounts were to be paid out of the profits and the same agreement had to be entered into by Amratlal with whomsoever he made any further agreement, whether transferring his rights under the agreement of 2nd January, 1951, or entering into partnership with the that person and that necessarily implied that only so long as Amratlal continued to use the goodwill the agreement was binding on him. If he ceased to use the goodwill, then the goodwill, according to Mr. Kolah, would revert to Padamsi or his heirs.
15. We are quite unable to accept this interpretation of the agreement, for in the first place there is absolutely no mention in the agreement that the goodwill shall revert in the event of Amratlal and/or his partners, transferees or assigns not continuing to use the name of Devidas Vithaldas & Co. At the most it can be said that the document is silent upon that question, but, in our opinion, coupled with the provisions of clause 2 which clearly and categorically say that the goodwill has been sold and the purchase price of it was to be paid upon certain terms, the document could not possibly have said anything to the contrary, namely, that the goodwill could thereafter ever revert to Padamsi and his representatives. Further, having regard to the provision of clause 6, it is, in our opinion, quite clear that the document cannot possibly be construed to mean that the goodwill was only temporarily assigned or transferred or that it was only the use of the goodwill that was assigned to Amratlal. 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 mere transfer of the right of user thereof. It was an outright sale of an asset of Devidas Vithaldas & Co., namely, the goodwill which till then belonged to Padamsi and in which he had reserved his exclusive right at the time when he entered into partnership with Amratlal.
16. No doubt, the consideration was not paid in one lump sum, but as we shall presently show it is not necessary that the consideration should be a stated amount or liquidated sum. It can be made payable in instalments or other deferred payments and the manner of payments would not be decisive of the nature of the transaction.
17. Before the Tribunal reliance had been placed on behalf of the assessee on the decision in Vithaldas Thakordas & Co. v. Commissioner of Income-tax. That was a case where, after the death of the Vithaldas, his widow had entered into an arrangement with the assessee for the use of Vithaldas's name for their bullion business. In consideration of the use of the name the partners of the assessee-firm had agreed to pay the widow an amount equivalent to two annas in the rupee out of the net profits of the business and the partners had also agreed that neither she nor the estate of Vithaldas, her husband, would be liable for the debts and liabilities of the partnership. No terms was fixed for the duration of the use of the goodwill. The assessee-firm had in the year of account made a net profit of Rs. 40,470 and the widow was paid an amount of Rs. 5,059 being her share in the profits. One of the questions raised was whether this was in the nature of expenditure for the acquisition of a capital asset or in the nature of a revenue expenditure and the court held that it was in the nature of a revenue expenditure. The reason for so holding was, in our opinion, obvious. The goodwill was not sold or transferred by the widow of Vithaldas as has been done in the present case by Padamsi. That was a case where the document in express terms had only granted the user of the goodwill albeit for a period which was indefinite. What was stipulated for in that case was the right to the user and enjoyment of the goodwill. It was so to say rented out the there was absolutely nothing to indicate in the document in that case that goodwill had been sold as in the present case and it was on that precise point that Chief Justice Chagla decided the issue before him. At page 830, he observed :
'In our opinion, it is clear that the expenditure is not in the nature of a capital expenditure. By paying a two annas share in the net profit the partnership did not acquire any asset. It paid a fee or rent for the use of the goodwill and that can only be a revenue expenditure. 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 if had paid the amount fixed for the goodwill by certain instalmenys, each instalmeny 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. ' (The underlining is ours.)
18. The alternative case which the learned Chief Justice postulated in the passage quoted above is precisely the case we have in hand and the Chief Justice made it clear that if the partnership had acquired the goodwill by paying a lump sum, '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. In the present case, therefore, the payments made under sub-clauses (a), (b) and (c) are, in our opinion, nothing more than payments made of the consideration or price for the acquisition of a capital asset, namely, the goodwill, the consideration being made payable annually and computed upon a certain principle.
19. Mr. Kolah argued that the distinction between Vithaldas's case and the present case cannot be made because even here the payment is linked to the net profits of the business of profession which Amratlal would carry on and that is an indication that it was in the nature of a revenue expenditure. If that had been the only stipulation, perhaps there was something to be said for Mr. Kolah's argument, but the opening words of clause 2 of the agreement are clear and categorical, namely, that the goodwill is sold and what was being fixed by sub-clauses (a), (b) and (c) was the consideration for a sale and it was paid in full satisfaction of the purchase price of the goodwill. Therefore, whether it is paid in lump sum, whether it is paid in instalments or whether it is paid out of the profits, what was being paid to Padamsi and his heirs was the purchase price of capital asset, namely, the goodwill. The case Vithaldas Thakordas and Co. v. Commissioner of Income-tax, therefore, cannot apply here.
20. In Commissioner of Income-tax v. P. N. Ethiraj, it was held that even in cases where a business in partly transferred to another and payment is made for what appears to be the acquisition of a capital asset, the conclusion whether the expenditure is of a capital or a revenue nature must necessarily rest upon the nature of the agreement and upon what was actually intended by the parties thereto. In other cases, the same principle has been stressed by saying that each case has to be determined upon the facts and circumstances of that case and upon what was the true intention of the parties. So far as the facts are concerned, Ethiraj's case is clearly distinguishable. In Assam Bengal Cement Co. Ltd. v. Commissioner of Income-tax, the Supreme Court quoted with approval the remark of Rowlatt J. in Countess Warwick Stemship Co. Ltd. v. Ogg at page 298 as laying down the same principle :
'It is very difficult, as I have observed in previous cases of this kind, following the highest possible authority, to lay down any general rule which is not sufficiently accurate and sufficiently exhaustive to cover all or even a great number of possible cases, and I shall not attempt to law down any such rule.'
21. After referring to several other cases on the same principle at page 45 it is observed as follows :
'If the expenditure is made for acquiring or bringing into existence an asset or advantage for the enduring benefit of the business it is properly attributable to capital and is of the nature of capital expenditure. If on the other hands it is made not for the purpose of bringing into existence any such asset or advantage but for running the business or working it with a view to produce the profits it is a revenue expenditure. If any such asset or advantage for the enduring benefit of the business is thus acquired or brought into existence it would be immaterial whether the source of the payment was the capital or the income of the concern or whether the payment was made once and for all or was made periodically. The aim and object of the expenditure would determined the character of the expenditure whether it is a capital expenditure or a revenue expenditure. The source or the manner of the payment would then be of no consequence. (The underlining is ours.)
Now we have said enough, we think, to show what was the aim and object of the expenditure in the present case. We have shown that the clear intention of the parties was to sell the goodwill outright and that was the aim and object of the expenditure which Amratlal made under the agreement. Whether the expenditure was to come out of the business profits or not, was a matter of no consequence, for the source or the manner of the payment cannot be of any consequence upon the principle laid down by the Supreme Court.
22. The sheet-anchor of the argument of Mr. Kolah was the decision in Travancore Sugar & Chemicals Ltd. v. Commissioner of Income-tax. There the assessee-company was floated to take over the assets of certain undertaking run by the Government of Travancore, and the promoters entered into an agreement with the Government whereby the assets of a sugar manufacturing concern, a distillery and a tincture factory were agreed to be sold by the Government to the company. The cash consideration for the sale of the assets of the sugar manufacturing concern was Rs. 3,25,000, that for the sale of the distillery was agreed to be arrived at as a result of joint valuation by engineers to be appointed by both the parties and the consideration for the sale of the assets of the tincture factory was the book value. Apart from the cash consideration, clause 7 of the agreement provided that the Government would be entitled to 20% of the annual net profits subject to a maximum of Rs. 40,000 after providing for depreciation and remuneration of the secretaries and treasurers. This clause was later on amended to reduce the percentage to 10% of the annual net profits. In the relevant year being the previous year relevant to the assessment year 1958-59 the assessee paid Rs. 42,480 and the question was whether the payment of that sum was allowable under section 10 of the Income-tax Act. The Supreme Court held, reversing the decision of the Kerala High Court, that the payment under clause 7 of the agreement was in the nature of revenue expenditure and not capital expenditure. The Supreme Court as in the cases to which we have referred above, pointed out that it was not easy to distinguish whether an agreement is for the payment of price stipulated in instalments or for making annual payments in the nature of income, but what the court has to took to is the entire transaction as evidenced by the document and also at the surrounding circumstances and to decide 'what is the real nature of the transaction from the commercial point of view'. No single test of universal application can be discovered for a solution of the question and the name which the parties may give to the transaction which is source of the receipt and the characterisation of the receipt by them are of little consequence. The court has to ascertain the true nature and character of the transaction from the covenants of the agreement tested in the light of surrounding circumstances.
23. Having said this, the Supreme Court proceeded to consider the several facts and circumstances as they appeared from the record and having considered the same came to the conclusion that the payment of the sum of Rs. 42,480 under clause 7 of the agreement was in the nature of revenue expenditure. Thus that case had several peculiar features which were special to it and which we do not find present in the case before us. In the first place, the assessee-company was floated with the idea of taking over all the assets of the undertaking run by the Government of Travancore and it had not other business. Secondly, it had paid a lump sum consideration in cash for certain of the items acquired under the agreement, as, for instance, the payment of Rs. 3,25,000 for the assets of the sugar manufacturing company. Therefore, in that case there were payments clearly stated to be made for the acquisition of capital assets and other payments and undoubtedly that factor must necessarily be taken into account. The decision certainly suggested that the payments under clause 7 could be payments other than the payments in the nature of a capital expenditure. Though no doubt there was a transfer of the several businesses from the Government to the assessee-company it was nowhere indicated in that case that any item was sold as it is stated in the present case, nor was the consideration described as the purchase price as in the present case. No doubt there were some ingredients which were similar to the ingredients present in the case before us, as for instance that the payment was for in indefinite period an no limitation of time attached to it. The payment was related to the annual profits as here which flowed from the trading activities of the appellant. In the present case also the period of the payment is not mentioned, but at least there is one limitation, namely, that the payment is to be made so long as the goodwill is being used. The stipulation in the present case also as to the making of the payment of the annual profits was not in the identical terms as agreed upon in the Travancore Sugars case. In the case, not only was the payment fixed at a certain percentage of the annual net profits but the manner of computing those profits after providing for the remuneration of the secretaries and treasurers was laid down, thus clearly indicating that the expenditure on the part of the assessee-company was in the nature of a revenue expenditure after computation of profits in a certain manner. In the present case we have shown a clear stipulation which truly indicated that the intention of the parties was that the goodwill was to be sold outright and we have also shown that upon clause 4 it cannot revert to the original owner of it, namely, Padamsi. What is more, the parties also described the consideration as the purchase price for the goodwill. In our opinion, therefore, the decision in the Travancore Sugars case, would be distinguishable upon its facts and would not apply in the present case.
24. At page 574, the Supreme Court referred to the English decision, Jones v. Commissioner of Inland Revenue, at page 715, and quoted with approval the observation of Rowlatt J. : 'The property was sold for a certain sum, and in addition the vendor took an annual sum which was dependent upon the volume of business done : that to say, he took something which arose or fell with the chances of the business. When a man down that he takes an income; it is in the nature of income..... ' Now, no doubt, as we have said, that extract from the English case could well apply to the facts in the Travancore Sugars case There, as we have pointed out, for one of the three business acquired by the assessee-company an outright payment of Rs. 3,25,000 had been made and by contrast, the payment for other business was out of a share of the profits. That indicated a clear distinction being drawn by the parties between the payment being made for a particular class and payment being made out of revenue, namely, the profits of the business. In the present case the whole of the consideration is in terms described as the consideration for the sale of the goodwill and the entire consideration in sub-clauses (a), (b) and (c) of clause 2 is stated to be the 'purchase price'. What is more, the other circumstances under within the transaction took place are wholly different. The principle, therefore, of the English case cannot apply to the facts and circumstances here.
25. Much the same was the case with the decision of the English Court of Appeals in Commissioner of Inland Revenue v. 36/49 Holding Ltd. (In Liquidation). There also several payments were made, some expressly stated to be for acquiring a capital asset and some dependent upon the number of article sold, that is to say, dependent upon the business of the acquiring company. Another case which was relied upon is Mackintosh (Mrs. V. O.) v. Commissioners of Inland Revenue. There the facts were somewhat peculiar. By a deed a partnership it was provided that on the death of one partners the remaining partners might continue to use the firm's name, makes and goodwill but upon paying to the executors of the deceased partner for this privilege the sum of pound 500 quarterly for a period of five years 'after which it may be enjoyed without further payment'. The payment thus made to the widow of the deceased partner was held to be in the nature of a revenue received in her hands. It has to be noticed that in that case other payments had been made by the remaining partners in respect of the share of the deceased partner. The share of the deceased partner had been valued and his share in the capital and income of the partnership was agreed upon and paid to the executors in fully discharge of all claims except the quarterly payments. Therefore, the share of the deceased partners had been separately valued and payment made for that share. The amount of pound 500 was in addition to that valuation of the deceased's share. Secondly, it may be noticed that the goodwill itself which had been paid for was an asset which belonged to all the five partners prior to the deaths of one of them and the widow would have been entitled to the profits of the partnership relating to the are of the decease partner in any case. The payment of pound 500 quarterly for a period of five years would in the circumstances will have been made attributable to that share in the profits. It seems to us therefore that Mackintosh's case is distinguishable upon its own facts.
26. Having regard to the principles laid down in the above cases and to the distinctions which we have pointed out, we have not doubt upon the facts of the present case that the amounts payable under sub-clauses (a), (b) and (c) of clause 2 of the agreement dated 2nd January, 1951, were amounts clearly paid s the purchase price of the goodwill which was a capital asset of Padamsi until the date of the agreement and which Amratlal purchased from Padamsi in consideration of the payments to be made under clause 2. The payments, therefore, made towards the acquisition of such capital assets would in the circumstances be clearly in the nature of expenditure to acquire that capital asset. It cannot in the circumstances be held to be in the nature of a revenue expenditure.
27. Then we turn to the other point argued in the case, namely, that the expenditure was directly to be met out of the profits and therefore it did not constitute the income of the assessee at all in the first instance. The payments stipulated in sub-clause (a), (b) and (c) of clause 2 were first to be deducted from the profits of the partnership between Amratlal and Chandrakant and then whatever was left was to be received by the two partners. Therefore, the profits which the assessee received from their business were profits minus the payments to be made under sub-clause (a), (b) and (c) of clause 2 of the agreement dated 2nd January, 1951. If that be so, then the payments made to Padamsi and his heirs could not have been taxed in the hands of the assessee at all, for it never represented the assessee's income.
28. On his point we may first of all consider the position on the facts. So far as the agreement of 2nd January, 1951, is concerned, the provisions of that agreement cannot support the contention. Though no doubt the consideration for the purchase of the goodwill as stated in clause 2 of the agreement was 'a share of eight annas in a rupee in the net profits of the said business or profession.... ' which later was reduced to Rs. 0-5-3, nothing is mentioned as to how the net profits were to be computed. The mere linking of the payment with the net profits would not, in our opinion, suggest that the profits were not first of all to come to the hands of the assessee or that the payment was first to be deducted before the profits could reach the assessee. We may incidentally also point out that the words used are 'net profits' and that would necessarily entail the profits which come to the hands of the assessee upon the making of accounts, as for instance, allowances for depreciation of fixtures, furniture, etc.
29. Mr. Kolah derived support for his contention from the provision of clause 5 of the subsequent deed of partnership entered into between Amratlal and Chandrakant dated 18th October, 1955. Clause 5 provides that 'the parties shall pay Rs. 0-5-4 share in the profits in a rupee as any by way of purchase price of the goodwill of the said firm to the said Shri Padamsi Haridas or to his wife or to his son as stated in detail hereinbefore..... The said Shri Padamsi Haridas has agreed to this reduction in his share mutually with Shri Amratlal Kashandas Parikh and Shri Chandrakant v. Parekh. After the sad share of Rs. 0-5-4 in a rupee is paid up as stated above the balance of the profits and loss of the firm shall be divided in two equal proportions between the parties of the first part and the second part. ' What Mr. Kolah has urged is that there is clearly a provision that he payments for which the partnership was liable under the agreement of 2nd January, 1951, were to be first made and then the profits ascertained and, therefore, the profits themselves went towards the payment and therefore before the profits became the income of the assessee it was disbursed to Padamsi and his heirs. We do not think that the provision of clause 5 in the first place can at all effect the stipulation in the original agreement of 2nd January, 1951. Undoubtedly, in the original agreement between Padamsi and Amratlal, Amratlal had undertaken that in the event of his taking with himself a partner he would stipulate in the partnership agreement to be made that clause 2 of the agreement shall be observed and it was in pursuance of that stipulation in the original agreement that clause 5 was inserted in the deed of partnership, but we do not think therefore that the terms of clause 5 can assist to interpret the terms of clause 2 of the original agreement. What was the intention between the parties so far as the agreement between Padamsi and Amratlal is concerned has to be judged upon the provision of that agreement and particularly the terms of clause 2 thereof and nothing that is said in clause 5 of the partnership agreement subsequently can alter that intention. As to that intention we have already said that clause 2 does not indicate that the payments were to be made before the profits were received by Amratlal or his partner. The arrangement mentioned in clause 5 of the partnership agreement is an arrangement which is only binding upon the two partners and Padamsi and his heirs could not enforce it. It was possibly made by Amratlal for his own safety when taking in Chandrakant as a partner but the manner in which the two partners decided to made up their accounts so as to provide for payment under the original agreement of 2nd January, 1951, cannot effect the terms of that agreement.
30. Reliance was placed upon the principle laid down by Lord Macmillan in Pondicherry Railway Co. v. Commissioner of Income-tax, laying down the test in such a case as follows :
'A payment out of profits and conditional on profits being earned cannot accurately be described as a payment made to earn profits. It assumes that profits have first come into existence. But profits on their coming into existence attract tax at that point and the revenue is not concerned with the subsequent application of the profits'.
31. In Vithaldas Thakordas & Co. v. Commissioner of Income-tax, Chief Justice Chagla pointed out that the principle was stated in rather wide terms and that the principle should be confined to its own context. (Vide page 831). The learned Chief Justice stated the principle thus : 'Therefore in every case the court has got to consider what are the real profits of the assessee and what are the apparent profits. It is only the real profits that attract the tax; and even though the language used in the material documents may be 'net profits', the court must look to the substance of the transaction and not the form. ' Upon the facts it was held in Vithaldas Thakordas v. Commissioner of Income-tax, that the months paid to Tarabai for the use of her husband's name for running the business of the partners of the assessee-firm, were not really profits in the hands of the firm. In that case the partnership deed itself provided that only after payment of the amount to the widow the balance of the net profits would be divided between the partners in a certain proportion and since that was the clear intention expressed it was held that the amounts were liable to be deducted before the profits reached the hands of the partners. Such is not the stipulation in the present case and we have already said that though such a stipulation came to be made subsequently between the partners inter se that cannot affect the intention of the parties under the original agreement. The partners made that agreement for their own convenience and it had no reference to Padamsi or his legal representatives.
32. The decision in Ratilal B. Daftari v. Commissioner of Income-tax was next relied upon. That was case where there was, so to say, sub-partnership between one partners and strangers and the share which the partner received was divisible between him and those strangers who were his sub-partners. The partner had contributed Rs. 25,000 out of the capital of the partnership of Rs. 3,45,000 and his share of the profits was determined at Rs. 14,661. His contention was that the whole of this amount did not constitute his income, because the sub-partners were to take 3/5th out of the amount and only 2/5th belonged to him, namely, Rs. 5,864. It was held that having regard to the agreement between the partner and the sub-partners, the real income of the partner was only 2/5th which he himself was to receive. The rest was payable by him out of the profits to the sub-partners. It will be noticed that in this case the special feature was that the agreement between the partners and the sub-partners expressly stipulated that the sub-partners shall share in the partner's share of the profits and the profits could be divisible between them before they reached the hand of the partner who was the assessee. No such provision or stipulation appears in the present case upon the terms of the agreement dated 2nd January, 1951, and as we have said, the subsequent agreement, namely, the deed of Partnership dated 18th October, 1955, cannot alter the position. The case in Ratilal B. Dafatri v. Commissioner of Income-tax is therefore, distinguishable.
33. The true test in cases of this kind was laid down by the Supreme Court in Commissioner if Income-tax v. Sitaldas Tirathdas, at p. 374, as follows :
'In our opinion, the true test is whether the amount sought to be deducted, in truth, never reached the assessee as his income. Obligations, no doubt, there are in every case, but is is the nature of the obligations which is the decisive fact. There is a difference between an amount which a person is obliged to apply out of his income and an amount which by the nature of the obligation cannot be said to e a part of the income of the assessee. Where by the obligations income is diverted before it reaches the assessee, it is deductible; but where the income is required to be applied to discharge an obligation after such income reaches the assessee, the same consequence, in law, does not follow.'
34. As we have shown, upon the facts and circumstances of the present case there is nothing to indicate that the amounts to be paid by Amratlal to Padamsi and his heirs were the diversion of income before it reached Amratlal's hands. On the other hand, the obligation is to pay them out of the profits but there is no stipulation to show that the profits themselves shall be applied to that payment. The contention, therefore, cannot be accepted.
35. Lastly, a point was raised by Mr. Kolah that the department itself in the present case has taken a different view in the assessment made of the income of Shrimati Premlata, the wife of Padmasi. At annexure 'c' is the order of the Tribunal dated 17th February, 1960, where in no doubt a view has been taken that Padamsi had not sold his right, title and interest in the goodwill and merely allowed the use of it for a number of years and since the payment was for the user of the goodwill it could clearly be a revenue receipt in the hands of the assessee. We think we have said enough to show that this was an incorrect view to take upon the fasts and circumstances that have been placed before us in the present case and upon the terms of the document dated 2nd January, 1951. The order clearly shown that the document dated 2nd January, 1951, was misconstrued. However, we do not think that a wrong order passed by the Tribunal can preclude us from taking a correct view upon the documents, facts and circumstances placed before us. We have no doubt that if the wrong view taken in that order is pointed out, the department will grant the necessary relief.
36. In the result, we answer the first question referred in the affirmative. The second question is answered in the negative. The assessee shall pay the costs of the Commissioner.