1. The assessee is aggrieved against the order of the AAC upholding the ITO's action disallowing payments of Rs. 11,802.
2. The assessee is a registered firm carrying on commission agency and cotton business at Udgir under the name and style of M. Jugalkishore and Tawani & Co. As per partnership deed dated 9-1-1969, partners were Mohanlal Hanumantaram with 40 per cent share, Gowardhan Mohanlal with 40 per cent share and Jugalkishore, Gowardhan's grandson, with 20 per cent share. Mohanlal executed a will on 13-2-1972 distributing Is.
20,000 out of his capital to his granddaughters and his daughter-in-law and bequeathing balance of capital and his share in goodwill in the firm to his two grandsons Kamal Kishore and Vinodkumar. It was further stipulated that as the share of goodwill of the aforesaid two grandsons would be utilised by the firm, the firm should pay 10 per cent of the profits each year to each of the said two grandsons, subject to minimum of Rs. 3,000 per annum as consideration. Mohanlal died on 17-7-1973 and the firm was reconstituted as per partnership deed dated 24-8-1973 between the surviving partners Gowardhan Mohanlal and his grandson Jugalkishore. The partnership deed recited that the business had been continued since the death of Mohanlal and that they agreed to pay to the aforesaid Kamal Kishore and Vinodkumar (grandsons of Mohanlal) at 10 per cent of net profits of the firm subject to minimum of Rs. 3,000 per annum by way of charge or fee towards use of their share in the goodwill of the firm. In accordance with the said partnership deed, assessee-firm made payment of Rs. 11,802 to the aforesaid two minor grandsons in the year under consideration for which relevant account year ended on 13-11-1974. Admittedly, no payment was made to the said grandsons in the earlier account years which ended in November 1973.
The ITO rejected the claim of deduction on the ground that the share of goodwill of Mohanlal was valued only at Rs. 3,000 in his estate duty case and that in the earlier constitution of the firm goodwill was never taken cognizance of and. therefore., estimated share value of goodwill of Rs. 3,000 of Mohanlal as estimated in his estate duty case appeared to be undisputable and, therefore, the minimum payment at Rs. 3,000 to each of the two grandsons for the use of their goodwill bequeathed by the deceased appeared to be excessive and that no payment on this account had been made in the assessment year 1974-75 and, therefore, this condition was imposed and accepted for non-commercial reasons and was not bona fide and even otherwise Section 40A(2) of the Income-tax Act, 1961 was attracted under which expenditure which appeared to the ITO to be excessive or unreasonable, having regard to the fair market value of the goods, services or facilities for which payment was made to a closely connected relation, was disallowable.
4. Learned counsel for the assessee at the hearing before us has urged that the aforesaid payment of Rs. 11,802 to the grandsons was clearly for commercial considerations and the said payment was made under overriding title to the said two grandsons of deceased Mohanlal as they were bequeathed the deceased's share in the goodwill and the assessee-firm had to make said payment for the user of the deceased's share of goodwill. For this proposition, reliance was placed on Vithaldas Thakordas & Co. v. CIT  14 ITR 822 (Bom.), CIT v.Harjivandas Vithaldas  60 ITR 613 (Guj.), Devidas Vithaldas & Co.
v. CIT  84 ITR 277 (SC), CIT v. Crawford Bayley & Co.  106 ITR 884 (Bom.) and CIT v. Nariman B. Bhamcha & Sons. Learned departmental representative urged that there was no binding agreement between the deceased Mohanlal and the continuing partners and under Clause 8 of partnership deed dated 9-1-1969 death of a partner was not to dissolve the firm, but the firm was to be continued with the legal heir or heirs of the partner so deceased. It was urged that if under the said clause on death of Mohanlal, his aforesaid two grandsons were to be admitted to the benefits of partnership, then they would not have got any overriding title and that the assessee's case was distinguishable from Vithaldas Thakordas & Co. v. CIT (supra) where there was agreement with the widow for the use of her deceased husband's name who had carried on bullion business. In the present case, there was no agreement between two minor grandsons and the continuing partners. It was also urged that similarly other cases relied on by the assessee were distinguishable. Reliance was placed on Addl. CGT v. P. Krishnamoorthy  110 ITR 212 (Mad.) for the proposition that a partner after retirement has no right to share future profits and such a non-existent right cannot be property. It was also urged that there was no gift or goodwill by a partner on retirement relying on Smt. Urmila v. CED  122 ITR 958 (Bom.). It was, therefore, urged that the deceased did not have share in any particular asset and, therefore, could not bequeath goodwill by his will and that the will was not an effective document to create an obligation on surviving partners by compelling them to pay 20 per cent of future profits and, hence, it was a voluntary obligation taken over by the continuing partners as was clear from the fact that no such payment had been made to the two minor grandsons in the assessment year 1974-75. It was also urged that the goodwill of the firm was illusory as per calculation made by departmental representative and further that share of deceased Mohanlal was not more than Rs. 3,000 as was valued by the accountable person in the deceased's estate duty case and that there was no agreement between the deceased and the continuing partners which could be enforced by the deceased's estate and there was no compulsion on the surviving partners to continue the firm and pay the charge, more so when the partnership was at will as per Clause 5 of partnership deed dated 9-1-1969. It was, therefore, urged that the payment in question was for the personal benefit of Kamal Kishore and Vinodkumar and was not for business considerations. Reliance was placed on CIT v. Dr. P. N. Awashthi  105 ITR 320 (All.) for the tests as to what is a charge on source and on a profit-earning apparatus. It was urged that there was no user of goodwill as an asset, as its existence was illusory, and no businessman could pay Rs. 3,000 to the minor grandsons even when there were no profits and, therefore, payments could no be said to be for the purpose of business and the said payments were also hit by Section 40A(2) as payments were to two closely related persons.
5. Learned counsel for the assessee urged that goodwill was an asset relying on Khushal Khemgar Shah AIR 1970 SC 1147 and, therefore, on death of Mohanlal his legal heirs were entitled to deceased's share of goodwill. The Bombay High Court in Smt. Urmila v. CED (supra) had also held that on the death of a partner his share of goodwill passed. It was urged that the aforesaid two grandsons were given part of the capital and share in goodwill and the continuing partners had agreed by the partnership deed dated 24-8-1973 to user of the said asset left by Mohanlal and pay for the said user at 10 percent of the net profits to the two minors and, therefore, continuing partners having taken over this obligation, it could not be said to be for non-business purposes and as it was a foundational condition for carrying on of the business, it amounted to overriding title created in favour of the two minors. It was, therefore, a binding obligation necessary for carrying on the business. It was also pointed out that under Section 29 of the Partnership Act a partner can assign his share in the firm and the deceased Mohanlal who had heritable rights in the assets of the partnership, including goodwill, disposed of such rights by will and the partnership by accepting the conditions of will had entered into a binding obligation attached to the profit-earning apparatus. It was also urged that Section 40A(2) applied to voluntary payments made to relatives specified in the said section and the two minor grandsons would not fall in the said category. It was also urged that the aspect of fair market value of the services had not been examined by any of the lower authorities.
6. We have carefully considered submissions of both the parties. We feel that the assessee has a good case. As per the will of Mohanlal his share of goodwill was bequeathed to his aforesaid two grandsons, Kamal Kishore and Vinodkumar, and as per the will the testator indicated consideration for the user of the said goodwill by the continuing partners. The continuing partners as per partnership deed dated 24-8-1973 accepted that obligation. Thus, payment to the said two grandsons was a condition precedent for carrying on of business and, therefore, amounted to overriding title. The payment was also essentially wholly and exclusively for the carrying on of the business.
The fact that quantum of the payment to the two grandsons appeared to revenue to be excessive is not very material. The testator had indicated the consideration for the user of goodwill and the continuing partners had accepted the obligation to make that payment. The testator had 40 per cent share in the firm and he had indicated payment only to the extent of 20 per cent of share of profits to the minor grandsons in lieu of user of his share of goodwill and this, therefore, would not appear to be unreasonable. Thus, Rs. 11,802 out of profits of the firm of about Rs. 60,000 appear to be quite reasonable and even Section 40A(2) would not be attracted. We would, accordingly, vacate the orders of authorities below and hold that deduction of Rs. 11,802 as claimed by the assessee should be allowed. The appeal is allowed.