1. These two appeals by the assessee are taken together and disposed of by a common order.
2. The assessee is a registered firm which derives income from manufacture and sale of bidis. The business was carried on by Smt.
Ujjambai, wife of Shri Hargovind, and Smt. Jadaobai, wife of Shri Mohanlal, under the firm name of Messrs Mohanlal Hargovinddas. Smt.
Jadaobai died on 12-4-1961 leaving behind an adopted son, Shri Parmanand Patel. Smt. Jadaobai also left a will executed by her which was registered on 22nd October, 1953. According to the will, all movable and immovable properties were given to Smt. Ujjambai. However, the properties, movable and immovable, given before her death, became the sole properties of the recipient. Shri Parmanand Patel joined the partnership with Smt. Ujjambai under the partnership deed dated 21-6-1961 and was entitled to 50% profit. Thereafter Shri Sravankumar, son of Shri Parmanand Patel, joined the partnership and a fresh partnership deed was drawn on 19-9-1963. According to the said partnership, the profit-sharing ratio of the partners was as follows: It was indicated in the deed dated 21st June 1961 that Smt Ujjambai may, if she wishes to retire from the firm, do so at any time leaving the business to be carried on by the said Shri Parmanand Patel on his own account and the said Shri Parmanand Patel shall be liable to pay the said Smt. Ujjambai the amount then standing to her credit and no value shall be placed upon the goodwill including the firm name and trade marks. More or less, the same clause was also inserted in the deed dated 19th September 1963. Shri Parmanand Patel was appointed as a Minister in the Madhya Pradesh Government, and as a Minister, he could not carry on the business and had, therefore, to retire from the partnership business. He retired on 24th October 1964 and a Memorandum of Agreement between Shri Parmanand Patel and the remaining two partners was executed. In the said Memorandum, it was provided that the retiring partner, namely, Shri Parmanand Patel shall be paid a sum of Rs. 50,000 per year in respect of the use of the goodwill. Thereafter, Shri Parmanand Patel joined the firm again on 24-7-1974 and a fresh deed was executed on 1-8-1974. Thereafter, Shri Parmanand Patel retired from partnership with effect from 8-1-1976. A new partnership deed dated 8-1-1976 was then executed. In this deed dated 8-1-1976 it was indicated that Shri Parmanand Patel should be paid for the use of goodwill Rs. 30,000 per annum. The assessee claimed the payment of Rs. 50,000 as a deduction for the assessment year 1970-71 and the claim was allowed by the Assessing Officer. The Commissioner of Income-tax, subsequently, took action under Section 263 of the Income-tax Act, 1961 and after issuing a show-cause notice to the assessee and hearing it set aside the assessment and directed the Assessing Officer to disallow the amount and accordingly to recompute the total income. In the assessment years 1971-72 to 1974-75, the Assessing Officer, for the detailed reasons discussed in his order, came to the conclusion that the payment of Rs. 50,000 per annum to Shri Parmanand Patel was not an admissible deduction as a business expenditure. However, the assessee was successful in the appeal before the first appellate authority who came to the conclusion that Shri Parmanand Patel having retained goodwill had only allowed the user of the goodwill to the assessee firm and, therefore, the payment of Rs. 50,000 made to him was an allowable business expenditure.
3. The assessee challenged the 263 order in ITA No. 421/Jab./1974-75 for the assessment year 1970-71 and the Department challenged the orders of the Appellate Asstt. Commissioner for the assessment years 1971-72 to 1974-75. the Tribunal, relying upon the decisions of the Supreme Court in Devidas Vithaldas & Co. v. CIT  84 ITR 277 and Travancore Sugars & Chemicals Ltd. v. CIT  62 ITR 566, held that the payment made by the assessee for the use of the goodwill was a revenue expenditure. Subsequently, the Assessing Officer disallowed the payment made for the assessment year 1975-76 at Rs. 36,292. The Commissioner of Income-tax (Appeals), following the earlier order of the Tribunal for the assessment year 1971-72 and others, allowed the appeal of the assessee. The Tribunal, vide its order in ITA No.213/Jab./1979, after quoting the earlier order in extenso, did not agree with the CIT(Appeals) on the ground that Shri Parmanand Patel has not paid any amount towards the goodwill of the firm and, therefore, the payment made by the assessee to Shri Parmanand Patel was for extra commercial consideration. Similar payments made for the assessment years 1977-78 and 1978-79 were also disallowed by the Assessing Officer and the CIT(Appeals), following the decision of the Tribunal for the assessment year 1975-76 (ITA No. 213/Jab./1979) did not allow the claim of the assessee. When the matter came before the Tribunal, the Bench found contradictory decisions on the point and, consequently, the point was referred to the Hon'ble President for constituting a larger Bench.
The Hon'ble President was pleased to constitute a larger Bench for the consideration of the following point.
Whether the amount of Rs. 30,000 per year paid to the retired partner Sri Parmanandbhai Patel is a proper deduction in the computation of the total income of the firm? 4. Shri Dastur, the counsel for the assessee, filed a paper-book containing 38 pages. He has also filed a copy of the will left by Smt.
Jadaobai. A statement showing the profits shown during the assessment years 1972-73 to 1976-77 was also filed. The paper book also contains copies of the orders of the Tribunal in ITA Nos. 421/Jab./74-75 & 479, 21,22 & 23/Jab./79 for the assessment years 1970-71 to 1974-75; and in ITA No. 213/Jab./1979 for the assessment year 1975-76, besides copies of the partnership deeds dated 21-6-1961, 19-9-1963, 24-10-63 and 8-1-1976. Before the matter was taken up for hearing, a query was raised by the Departmental Representative that a reference had been made against the order of the Tribunal in ITA No. 213/Jab./1979 under RA No. 36/Jab./1982 to the Hon'ble Madhya Pradesh High Court and the Court, by their order dated 16-1-1988, asked the Tribunal to send the supplementary Statement of the case. The Hon'ble High Court, while calling for the supplementary statement of the case, observed as follows: We are informed that Parmanandbhai is not a natural son but an adopted son of Mohanlal. Be that as it may, the relationship of Parmanandbhai with Smt. Jadavbai is apparent from these two documents. In the normal course, for purpose of succession it would not be material whether Parmanandbhai is natural son of Mohanlal or his adopted son. Consequently, in the absence of anything to the contrary, on the death of Smt. jadavbai, which took place on 12-4-1963, her interest in the assets of the firm included goodwill, which even according to the Tribunal had already been acquired, would devolve on Parmanandbhai. As such when consequently Parmanandbhai entered into partnership with the surviving partner Smt. Ujjainbai on 21-6-1961, he would in the normal course be deemed to have an interest in the assets including goodwill of the share of Smt. Jadavbai by inheritance unless Smt. Jadavbai had disposed of her interest either by a will or otherwise.
The Departmental Representative accordingly urged that first it should be clarified whether supplementary Statement of the case has been forwarded to the Hon'ble High Court and if not what is the correct position. Shri Dastur explained the circumstances under which the said observation was made by the Hon'ble High Court for calling for the supplementary Statement of the case. He further, by filing will of Smt.
Jadaobai indicated that all the movable and immovable assets were bequeathed by Smt. Jadaobai to Smt. Ujjambai. Further, he clarified that he is going to argue the case that on the basis of the partnership deed, Shri Parmanand Patel was given certain amount for the use of the goodwill.
5. Shri Dastur, after replying to the said query of the Departmental Representative, urged that if the various partnership deeds and documents are carefully perused, it is clear that Shri Parmanand Patel joined the partnership with Smt. Ujjambai on 21-6-1961. There was no clause about the sharing of the assets including goodwill and, therefore, Section 48 of the Partnership Act would apply for the division or share of the assets in the event of dissolution or retirement. Shri Parmanand Patel was sharing the profit at 50%.
Further, it was indicated in the deeds dated 21-6-1961 and 19-9-1963 that the goodwill was exclusively owned by Shri Parmanand Patel.
Therefore, Shri Parmanand Patel was the sole owner of the goodwill but he limited his claim to 50% and, accordingly, the partners agreed to pay Rs. 50,000 for the use of the goodwill which is evidently clear from the various partnership deeds and memorandum of agreement. The concept of payment for acquisition of goodwill and use of goodwill has been clarified by the Supreme Court in Devidas Vithaldas & Co.'s case (supra). It has been indicated that the payment for the acquisition of goodwill is a capital expenditure whereas the payment for the use of the goodwill is a revenue expenditure. The payment was made in the instant case for the use of the goodwill and, therefore, the claim of the assessee should be allowed. He further referred to the second order of the Tribunal (ITA No. 213/Jab./79) and argued that the Tribunal did not consider properly the facts considered earlier by the Tribunal in the decision for the assessment years 1970-71 to 1974-75. It is not necessary at all for a partner to contribute towards goodwill. The partner, without contributing to the goodwill, subject to the conditions in the partnership deed, may share the assets of the firm including the goodwill. He relied upon the decision of the Bombay High Court in Vithaldas Thakordas & Co. v. CIT  14 ITR 822 and that of the Supreme Court in Devidas Vithaldas & Co. 's case (supra).
Shri Dastur urged that no new facts were found by the subsequent Bench of the Tribunal in ITA No. 213/Jab./1979 and, therefore, it was not fair for the subsequent Bench to differ from the earlier order of the predecessor Bench. Accordingly, he urged that the claim of the assessee should be allowed.
6. The Departmental Representative very strongly supported the order of the Tribunal in ITA No. 213/Jab./79 and urged that Shri Parmanand Patel has not contributed towards the goodwill of the firm. The firm was doing the same business before he joined the firm and even after his retirement. Therefore, the assessee was not entitled for the deduction claimed. He referred to various deeds filed by the assessee and indicated that nothing was contributed by Shri Parmanand Patel towards the goodwill of the firm. He distinguished the case cited by Shri Dastur in Devidas Vithaldas & Co. 's case (supra). He, on the other hand, relied on 71 ITR 119 (SC) and 63 ITR 75(SC)(sic).
7. The point for consideration of the Special Bench is about the allowance of Rs. 30,000 per annum paid to Shri Parmanand Patel for the use of the goodwill. He joined the firm in 1961 on the death of his adopted mother, Smt. Jadaobai, who died on 12-4-1961 with Smt. Ujjambai and subsequently his son Shri Sravankumar also joined the firm on the basis of the partnership deed dated 19-9-1963. He became a Minister in the Government of Madhya Pradesh and, therefore, he retired from the partnership on 24-10-1964. A memorandum of agreement was executed between him and the remaining partners and it was provided therein to pay him a sum of Rs. 50,000 per annum for the use of the goodwill. Shri Parmanand Patel, in between, again joined the firm and retired and subsequently the payment was reduced to Rs. 30,000 per annum. As mentioned earlier, the Tribunal passed one order for the assessment years 1970-71 to 1974-75 and another order for the assessment year 1975-76 and subsequently the Bench did not follow the earlier order passed by the predecessor-Bench, though the earlier order was accepted by the Department. A reference was made to the Hon'ble High Court against the said order (ITA No. 213/Jab./79) and the High Court has called for a supplementary statement of the case. The said order of the High Court in Mohanlal Hargovinddas v. CIT [1988) 174 ITR 26 (MP). It was informed in the course of the argument that the supplementary statement of the case has not been forwarded to the High Court.
However, the point raised in the order of the Hon'ble High Court has been explained by Shri Dastur that Smt. Jadaobai bequeathed all movable and immovable assets to Smt. Ujjambai and nothing was given to Shri Parmanand Patel and even then he became entitled for payment for the use of goodwill as a partner.
8. It would also be relevant at this stage to mention that a miscellaneous application was made against the order of the Tribunal in ITA No. 213/Jab./1979, and this application was rejected by the Tribunal vide order in MA No. 8/Jab./1981 dated 13-8-1982 on the ground that there was no apparent mistake in the said appellate order, though it was observed therein that the subsequent Bench, instead of differing with the predecessor Bench, could have referred the matter for constitution of a larger Bench.
9. Two points are important for consideration before coming to the conclusion whether the payment was made as a revenue expenditure. The Departmental Representative, in course of argument, has raised the point that there was no goodwill at all. This point has not been raised by the lower authorities, nor it was taken up before the two Benches which passed two separate orders. However, the assessee is an old firm and dealing in manufacture and sale of bidis. The assessee's turnover was in millions and it was making huge profits. Under the circumstances, it would be difficult to say that the assessee-firm did not have any goodwill. Goodwill is created not only by the turnover and profit but by the quality of product, efficiency of administration, liking of the customers, etc. It would be appropriate to quote the observations of the Hon'ble Calcutta High Court which has considered various aspects of goodwill in CIT v. Chunilal Prabhudas & Co.  76 ITR 566. Their Lordships have observed at pages 577-578 as follows : Goodwill has been variously described. It has been horticulturally and botanically viewed as 'a seed sprouting' or an 'acorn growing into the mighty oak of goodwill'. It has geographically described by locality. It has been historically explained as growing and crystallising traditions in the business. It has been described in terms of a magnet as the 'attracting force'. In terms of comparative dynamics, goodwill has been described as the 'differential return of profit'. Philosophically it has been held to be intangible. Though immaterial, it is materiality valued. Physically and psychologically, it is a 'habit' and sociologically it is a 'custom'. Biologically, it has been described by Lord Macnaghten in Trego v. Hunt as the 'sap and life' of the business.
Architecturally, it has been described as the 'cement' binding together the business and its assets as a whole and a going and developing concern. It has been zoologically explained by Rich J. in Federal Commissioner of Taxation v. Williamson, quoted at pages 39-40 of the 4th edition of The Valuation of Company Shares and Business by Adamson and Coorey in these terms: In Whiteman Smith Motor Company v. Chaplin the types were zoologically classified into cats, dogs, rats and rabbits. The cat prefers the old home to the person who keeps it, and stays in the old home although the person who has kept the home leaves, and so it represents the customer who goes to the old shop whoever keeps it, and provides the local goodwill. The faithful dog is attached to the person rather than the place, he will follow the outgoing owner if he does not go too far. The rat has no attachments, and is purely casual. The rabbit is attracted by mere propinquity. He comes because he happens to live close by and it would be more trouble to go elsewhere. These categories serve as a reminder that the goodwill of a business is a composite thing referable in part to its locality, in part to the way in which it is concluded, and the personality of those who conduct it and in part to the likelihood of competition, many customers being no doubt actuated by mixed motives in conferring their custom.
If the various definitions discussed above are taken into consideration, the existence of goodwill in the assessee-firm could not be doubted. The second question which is raised by the Departmental Representative as well as the members of the Second Bench of the Tribunal which considered the appeal of the Department for the assessment year 1975-76 (ITA No. 213/Jab./1979) is about the contribution towards goodwill in order to share goodwill or receive any payment for the use of the goodwill. It is open to the contracting partners to stipulate whether the incoming partner will contribute anything for goodwill or the right of any partner will be restricted for sharing the goodwill. If there is no stipulation, otherwise, a partner is entitled to share goodwill. Therefore, it could not be said, after considering various documents, that the payment made to Shri Parmanand Patel of any amount for the use of the goodwill could not be considered because he did not contribute any amount towards goodwill.
Therefore, both the objections raised by the revenue are rejected.
10. Now, the only question which survives for consideration is whether the payment for the use of the goodwill made to Shri Parmanand Patel was rightly claimed as a revenue expenditure by the assessee. The question has been answered by the Supreme Court in Devidas Vithaldas & Co's case (supra). The Hon'ble Supreme Court has laid down two principles. The first principle laid down by the Hon'ble Supreme Court is that any payment made for acquisition of goodwill is capital expenditure. The second principle is that any payment made for the use of the goodwill is a revenue expenditure. This matter has been elaborately discussed by the Bench which heard the appeals for the assessment years 1970-71 to 1974-75. The reasonings discussed by the Bench are not reproduced. In short, the Bench concluded the matter following the said principle of the Hon'ble Supreme Court (supra).
There is no doubt that the assessee-firm had paid the amount for the use of the goodwill with the consent of the partners and, therefore, the payment could only be considered as a revenue expenditure. The said conclusion is also supported by the decision in CIT v. Dharampal Shantisarup  162 ITR 134 (Punj. & Har.).
11. We, therefore, hold that the CIT (Appeals) has erred in confirming the disallowance of the payments made to Shri Parmanand Patel for the use of the goodwill during the years under consideration. We, therefore, delete the said disallowances.