JUDGEMENT
Y. Upadhyay, Vice President -
(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:
JUDGEMENT_10910_TLIT0_19890.htm
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.
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 [1972] 84 ITR 277 and Travancore Sugars & Chemicals Ltd. v. CIT [1966] 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?
(3.)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.