JUDGEMENT
T.V.K. Natarajachandran, Accountant Member -
(1.)THIS is an appeal by the assessee which is directed against the revisional order of the CIT, Pune, dt. 18-10-1985 wherein he has held that the fees of Rs. 12,000 per annum for five years paid to the retiring partner for the use of goodwill was in fact repayment of capital asset and therefore it was not a revenue expenditure allowable as a deduction in computation of total income of the firm M/s Doshi Motors, Pune. The assessment order passed by the ITO for the assessment year 1983-84 on 15-11-1983 was therefore held to be, prima facie, erroneous insofar as it was prejudicial to the interests of revenue. After issuing show cause for the proposed revision and considering the submissions made by the assessee in this behalf, the CIT set aside the assessment order and directed the ITO to reframe the assessment disallowing the fees of Rs. 12,000 paid to the retiring partner treating it as capital expenditure. Hence the appeal by the assessee to the Tribunal.
(2.)By raising several grounds, the assessee urged that the CIT erred in his assumption and presumption and erroneously concluded that the payment of fees for user of the goodwill to the retiring partner was capital in nature and in view of the authority of the Supreme Court in the case of Devidas Vithaldas & Co. v. CIT [1972] 84 ITR 277 and that of the Bombay High Court in the case of Vithaldas Thakordas & Co. v. CIT [1946J 14 ITR 822, the fees paid for user of the goodwill should be allowed as business expenditure.
M/s Doshi Motors is a partnership firm which consisted of three partners as per deed of partnership dated 18-4-1963, viz., Shri Bhogilal Manilal Doshi, Smt. Madhukanta Kantilal Doshi and Smt. Kanchanben Manilal DosM sharing profits or losses of the business equally. The partnership business consisted of dealing in motor spare-parts, tyres, tubes, motor oil etc. The partner Smt. Kanchanben Manilal Doshi (Smt. Kanchanben for short) is the mother of first partner Shri Bhogilal Manilal Doshi and motlier-in-law of second partner Smt. Madhukanta Kantilal Doshi. In this connection, it is necessary to state that only the first partner Shri Bhogilal. Manilal Doshi was the active partner and was in charge of over all control and management of the activities of the firm and Smt. Kanchanben was a sleeping partner. Smt. Kanchanben retired from the partnership with effect from 1-4-1982 and a deed of retirement dated 1-4-1982 has been drawn up, besides a new deed of partnership dated 1-4-1982 in which two more new partners, Shri P.B. Doshi (19 years) and Shri K.K. Doshi (18 years) were taken in as new partners in the place of retiring partner.
(3.)IT is necessary to refer to certain specific provisions of the deed of retirement dated 1-4-1982 which lays down the terms and conditions agreed upon at the time of retirement. As per Clause (1), Smt. Kanchanben retired from the partnership as on 31-3-1982. Clause (3) provides for full and final settlement of the payment of amounts standing to the credit of the retiring partner as on 31-3-1982 after crediting the share of profits for the year ending 31-3-1982. IT is relevant to extract Clauses 4, 5, 6 and 7 of the retirement deed which have a bearing on the issue in this appeal:
4. (a) In consideration of the retiring partner agreeing to allow the continuing partners to use the goodwill, the name of partnership, the tenancy right of the premises of the partnership etc. the continuing partners agree to pay out of the income of the firm an amount of Rs. 12,000 per annum to the retiring partner by way of fees for a period of 5 years. IT is expected that the goodwill of the partership business will last for the aforesaid period of 5 years only. Thereafter for the use of goodwill including tenancy rights the continuing partners agree to pay to the retiring partner a sum of Rs. 1,000 per annum. The amounts referred to in this clause shall be paid to the retiring partner irrespective of whether firm makes profit or incurs losses.
(4.1) The continuing partners agree to pay the amount referred to in Clause 4(a) above to the retiring partner out of the income of the firm irrespective of whether they continue the business in partnership themselves or by admitting new persons as partners.
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