Commissioner of Income Tax, Gujarat vs Harjivandas Vithaldas

Bhagwati, J.—The short question that arises in this reference is whether certain payments made by the assessee to his wife and minor sons constituted revenue expenditure allowable u/s 10(2)(xv) as an expenditure wholly and exclusively laid out for the purpose of business. The assessee and this father, Vithaldas Dhanji, carried on business in partnership in the firm name and style of New Digvijaysinhji Tin Factory. The business commenced sometime in 1931 and was carried on through the years with out any written instrument of partnership. On 28th July, 1949, however a deed of partnership was drawn up between the assessee and his father regarding the terms and condition on which the partnership was carried on by them. This deed of partnership was amended subsequently on two or three occasions and was ultimately superseded by a new deed of partnership dated 6th August, 1953. That is the deed of partnership with which we are concerned in the present reference. Clause 16 of the deed of partnership according to its English translation provided as follows - and we are setting out here the whole clause since considerable argument before us turned on the true meaning of the clause :

"(16) After the death of the first partner in respect of this share in the assets, goodwill and in case the business is continued, profits and losses, Shrimati Lilavati is to be given a share of two annas in a rupee, Chiranjivi Mansukhlal Harjivandas aged 14 years a share of one anna six pies, Chiranjivi Narendrakumar Harjivandas aged about 9 years a share of one anna six pies, Chiranjivi Chandulal Harjivandas about 6 years a share of one anna six pies and chiranjivi Rameshchandra Harjivandas aged about five years a share of one anna six pies making in all share of eight annas in a rupee and in that manner having considered their shares the assets of the first partner are to be divided amongst them and they are to be intoduced as partners in the business but so long as Chiranjivi Mansukhlal, Narendrakumar, Chandulal and Rameshchandra are minors they are to be admitted to the benefits of the partnership with shares in profits only and if in any year the partnership sustains a loss the loss coming to the share of minor shall be borne by Bai Lilavati Harjivandas from her assets. In case of death of any of the parties named herein the other partner are at liberty to divide his share amongst the other parties as they think fit."

The firm thereafter carried on business on the terms and conditions recorded in the deed of partnership until the death of Vithaldas Dhanji which occurred on or about 29th December, 1954. As result of the death of Vithaldas Dhanji, the firm was dissolved but the assessee continued to carry on the business as sole proprietor after the death of Vithaldas Dhanji. Now under clause (16) of the deed of partnership the assessee''s wife and minor sons were entitled to the amount standing to the credit of the capital account of Vithaldas Dhanji in the properties set out in the clause and the amount of Rs. 6,568-5-0 standing to the credit of the capital account of Vithaldas Dhanji at the time of his death was according divided between the assessee''s wife and minor sons in those proportions and then amount coming to the share of each of each of them was credited to his or her account, as the case may be, in the books of account of the business on the basis that such amount belonged to him or her, as the case may be, and this was agreed to between the parties. The assessee''s wife and minor sons were also entitled under clause (16) of the deed of partnership to the share of Vithaldas Dhanji in the goodwill of the business in the same proportions and the wife was entitled to be admitted as a partner and the minor sons were entitled to be admitted to the benefits of the partnership in the share of Vithaldas Dhanji, the share of Vithaldas Dhanji to be divided between them again in the same proportions with this qualification that, in case of loss, the share otherwise going to the minor sons should be borne by the wife. An agreement in writing dated 24th March, 1955, Was however made between the assessee on the one hand and the assessee''s wife and minor sons on the under which the assessee''s wife and minor sons stated they would not join the business as partner or be admitted to the benefits of the partnership and agreed that the assessee should be entitled to continue to carry on the business as sole proprietor or by taking other in partnership with him and that so for as the share of Vithaldas Dhanji in the goodwill was concerned - to which the wife and minor sons were entitled in the proportions set out in clause (16) of the deed of partnership - the assessee should be entitled to use and enjoy the same and in consideration thereof the assessee should pay to the wife and minor sons with effects from 29th December, 1954, the following amounts pay year by way of guaranteed profits.

Rs. Lilavati Harjivandas 7,500 Mansukhlal Harjivandas 5,625 Narendrakumar Harjivandas 5,625 Chandulal Harjivandas 5,625 Rameshchandra Harjivandas 5,625 ---------- 30,000 ----------

was provided by the agreement that, if the assessee made any breach of the terms an condition of the agreement, the assessee''s wife and minor sons would be entitled to insist on their original right under clause (16) of the deed of partnerships, The agreement was initially for the period up to Aso Vad Amas, 2013, but it was provided that after the expiration of such period the agreement shall continue in force unless either party to the agreement gave one month''s notice terminating the agreement. Pursuant to the agreement the assessee paid the aforesaid amount to his wife and minor sons every with effects from 29th December, 1954. In the course of the assessment for the assessment years 1956-57, 1957-58 and 1958-59, it was claimed that the aforesaid amounts aggregating to Rs. 30,000 paid by the assessee to his wife and minor sons were allowable deductions u/s 10(2)(xv) since they represented rent or fee for the use of Vithaldas Dhanji''s share of the goodwill which belonged to the wife and minor sons under clause (16) of the deed of partnership. The firm having come to an end and the assessee having started carrying on business as sole proprietor from December 29, 1954, during the currency of Samvat Year 2011, being the year of account relevant to the assessment year 1956-57, the Income Tax officer for the sake of convenience proceeded to determine the income of the business for the whole year in the case of the firm and then to apportion the income between the firm and the assessee on proportionate time basis and the claim for allowance of the aforesaid amount for the assessment years 1956-57 was, therefore, made in the assessment of the firm. In respect of the subsequent two assessment years, however, the claim for allowance was made by the assessee himself in the course of his assessment for those assessment years. The claim for all the three assessment years was negatived by the Income Tax Officer and on appeal by the Appellate Assistant Commissioner but on further appeal the Tribunal took the view that the amounts paid by the assessee to this wife and minor sons under the agreement were by way of rent or fee for use of Vithaldas Dhanji''s share of the goodwill and, therefore, Constituted revenue expenditure laid out wholly and exclusively for the purpose of the business of the assessee and were accordingly allowable as deduction u/s 10(2)(xv). This decision of the Tribunal is now challenged before us on the present reference made at the instance of the Commissioner. It is a consolidated reference made on three reference application, one in respect of each assessment year and since the claim for deduction in respect of the first assessment year was made on behalf of the firm, the firm is the respondent in the reference application for that assessment year and the claim for deduction is respect of the sub-sequent two assessment years being made by the assessee, the assess is the respondention in the reference applications for those assessment years. The question referred to us for our opinion is, however, common to all the reference applications and it is : Whether the amounts paid by the assessee to his wife and minor sons are allowable deductions in computing the profits of the business u/s 10(2)(xv) ?

Section 10 lays down the rules for computation of profits and gains of business, profession or vocation. Sub-section 10 provides that the tax shall be payable by an assessee under the head "Profits and gains of business, profession or vocation" in respect of the profits or gain of any business, profession or vocation carried on by him. Sub-section (2) of section 10 says what allowance shall be taken into account in computing such profits or gain and one of the allowances is that set out in section 10(2)(xv), which runs in the following terms : "(xv) Any expenditure (not being an allowance of the nature described in any of the clause (i) to (xiv) inclusive and not being in the nature of capital expenditure or personal expenses of the assessee) laid out or expended wholly and exclusively for the purposes of such business, profession or vocation."

Section 10(2)(xv) sets out several conditions which must be fulfilled before an amount paid by an assessee can qualify as an allowable expenditure under that section, but it is not necessary to refer to all those conditions, since the only condition which according to the revenue was not fulfilled in the present case was the condition which requires that the amount shall be laid out or expended wholly and exclusively for the purpose of business. The fulfillment of the other conditions was not disputed on behalf of the revenue. The only question which we are, therefore, called upon to consider is whether the amounts paid by the assessee to his wife and minor sons could be said to be laid out or expended wholly and exclusively for the purpose of the business of the assessee. We shall presently examine this question but, before we do so, it is necessary to advert to one other aspect which was touched in the course of the arguments but was not ultimately pressed on behalf of the revenue and that related to the character of the expenditure, namely whether the expenditure involved in payment of the amounts was capital expenditure or revenue expenditure. In order to fall within section 10(2)(xv), one of the conditions which is required to be satisfied is that the expenditure must not be capital expenditure and in view of the fact that the amounts were paid for acquisition of the goodwill which would of course be a permanent or enduring asset but by way of rent or fee for the use of the goodwill, it was conceded on behalf of the revenue, and in our opinion, rightly, that the expenditure was revenue expenditure. In a similar case reported in Vithaldas Thakordas & Co. v. Commissioner of Income Tax where the question was whether a certain payment made by the assessee to the widow of one Vithaldas under an agreement under which the widow agreed to allow the assessee to use the name of Vithaldas for the purpose of the business of the assessee and in consideration thereof the assessee agreed to pay to widow out of the net profits of the business an amount equivalent to two annas in a rupee, was capital expenditure or revenue expenditure, Chagla C.J., as he then was, 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 profits 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 it had paid the amount fixed for the goodwill by certain instalments, each instalment 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.''

These observation were quoted with approval by the Madras High Court in the case of S. Kupuswami v. Commissioner of Income Tax and, having regard to these observations, the inevitable conclusion which must follow is that the disbursement of the amounts by the assessee to his wife and minor sons under the agreement was revenue expenditure and not capital expenditure.

That takes us to the main question in dispute between the parties, namely, whether the amounts paid by the assessee were laid out or expended wholly and exclusively for the purpose of the business of the assessee within the meaning of section 10(2)(xv). It was contended on behalf of the assessee that the finding of the Tribunal on this question was in his favour and that being a finding of fact could not be assailed before us unless the revenue was in a position to show that it was not based on any evidence at all or was unreasonable or perverse which was admittedly not the case. In support of this contention reliance was placed on certain observations contained in the decision of the Supreme Court in Commissioner of Income Tax v. Chandulal Keshavlal & Co. where Kapur J., delivering the judgment of the court, said :

"... in every case it is a question of fact whether the expenditure was expended wholly and exclusively for the purpose of trade or business of the assessee. In the present case the finding is that it was laid out for the purpose of the assessee''s business and there is evidence to support this finding."

Now these obsevation at first blush and read outside the context of the facts, do seem to lend support to the contention of the assessee that the question whether an amount is expended wholly and exclusively for the purpose of the trade or business of the assessee is a question of fact but these observations were explained by the Supreme Court in the subsequent decision in Commissioner of Income Tax v. Royal Calcutta Turf Club, as not laying down any such proposition and it was pointed out that these observations must be read in the context and if they were so read, it was clear that they were meant to give finality only to the findings of fact reached by the Tribunal and were not intended to lay down that the question whether on the facts so found the amount can be said to be wholly and exclusively laid out for the purpose of the assessee''s business is a question of fact immune from attack on a reference. The Supreme Court in this decision reaffirmed what was stated by it in Eastern Investment Ltd. v. Commissioner of Income Tax, namely, that "though the question must be decided on the facts of each case, the final conclusion is one of law." The question whether on the facts found by the Tribunal the amount paid by the assessee is wholly and exclusively laid out or expended for the purpose of the business of the assessee is, therefore, always a question of law which can be examined by the court in the exercise of its advisory jurisdiction u/s 66(1). Turning to the merits of the question, it may be pointed out at the outset that in the present case the genuineness or bona fides of the agreement was not in question nor was it the contention of the revenue that the amounts agreed to be paid by the assessee to his wife and minor sons were excessive or unreasonable, assuming such a contention could in law be raised by the revenue in answer to a claim for deduction u/s 10(2)(xv) - a matter on which we do not express any opinion. The finding of fact reached by the Tribunal was that the amounts in question were agreed to be paid by the assessee to his wife and minor sons as rent or fee for the use of Vithaldas Dhanji''s share of the goodwill to which the wife and minor sons were entitled under clause (16) of the deed of partnership. If this finding of fact stands, as it must, it cannot be seriously disputed that the amounts paid by the assessee constituted expenditure laid out wholly and exclusively for the purpose of the business of the assessee. The decision of the Bombay High Court in Vithaldas Thakordas & Company''s case would directly cover the point. In that case also the assessee agreed to pay to the widow of Vithaldas two annas share out of the net profits of the business in consideration of the widow allowing the assessee to use the name of Vithaldas for the purpose of the business of the assessee and the Bombay High Court held that the payment was a revenue expenditure incurred wholly and exclusively for the purpose of the business of the assessee. This decision should conclude the determination of the present question against the revenue, but the learned Advocate-General appearing on behalf of the revenue tried to point out what in his submission constituted an important distinction between the facts of that case and that facts of the present case. He urged that in the case before the Bombay High Court the widow of Vithaldas was a stranger so far as the assessee was concerned in the sense that she had nothing to do with the assessee''s business nor was she entitled to any right in respect of the assessee''s business and the transaction between her the assessee was a pure and simple transaction between two strangers under which one party agreed to give use of the goodwill belonging to her to the other party for a certain rent or fee. But in the present case, he submitted, the assessee''s wife was entitled to be admitted as a partner in the business and the assessee''s minor sons were entitled to be a admitted to the benefits of the partnership under clause (16) of the deed of partnership and when the assessee agreed to pay various amounts to his wife and minor sons, he did so not wholly and exclusively for the purpose of obtaining the use of their share of the goodwill but also for the purpose of getting them to agree not to exercise their right to join the business and it could not, therefore, be said that the amounts were expended wholly and exclusively for the purpose of the assessee''s business. The contention is certainly an ingenious one but we are afraid there is no merit in it. In the first place the contention runs counter to the finding of the Tribunal that the amounts were paid by the assessee as rent or fee for the use of the share of the goodwill belonging to the assessee''s wife and minor sons and consequentially for no other purpose. Secondly, even if we were to go behind this finding and examine the question on merits, we do not think the contention of the revenue can succeed. It overlooks the direct concern and direct purpose for which the amounts were paid by the assessee. It may be observed that on the death of Vithaldas Dhanji the assessee had, having regard to clause (16) of the deed of partnership, two alternatives if he wanted to continue to take advantage of the goodwill of the business. The assessee could either : (1) take his wife as a partner and admit his minor sons to the benefits of the partnership in which event he would get the use of their share of the goodwill; or (2) acquire their share of the goodwill for a price or obtain the use of it on payment of rent or fee if his wife and minor sons were not to join him in business. The assessee chose the later alternative and decided to continue the business as sole proprietor - a course to which his wife and minor sons were agreeable - and obtained the use of their share of the goodwill by agreeing to pay various amounts to them by way of rent or fee. Once it was agreed that the wife and minor sons would not join the assessee in business, the assessee had to obtain for the purpose of earning profits in the conduct of the business the use of their share of the goodwill, for otherwise he would not be able to make use of the goodwill and he, therefore, agreed to pay various amounts to his wife and minor sons by way of rent or fee for the use of their share of the goodwill. Of course, it is true that as a result of this arrangement the assessee''s wife was not admitted as a partner and the assessee''s minor sons were not admitted to the benefits of the partnership, but it was precisely because of this that the assessee had to obtain the use of the share of the goodwill belonging to his wife and minor sons and was required to pay diverse amounts to his wife and minor sons as rent or fee for obtaining the use of their share of the goodwill. The amounts paid by the assessee were, therefore, clearly laid or expended wholly and exclusively for the purpose of the business of the assessee and were allowable deductions u/s 10(2)(xv).

9.Our answer to the question referred to us is, therefore, in the affirmative. The Commissioner will pay the costs of the reference to the assessee.

Question answered in the affirmative.