DEVIDAS VITHALDAS & CO. versus C.I.T, BOMBAY CITY

Citation: [1972] 3 S.C.R. 215 · Decided: 28-01-1972 · Supreme Court of India · Bench: S.M. SIKRI · Disposal: Appeal(s) allowed

Cited by 1 judgment(s) · see the full citation network in Lexace

Judgment (excerpt)

A 
B. 
c 
0 
E 
G 
H 
DEVIDAS VI111ALDAS Ii: CO. 
v. 
C.I.T., BOMBAY CITY 
Janµnry 28, 1972 
[S. M. S!KRI, C.J., J, M. SHELAT, H. R. KHANNA AND 
G. K. MIT'.l'ER, JJ .] 
215 
Jm:ome-tax-Capital or Re.en"" 
ex1mtdltu~oodwill-D•ed of 
·dissolution of partnership reciting "sale" of goodwUI In conslUratlon of 
share in the profits--Payment not related to any lumINum fixed as pur-
cluue price-Duration of payment Indefinite and amount indt!(inite-
Payment made by vendee If admissible deduction a.J revenue expendi~. 
P and 
A carried on business as Chartered accountants in the . 
name of D.V. & Co.. On P retiring from plrtnership a deed 6f dissOlu-
tion was executed which provided that the business would be carried on 
by A. 
By clause 2 of the deed, P, who owned the rights and in!emt 
in the goodwill, "agreed to sell" the goodwill to A and "as consideration 
for and in full satisfaction of the purchase price of the goodwill" A was 
to ~y eight annas in the rupee in the net profits of the businoos payable . 
dunng the life time of P and after him during, the life time 'of his wife 
and then to their son during his life time. Clause 6 provided that in the 
event of A entering into pal'tnership or transferring or assigning his busV 
aell so long as the business was carried . on in the name of D.V. & Co.; 
the p:irtnership, the assignee or the transferee was to pay the share in 
the profits in the manner provided in cl. (2). A enla'ed into part:nttship 
with C, the deed of partnership reciting that the goodwill of the busineoa 
beloilged solely to P which A had "bought" in oonsideration of his agree. 
ins to pay a share of eight annas in lhe rupee ond that the parties thereto 
pay fh1' annas four pies share in the profits, by way of purchase price 
of the goodwill "" agreed by P. The firm paid to P's wife, after the 
death of P, various amounts during the years 1955-59. It clsimed that 
those amounts should be deducted in its assessmenl9 for . those years. 
Tho Income-tax Officer and the Appellate Assistant Commi'8loner re-
jected the claim holding that the payments were capital and not revenue 
payments and the tnulsaction evidenced by the deed of dissolution was 
one . ot outright sale. On appe9l, the Tribunal held that the payments 
constituted only fee oi' rent for the use of the goodwill so long a.s 
it 
was used and accordingly they 
were in the nature of revenue expendi-
ture. 
On reference the High Court answered in favour of the Revenue. 
Allowing th~ appeal, 
HELD : (Sikri CJ. Dissenting) On the facts of the ca.so the tranaao-
tion was a licence and not a sale of the goodwill; the disbursements in 
question, therefore, were in the nature of royalty and must be treated as 
admissible deduction. [232 BJ 
(i) There · is no single test of universal 
application for 
deciding 
the question whether an agreement is for payment of price in stlpufated 
instalments or folr making annual payment in the nature of income and, 
therefore, the Court has to look not only into the .document relating to 
the transaction, but also !he surrounding circumstances to decide its true 
nature, the n~me which the parties give to it being of little C'Onsequence. 
216 
SUPKEME COURT REPORTS 
( 1972] 3 S.C.R. 
This does not mean that the legal character of the transaction which is 
A 
1he !\()urce of the receipt in question can be ignored and substituted by 
what the taxing authority considers the substanc~ of the matter. [224 Bl 
Travancore Sugars a11d C/Jemicc./s Ltd. vs. C.l.T., (1966) 62 J.T.R. 
566, referred to. 
(ii) One of the tests c·ourts have applied in distinguishing between 
capital and revenue expenditure is whether the expenditure in question 
was for bringing into .existence an asset or an advantage of uan enduring 
nature'!, and is made "once and for all". 
It may be payable not neces-
s.arily '311 at once but even by instalments as against a recurrent expendi-
Jure in the nature of operational expenses. The question in such cases 
would be; is the expenditure the assessee's \\'orking expenditure laid out 
3S· part of the process of profit earning or a capital outlay necessary for 
the acquisition of a property dr rights of ~ permanent character the pos-
se!Sion of which is a condition of carrying on the trade. But the expres-
sions "enduring benefit'\ and rights of a permanent character are only 
descriptive_ and not definitive and are. relative in meaning, not synonymous 
with 'perpetual' ct 'ever1'3.Sting'. The expression "endu

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