The DCIT, Central Circle, Guntur V. M/s Gowtham Residential Junior College, Gudavalli

ITA 297/VIZ/2010

• Counselvise Citation: [2011] 119 COUNSELVISE.COM (IT) 7394 (ITAT-VISAKHAPATNAM)
• Duration Of Justice: 1 year(s) 3 month(s) 6 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 24-08-2011
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: DB
• Next Hearing Date: 12-04-2011
• Assessment Year: 2006-2007
• Appeal Filed On: 18-05-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: TH L PETER
• Keywords: Capital asset; Gift; Search and seizure; Document seized; Capital receipt; Documents seized; Revenue expenditure; Capital expenditure
• Section: 133A; 263; 132; 28

Judgement Text

ITA NOS.296&297/V/2010 GOWTHAM RESIDENTIAL JUNIOR COL LEGE, KRISHNA DIST. 1 IN THE INCOME TAX APPELLATE TRIBUNAL VISAKHAPATNAM BENCH, VISAKHAPATNAM BEFORE: SHRI SUNIL KUMAR YADAV, JUDICIAL MEMBER AND SHRI BR BASKARAN, ACCOUNTANT MEMBER ITA NO. 296&297 /VIZAG/ 20 10 ASSESSMENT YEAR S : 2005 - 06 & 2006 - 07 DCI T CENTRAL CIRCLE VIJAYAWADA VS. GOWTHAM RESIDENTIAL JUNIOR COLLEGE KRISHNA DIST. (APPELLANT) (RESPONDENT) PAN NO.AAEFG 4399L APPELLANT BY: SHRI TH.L. PETER, CIT(DR) RESPONDENT BY: SHRI C. SUBRAHMANYAM, CA DATE OF HEARNG: 14.7.2011 DATE OF PRONOU NCEMENT: 24 .8.2011 ORDER PER SHRI S.K. YADAV, JUDICIAL MEMBER:- THESE APPEALS ARE PREFERRED BY THE REVENUE AGAINS T THE ORDER OF THE CIT(A) PERTAINING TO THE ASSESSMENT YEAR 2005-06 & 2006-07 ON COMMON GROUNDS THAT CIT(A) IS NOT JUSTIFIED IN DELETING TH E ADDITION TREATING THE SAME AS A NON-COMPETE FEES PAID TO SHRI K. KOTESWARA RAO AS THE WORD GOODWILL IS CLEARLY MENTIONED IN MORE THAN ONE DOCUMENT I.E. MOU AND THE GUARANTEE DEED ETC. SINCE THE CONTROVERSY INVOLVED IN BOTH T HESE APPEALS ARE SAME AND THESE APPEALS WERE HEARD TOGETHER, WE PREFER TO ADJ UDICATE THESE APPEALS THROUGH THIS CONSOLIDATED ORDER FOR THE SAKE OF CON VENIENCE. 2. THE FACTS IN BRIEF BORNE OUT FROM THE RECORD ARE THAT THE ASSESSEE IS A PARTNERSHIP FIRM RUNNING A RESIDENTIAL COLLEGE FOR IMPARTING INTERMEDIATE EDUCATION. A SEARCH AND SEIZURE OPERATION U/S 132 OF THE INCOME-TAX ACT (HEREINAFTER CALLED AS AN ACT) WAS CONDUCTED IN T HE RESIDENTIAL PREMISES OF A PARTNERS OF THE FIRM AND OTHER CONNECTED CASES OF G OWTHAM GROUP ON 24.7.2006, WHILE A SURVEY OPERATION U/S 133A OF THE ACT WAS CARRIED OUT IN THE BUSINESS PREMISES OF THE ASSESSEE FIRM. ON THE BASIS OF THE SEIZED DOCUMENTS, BOOKS OF ACCOUNTS AND OTHER MATERIALS, P ROCEEDING U/S 153C WAS INITIATED IN RESPONSE TO WHICH THE ASSESSEE FILED A RETURN DECLARING INCOME OF ITA NOS.296&297/V/2010 GOWTHAM RESIDENTIAL JUNIOR COL LEGE, KRISHNA DIST. 2 ` 53,56,770/- AND ` 19,60,838/- FOR THE ASSESSMENT YEAR 2005-06 & 2006 -07 RESPECTIVELY AS WAS DECLARED IN THE ORIGINAL RETURN S OF INCOME. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE A.O. OBSERVED FROM THE SEIZED MATERIAL THAT 3 PARTNERS NAMELY SHRI K. KOTESWARA R AO, SMT. K. DURGA RANI AND SMT. VARALAKSHMI RETIRED W.E.F. 1.4.2003. AS P ER THE MOU EXECUTED BETWEEN THE RETIRING PARTNERS AND THE CONTINUING PA RTNERS, THE RETIRING PARTNERS WERE ENTITLED TO RECEIVE CASH OF ` 2.77 CRORES, LAND MEASURING AC. 4.62 AND GOODWILL OF ` 60 LAKHS. THE A.O. FURTHER CONSIDERING THE EXPLANATIONS OFFERED DURING THE ASSESSMENT PROCEEDI NGS CONCLUDED THAT SUM OF ` 60 LAKHS PAID BY THE ASSESSEE FIRM TO 3 RETIRING P ARTNERS THROUGH K. KOTESWARA RAO IN TWO INSTALMENTS NAMELY ` 40 LAKHS DURING THE PERIOD RELEVANT TO THE ASSESSMENT YEAR 2005-06 & ` 20 LAKHS DURING THE PERIOD RELEVANT TO ASSESSMENT YEAR 2006-07 WAS NOT IN THE NATURE OF NON COMPETE FEES AS CLAIMED BUT WAS ONLY PAYMENT TOWARDS GOODWI LL AND THE EXPENDITURE BEING CAPITAL IN NATURE. ACCORDINGLY, DISALLOWANCE OF ` 40 LAKHS AND ` 20 LAKHS WERE MADE IN BOTH THE ASSESSMENT YEARS. 3. THE ASSESSEE PREFERRED AN APPEAL BEFORE THE CIT( A) AND PLACED A HEAVY RELIANCE UPON THE CLAUSES OF THE MOU IN SUPPO RT OF HIS CONTENTION THAT THE AMOUNT PAID BY THE ASSESSEE WAS TOWARDS THE NON COMPETITION FEES AND NOT AS A GOODWILL. BEING CONVINCED WITH THE EXPLAN ATIONS OF THE ASSESSEE, THE CIT (A) TREATED THE PAYMENT TO BE MADE ON ACCOUNT O F NON-COMPETITION FEES AND TREATED IT TO BE REVENUE EXPENDITURE. 4. NOW THE REVENUE HAS PREFERRED AN APPEAL BEFORE T HE TRIBUNAL WITH THE SUBMISSION THAT AS PER THE MOU, THE PAYMENT WAS MAD E BY THE ASSESSEE TO K. KOTESWARA RAO WAS ON ACCOUNT OF GOODWILL ACQUIRE D BY THE EDUCATIONAL INSTITUTIONS OVER A PERIOD OF TIME. IN CLAUSE NO.6 OF THE MOU, IT HAS CATEGORICALLY STATED THAT ` 60 LAKHS WAS TO BE PAID TOWARDS GOODWILL IN TWO INSTALMENTS I.E. FIRST INSTALMENT OF ` 40 LAKHS ON OR BEFORE 15.7.2004 AND SECOND INSTALMENT OF ` 20 LAKHS ON OR BEFORE 15.7.2005. THOUGH THERE IS A CLAUSE WHICH RESTRICT THE RETIRING PARTNERS FROM IN VOLVING IN EDUCATIONAL ACTIVITIES UP TO AND UNTIL 1 ST APRIL, 2007 BUT NOTHING HAS BEEN PAID AS A NON- COMPETITION FEES TO K. KOTESWARA RAO. OUR ATTENTIO N WAS ALSO INVITED TO THE ITA NOS.296&297/V/2010 GOWTHAM RESIDENTIAL JUNIOR COL LEGE, KRISHNA DIST. 3 FACT THAT K. KOTESWARA RAO HAS SHOWN THE RECEIPT OF THIS AFORESAID AMOUNT TOWARDS THE GOODWILL WHICH WAS ACCEPTED BY THE A.O. IN THE INSTANT CASE, THE PAYER CLAIMED THIS PAYMENT TO BE AS A NON-COMPE TITION FEES. THE LD. D.R. FURTHER INVITED OUR ATTENTION THAT AFTER THE R ECEIPT OF THE AFORESAID AMOUNT, SHRI K. KOTESWARA RAO HAS SET UP AN EDUCATI ONAL INSTITUTION AND WAS ENGAGED IN IMPARTING EDUCATION AGAINST WHICH CIVIL SUIT WAS FILED FOR PERMANENT INJUNCTION RESTRAINING KOTESWARA RAO FROM INVOLVING HIMSELF IN THE ACTIVITIES OF IMPARTING EDUCATION. BUT THE SAID CI VIL SUIT WAS DISMISSED. THE CONDUCT OF THE RECIPIENT AND THE PAYER ITSELF SPEAK S THAT NOTHING WAS PAID AS A NON-COMPETITION FEES RESTRAINING K. KOTESWARA RAO FROM INVOLVING HIMSELF IN STARTING OR RUNNING ANY JUNIOR COLLEGE OR IMPARTING EDUCATION UPTO AND UNTIL 1.7.2007. THEREFORE, THE ASSESSING OFFICER HAS RIG HTLY TREATED THE PAYMENT TO BE MADE ON ACCOUNT OF A GOODWILL AND NOT AS A NON-C OMPETITION FEES. THE CIT(A) WAS SWAYED WITH THE ARGUMENTS OF THE ASSESSE ES AND HAS ACCEPTED THEIR CLAIM WITHOUT LOOKING TO THE DEED OF GUARANTE E. 5. THE LD. COUNSEL FOR THE ASSESSEE ON THE OTHER HA ND HAS SUBMITTED THAT A SPECIFIC CLAUSE WAS INSERTED IN THE MOU THAT K. K OTESWARA RAO OR THE RETIRING PARTNER SHALL NOT DIRECTLY OR INDIRECTLY I NVOLVE IN STARTING OR RUNNING ANY JUNIOR COLLEGE UP TO AND UNTIL 1 ST JULY, 2007. THOUGH THIS CLAUSE IS AN INDEPENDENT CLAUSE BUT IT HAS TO BE READ ALONG WITH THE CLAUSE NO.6 IN WHICH THE ASSESSEE HAS AGREED TO PAY A SUM OF ` 60 LAKHS TO K. KOTESWARA RAO AS A PART OF GOODWILL. THE WORD GOODWILL WAS LOOSELY USED IN THIS MOU. HE HOWEVER, PLACED A HEAVY RELIANCE UPON THE ORDER OF THE CIT(A). IN SUPPORT OF HIS CONTENTION THAT NON-COMPETE FEES IS AN ALLOWABL E EXPENDITURE, HE PLACED A RELIANCE UPON THE FOLLOWING JUDGEMENTS: 1. SAMRAT CHEM. TECHNOLOGY LTD. VS. ITO 97 TTJ 818 2. JCIT VS. SYNERGY CREDIT CORPORATION LTD. 2 SOT 75 3. CIT VS. ISHER LTD. 302 ITR 249 6. THE LD. COUNSEL FOR THE ASSESSEE FURTHER CONTEND ED THAT IF THE CONTENTION OF THE ASSESSING OFFICER IS PRESUMED FOR A WHILE TO BE CORRECT THAT GOODWILL WAS ACQUIRED BY THE FIRM RESULTING IN ENDU RING ADVANTAGE OF CAPITAL NATURE THE SO CALLED ADVANTAGE PERCEIVED BY THE ASS ESSING OFFICER, ENDED FOR ITA NOS.296&297/V/2010 GOWTHAM RESIDENTIAL JUNIOR COL LEGE, KRISHNA DIST. 4 THE FINANCIAL YEAR 2006-07 AS SUBSEQUENTLY BUSINESS WAS NOT DONE BY THE ASSESSEE. THE BUSINESS WAS CONTINUED BY THE ASSESS EE FIRM ONLY TILL THE DATE OF RESTRICTIVE COVENANTS THAT K. KOTESWARA RAO STIP ULATED THE RESTRAINT CLAUSE OF NOT SETTING UP BUSINESS AND RESTRICTING HIM TO U SE NAME GOWTHAM TILL 1.7.2007 IN THE VICINITY OF THE BUSINESS PREMISES O F THE ASSESSEE. THE ASSESSEE HAS NOT ACQUIRED ANY ALLEGED GOODWILL HAVI NG ENDURING BENEFIT SO AS TO BE TREATED AS A CAPITAL EXPENDITURE. IT WAS FUR THER CONTENDED THAT THE PAYMENT IS NOT MADE TOWARDS PURCHASE OF GOODWILL WH EN A PARTNER RETIRES FROM A FIRM. IF AT ALL THE PAYMENT IS MADE TOWARDS GOODWILL, IT SHOULD BE FOR THE RIGHT TO EXCLUSIVELY USE THE SAME WHICH THE FIR M ALREADY POSSESSES AND WHICH IS AN ALLOWABLE EXPENDITURE. IN SUPPORT OF T HIS PROPOSITION, HE PLACED A RELIANCE UPON THE FOLLOWING JUDGEMENTS: 1. CIT VS. DAILYBIDI SALES AGENCIES 235 ITR 54 2. VITHALDAS AND COMPANY VS. CIT 14 ITR 822 3. BHAKTI MILL BIDI FACTORY VS. CIT 219 ITR 6 4. CIT VS. DHARAMPAL 162 ITR 134 5. MOHANLAL HARSHIDAS VS. CIT 188 ITR 6. MEHRA KHANNA VS. CIT 250 ITR 436 7. HAVING HEARD THE RIVAL SUBMISSIONS AND FROM A CA REFUL PERUSAL OF THE ORDERS OF THE LOWER AUTHORITIES AND DOCUMENTS PLACE D ON RECORD, WE FIND THAT THE ASSESSEE WAS A PARTNERSHIP FIRM IN WHICH SHRI K OTESWARA RAO AND HIS FAMILY MEMBERS WERE PARTNERS AND THEY HAVE RETIRED. AT THE TIME OF RETIREMENT OF THESE PARTNERS, A MOU WAS EXECUTED. AS PER THE MOU, THE CONTINUING PARTNER HAVE AGREED TO PAY A GOODWILL OF ` 60 LAKHS IN TWO INSTALMENTS I.E. FIRST INSTALMENT OF ` 40 LAKHS ON OR BEFORE 15.7.2004 AND THE SECOND INSTALMENT OF ` 20 LAKHS ON OR BEFORE 15.7.2005. IN CLAUSE 6 & 7 IT WAS FURTHER CLARIFIED THAT THE ABOVE AMOUNTS PAYABL E BY THE PARTY NO.2 I.E. CONTINUING PARTNER, HERETO SHALL NOT BEAR ANY INTER EST FROM THE DATE OF RETIREMENT. THEREFORE, THE CLAUSE NO.6 & 7 SIMPLY TALKS ABOUT THE PAYMENT OF ` 60 LAKHS AS GOODWILL. NOTHING HAS BEEN STATED IN THIS CLAUSE WITH REGARD TO THE NON-COMPETE FEES OR ANY CONDITION WHICH PROHIBI TS THE RECIPIENTS OR RETIRING PARTNERS FROM INVOLVING THEMSELVES IN THE STARTING OR RUNNING ANY JUNIOR COLLEGE OR EDUCATIONAL INSTITUTIONS. THE CL AUSE NO.8 WAS INDEPENDENT CLAUSE OF THE MOU WHICH SAYS THAT THE RETIRING PART NERS HERE TO SHALL NOT ITA NOS.296&297/V/2010 GOWTHAM RESIDENTIAL JUNIOR COL LEGE, KRISHNA DIST. 5 DIRECTLY OR INDIRECTLY INVOLVE IN STARTING OR RUNNI NG ANY JUNIOR COLLEGE UP TO AND UNTIL 1 ST JULY, 2007. IN THIS CLAUSE, NO REFERENCE WAS MADE EITHER OF THE PAYMENT OF THE ` 60 LAKHS OR TO CLAUSE NO.6. THEREFORE, WE ARE OF THE VIEW THAT ALL THESE CLAUSES SHOULD BE READ INDEPENDENTLY . FOR THE SAKE OF REFERENCE, WE EXTRACT CLAUSE NO.6, 7 & 8 AS UNDER: 6. THAT ON THE COMPLETE RETIREMENT PARTY NO.(1) HE RETO, THE PARTY NO.(2) HERETO, HAS AGREED TO PAY A GOODWILL OF ` 60,00,000.00 (RS. SIXTY LAKHS ONLY) IN TWO INSTALMENTS I.E. THE FIRST INSTA LMENT OF ` 40,00,000.00 ON OR BEFORE 15 TH JULY, 2004 AND THE SECOND INSTALMENT OF ` 20,00,000.00 ON OR BEFORE 15 TH JULY, 2005. 7. THAT THE ABOVE AMOUNTS PAYABLE BY THE PARTY NO. (2) HERETO SHALL NOT BEAR ANY INTEREST FROM THE DATE OF RETIREMENT. 8. THAT THE PARTY NO.(1) HERETO SHALL NOT DIRECTLY OR INDIRECTLY INVOLVE IN STARTING OR RUNNING ANY JUNIOR COLLEGE UPTO AND UNT IL 1 ST JULY, 2007. 8. AFTER THIS MOU A DEED OF RETIREMENT WAS ALSO EXE CUTED ON 17.9.2003 IN WHICH IT HAS BEEN STATED THAT THE RETIRING PARTNERS HAVE AGREED TO RECEIVE THE OUTSTANDING BALANCE IN THEIR CAPITAL ACCOUNT PART F ROM A CONSOLIDATED AMOUNT OF A GOODWILL OF ` 60 LAKHS TO BE PAID TO K. KOTESWARA RAO. IN THIS CLAUSE, THERE IS NO REFERENCE EITHER OF A NON-COMPETITION F EES OR OF RESTRAINT CLAUSE THAT RETIRING PARTNERS SHALL NOT INVOLVE IN STARTIN G OR RUNNING ANY JUNIOR COLLEGE. FOR THE SAKE OF REFERENCE WE EXTRACT THE CLAUSE NO.2 OF THE RETIREMENT DEED AS UNDER: THE RETIRING PARTNERS HERETO HAVE AGREED TO RECEIVE THE OUTSTANDING BALANCE IN THEIR CAPITAL ACCOUNTS APART FROM A CONS OLIDATED AMOUNT OF GOODWILL OF ` 60,00,000/- TO BE PAID TO SRI K. KOTESWARA RAO, ON E OF THE RETIRING PARTNERS. THE SAID AMOUNT IS TO BE PAID A T ` 40,00,000/- ON OR BEFORE 15 TH JULY, 2004 AND BALANCE AMOUNT OF ` 20,00,000/- ON OR BEFORE 15 TH JULY, 2005 WHICH WILL BE INTEREST FREE. 9. A DEED OF GUARANTEE WAS ALSO EXECUTED BY THE CON TINUING PARTNERS GIVING A GUARANTEE TO SHRI K. KOTESWARA RAO AND THE OTHERS, RETIRING PARTNERS, THAT THIS AMOUNT OF ` 60 LAKHS IS TO BE PAID BEFORE THE SPECIFIED DATE A S GOODWILL AMOUNT. IN THIS DEED OF GUARANTEE, NOTHIN G HAS BEEN STATED WITH REGARD TO THE RESTRICTIVE COVENANTS. THE RELEVANT NARRATION IN THIS REGARD IN DEED OF GUARANTEE IS EXTRACTED HEREUNDER FOR THE SA KE OF REFERENCE: IN VIEW OF THE ABOVE UNDERSTANDING, WE THE UNDER SI GNED HAVE ISSUED THE ABOVE MENTIONED GOODWILL AMOUNT BY WAY O F THE FOLLOWING CHEQUES TO BE ENCASHED IN TWO INSTALMENTS. ITA NOS.296&297/V/2010 GOWTHAM RESIDENTIAL JUNIOR COL LEGE, KRISHNA DIST. 6 1. ` 40,00,000/- (RS. FORTY LAKHS ONLY) PAYABLE ON 15.7 .2004, VIDE CHEQUE NUMBER 262611 DRAWN ON INDIAN OVERSEAS BANK, RING ROAD, VIJAYAWADA IN FAVOUR OF SRI K. KOTESWARA RAO. 2. ` 20,00,000/- (RS. TWENTY LAKHS ONLY) PAYABLE ON 15. 7.2005, VIDE CHEQUE NUMBER 262612 DRAWN ON INDIAN OVERSEAS BANK, RING ROAD, VIJAYAWADA IN FAVOUR OF SRI K. KOTESWARA RAO. 10. FROM A CONJOINT READING OF ALL THESE DOCUMENTS, IT IS CLEAR THAT THIS AMOUNT OF ` 60 LAKHS WAS PAID TO KOTESWARA RAO AS AN AMOUNT OF GOODWILL ON RELINQUISHMENT OF HIS SHARE IN GOODWILL ACQUIRED OV ER A PERIOD OF TIME BY THE EDUCATIONAL INSTITUTIONS. THERE IS NO CLAUSE EITHE R IN THE MOU EXECUTED ON 1 ST APRIL, 2002 OR DEED OF RETIREMENT OR DEED OF GUARAN TEE THAT CERTAIN AMOUNT IS BEING PAID AS NON-COMPETITION FEES AND FOR THE VIOL ATION OF RESTRICTIVE COVENANTS OR THE PROHIBITORY CLAUSE, THE RETIRING P ARTNERS WOULD BE LIABLE TO PAY A CERTAIN AMOUNT TO THE CONTINUING PARTNERS. N O DOUBT, A SPECIFIC CLAUSE IS AVAILABLE IN THE MOU AND THE DEED OF RETIREMENT THAT RETIRING PARTNERS SHALL NOT DIRECTLY OR INDIRECTLY INVOLVE IN STARTING OR R UNNING ANY OTHER JUNIOR COLLEGE UPTO AND UNTIL 1 ST JULY, 2007 BUT NOTHING HAS BEEN STATED IN ANY OF T HE DOCUMENT THAT IF THE RETIRING PARTNERS VIOLATE THES E TERMS OR CONDITIONS, THEY WOULD BE LIABLE TO PAY CERTAIN AMOUNT TO THE SURVIV ING PARTNERS. IN THE ABSENCE OF SUCH SPECIFIC CLAUSE, IT CANNOT BE SAID THAT WHATEVER AMOUNT IS PAID ON ACCOUNT OF GOODWILL IS A NON-COMPETITION FE ES FOR RESTRAINING THE RETIRING PARTNERS FROM INVOLVING THEMSELVES IN THE EDUCATIONAL ACTIVITIES. THESE FACTS ARE ALSO EVIDENT FROM THE CIVIL SUIT FI LED BY THE CONTINUING PARTNERS AGAINST THE RETIRING PARTNERS WHEN THE RETIRING PAR TNERS HAD STARTED THE EDUCATIONAL ACTIVITIES BY SETTING UP AN EDUCATIONAL INSTITUTION. IN THE ABSENCE OF SPECIFIC CLAUSE IN THE MOU AND THE DEED OF RETIR EMENT THAT THE RETIRING PARTNERS ARE LIABLE TO PAY SOMETHING TO THE CONTINU ING PARTNERS OR TO FACE SOME PENAL ACTION, THE CIVIL COURT HAS DISMISSED TH E SUIT ON THE GROUND THAT THIS PROHIBITORY COVENANT IS AGAINST THE PUBLIC POL ICY. IF ALL THESE FACTS ARE TO BE VIEWED SIMULTANEOUSLY, WE WOULD FIND THAT THOUGH THERE IS A CLAUSE IN THE MOU AND IN THE DEED OF RETIREMENT, THE RETIRING PAR TNERS HAD NO INTENTION TO RESTRAIN THEMSELVES FROM INVOLVING IN THE EDUCATION AL ACTIVITIES AS THERE WAS NO PENAL PROVISION FOR THEM. ITA NOS.296&297/V/2010 GOWTHAM RESIDENTIAL JUNIOR COL LEGE, KRISHNA DIST. 7 11. WE ARE ALSO CONSCIOUS ABOUT THE FACT THAT ABOUT FEW DAYS BACK, THE APPEAL FILED BY K. KOTESWARA RAO ON THE SAME ISSUE WAS HEARD AND IN THAT APPEAL, K. KOTESWARA RAO CLAIMED THE RECEIPT OF ` 60 LAKHS ON ACCOUNT OF GOODWILL. IN THAT CASE, THE ASSESSING OFFICER HAS ACCEPTED THE CLAIM OF THE ASESSEES BUT IT WAS REVISED U/S 263 OF THE ACT BY T HE CIT AND THE CIT WAS OF THE VIEW THAT THE AMOUNT RECEIVED BY THE ASSESSEE W AS ON ACCOUNT OF NON- COMPETITION FEES AND AS SUCH CHARGEABLE TO TAX U/S 28(VA)(A) OF THE ACT. IN THAT APPEAL, WE HAVE EXAMINED THIS ISSUE IN DETAIL AND ARRIVED AT A CONCLUSION THAT THE AMOUNT RECEIVED BY THE ASSESSEE IS NOTHING BUT AN AMOUNT OF GOODWILL RECEIVED ON RELINQUISHMENT OF THE SHARES I N THE GOODWILL, ACQUIRED OVER A PERIOD OF TIME BY THE EDUCATIONAL INSTITUTIO NS, BY THE RETIRING PARTNERS. THE RELEVANT OBSERVATION OF THE TRIBUNAL IS EXTRACT ED HEREUNDER FOR THE SAKE OF REFERENCE: 7. HAVING HEARD THE RIVAL SUBMISSIONS AND FROM A C AREFUL PERUSAL OF THE ORDERS OF THE LOWER AUTHORITIES, WE FIND THAT THE C ONTROVERSY REVOLVES AROUND THE MOU EXECUTED BETWEEN THE RETIRING PARTNERS AND THE SURVIVING PARTNERS. IN CLAUSE 6 OF THIS MOU, IT WAS AGREED AMONG THE PA RTIES THAT THE SURVIVING/CONTINUING PARTNERS WOULD PAY A GOODWILL OF ` 60 LAKHS IN TWO INSTALMENTS I.E. THE FIRST INSTALMENT OF ` 40 LAKHS ON OR BEFORE 15.7.2004 AND THE SECOND INSTALMENT OF ` 20 LAKHS ON OR BEFORE 15.7.2005. 8. THERE IS ONE MORE CLAUSE I.E. CLAUSE NO.8 WHICH SAYS THAT THE PARTY NO.1 I.E. RETIRING PARTNERS HERE TO SHALL NOT DIREC TLY OR INDIRECTLY INVOLVE IN STARTING OR RUNNING ANY JUNIOR COLLEGE UPTO AND UN TIL 1 ST JULY, 2007. BOTH THE CLAUSES I.E. CLAUSE NOS.6&7 ARE INDEPENDENT CLAUSES AND NOWHERE IT HAS BEEN MENTIONED IN EITHER OF THE CLAUSE THAT THE AFORESAI D PAYMENT IS MADE WITH A CONDITION THAT THE ASSESSEE SHALL NOT DIRECTLY OR I NDIRECTLY INVOLVE IN STARTING OR RUNNING ANY JUNIOR COLLEGE UPTO AND UNTIL 1 ST JULY, 2007. BOTH THE CLAUSES ARE TO BE INTERPRETED INDEPENDENTLY. THE INTENTION OF THE ASSESSEE IS ALSO CLEAR FROM THE FACTS THAT AFTER THE RECEIPT OF THE AFORES AID AMOUNT, HE SET UP THE EDUCATIONAL INSTITUTIONS. AGAINST THIS ACTIVITY OF THE ASSESSEE, THE CONTINUING PARTNERS FILED A CIVIL SUIT SEEKING PERMANENT INJUN CTIONS RESTRAINING THE ASSESSEE FROM HAVING ANY JUNIOR COLLEGE EITHER RESI DENTIAL OR NON-RESIDENTIAL AND TO IMPART COACHING TO STUDENTS APPEARING FOR VA RIOUS COMPETITIVE EXAMINATIONS, SUCH AS OF THE SURVIVING PARTNERS, IN ANY MANNER, WHATSOEVER INCLUDING USING THE SURVIVING PARTNERS POPULAR NAME GOWTHAM AND ITS LOGO UP TO AND UNTIL 1.7.2007. THIS CIVIL SUIT WAS DISM ISSED BY THE CIVIL COURT. THE COPY OF THE JUDGEMENT OF THE CIVIL COURT IS AVAILAB LE AT PG.NO.16 TO 27 OF THE COMPILATION OF THE ASSESSEE. 9. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, A S PECIFIC QUERY WAS RAISED BY THE ASSESSING OFFICER VIDE ITS LETTER DAT ED 13.10.2008 ASKING THE ITA NOS.296&297/V/2010 GOWTHAM RESIDENTIAL JUNIOR COL LEGE, KRISHNA DIST. 8 ASSESSEE TO EXPLAIN WHY THIS AMOUNT RECEIVED SHOULD NOT BE BROUGHT TO TAX AS PROFIT IN TERMS OF SECTION 28 OF THE INCOME-TAX ACT 1961. THE SPECIFIC QUERY RAISED TO THE ASSESSEE IS EXTRACTED HEREUNDER FOR T HE SAKE OF REFERENCE: NON-COMPETE FEE RECEIVED: ` 20,00,000/- DURING THE FINANCIAL YEAR RELEVANT TO THE ASSESSME NT YEAR 2006-07, YOU HAVE RECEIVED A SUM OF ` 20,00,000/- ON 15.7.2005, TOWARDS THE 2 ND INSTALMENT OF NON-COMPETE FEE IN TERMS OF A MEMORAN DUM DATED 1.4.2002 ENTERED INTO BETWEEN THE RETIRING AND EXISTING PART NERS OF GOWTHAM RESIDENTIAL JUNIOR COLLEGE. THIS IS EXCLUSIVELY RE CEIVED BY YOU DURING THE FINANCIAL YEAR RELEVANT FOR ASST. YEAR 2006-07. TH OUGH IT IS SHOWN IN THE RECEIPTS SIDE OF CASH FLOW STATEMENT, THE ABOVE REC EIPT IS NOT ADMITTED AS INCOME. IN THIS REGARD, YOUR ATTENTION IS DRAWN TO SECTION 28 OF THE I.T. ACT WHICH GOVERNS THE RECEIPT OF THE NATURE OF THE PAYM ENT RECEIVED WHICH IS EXCLUSIVELY RECEIVED BY YOU FOR NOT CARRYING OUT AN Y BUSINESS OF RUNNING ANY INSTITUTION UPTO 2007. AS THIS NON-COMPETE FEE FAL LS UNDER SECTION 28 OF ACT AND AS THE SAME WAS NOT ADMITTED AS INCOME, PLEASE EXPLAIN WHY THIS SHOULD NOT BE BROUGHT TO TAX AS PROFIT IN TERMS OF SECTION 28 OF INCOME-TAX ACT, 1961. 10. THE REPLY WAS FILED BY THE ASSESSEE VIDE ITS LE TTER DATED 3.11.2008. THE QUESTIONNAIRE AND RECEIPTS ARE AVAILABLE AT PG. NO.30 TO 44 OF THE COMPILATION OF THE ASSESSEE. IN REPLY DATED 3.11.2 008, IT WAS SPECIFICALLY STATED BY THE ASSESSEE THAT WHATSOEVER AMOUNT WAS R ECEIVED BY THE ASSESSEE IT WAS A COST OF GOODWILL RELINQUISHED BY THE ASSES SEE IN FAVOUR OF THE SURVIVING PARTNERS AND IT IS NOT A FEES FOR NON-COM PETITION. THE SPECIFIC REPLY GIVEN BY THE ASSESSEE IS ALSO EXTRACTED HEREUNDER F OR THE SAKE OF REFERENCE: NON COMPETE FEE . NO NON COMPETE FEE RECEIVED BY ME. I HAVE ENTITLE D FOR GOODWILL OF ` 60,00,000/- AS PER CLAUSE VI OF THE MEMORANDUM DATE D 1.4.2002 REFERRED BY YOUR GOODSELVES IN YOUR LETTER DATED 13.10.2008. C LAUSE VI OF THE MOU IS HEREWITH REPRODUCED. THAT ON THE COMPLETE RETIREMENT PARTY NO.(1) HERE TO, THE PARTY NO.(2) HERETO, HAS AGREED TO PAY A GOODWILL OF ` 60,00,000/- (RUPEES SIXTY LAKHS ONLY) IN TWO INSTALMENTS I.E. THE FIRST INSTALMENT OF ` 40,00,000/- ON OR BEFORE 15 TH JULY, 2004 AND THE SECOND INSTALMENT OF ` 20,00,000/- ON OR BEFORE 15 TH JULY, 2005. FROM THE ABOVE IT IS CLEAR THAT FIRM PAID ME GOODW ILL ONLY AND THE NOT FEES FOR NON COMPETITION. AS I AM THE PARTNER RETI RING I AM ENTITLED FOR THE SHARE IN THE ASSETS OF THE FIRM INCLUDING GOODWILL. MY SHARE OF GOODWILL WAS ASSESSED AT ` 60 LAKHS AND OUT OF WHICH ` 20 LAKHS WAS PAID. THIS CONSTITUTES CAPITAL RECEIPT IN MY HANDS. IN THIS CONNECTION I WISH TO BRING TO YOUR KIND NOTICE THE DECISION OF HONORABLE A.P. HIGH COURT IN THE CASE OF CIT VS. L. RAGHU KUMAR REPORTED IN 141 ITR 674. THIS DECISION WAS APPROVED BY THE HONORABLE SUPREME COURT IN THE CASE OF CIT VS. R. L INGMALLU RAGHUKUMAR REPORTED IN 247 ITR 801. COPIES OF THE DECISION CI TED ABOVE ARE HEREWITH ITA NOS.296&297/V/2010 GOWTHAM RESIDENTIAL JUNIOR COL LEGE, KRISHNA DIST. 9 ENCLOSED FOR YOUR RECORD AND KIND PERUSAL. THEREFO RE THERE IS NO QUESTION OF APPLICABILITY OF SECTION 28 OF THE I.T. ACT. 11. FROM A CAREFUL PERUSAL OF THE MATERIAL AVAILABL E ON RECORD, WE FIND THAT DURING THE COURSE OF ASSESSMENT PROCEEDINGS THE ASS ESSING OFFICER HAS EXAMINED THE ISSUE IN THE LIGHT OF EXPLANATIONS OF THE ASSESSEE AND THE RELEVANT DOCUMENT. HAVING CONVINCED WITH THE EXPLA NATIONS OF THE ASSESSEE THE ASSESSING OFFICER HAS ACCEPTED THE CLAIM OF THE ASSESSEES THAT THE AMOUNT RECEIVED WAS TOWARDS THE GOODWILL AND NOT A NON-COM PETITION FEES. IT IS ALSO A SETTLED POSITION OF LAW THAT ONCE THE ASSESSING O FFICER IS SATISFIED WITH THE EXPLANATION OF THE ASSESSEE AND ACCEPTED HIS CLAIM, THE A.O. IS REQUIRED TO RECORD ANY REASONS FOR HIS ACCEPTANCE IN THE ASSESS MENT ORDER AND HIS ORDER CANNOT BE REVISED U/S 263 OF THE ACT FOR THE SIMPLE REASON THAT A.O. HAS NOT DISCUSSED THE ISSUE AT ALL IN THE ASSESSMENT ORDER. WHAT IS REQUIRED TO BE SEEN IS THAT WHETHER THE ASSESSING OFFICER HAS JUDI CIOUSLY APPLIED HIS MIND AND HE HAS TAKEN A POSSIBLE VIEW. THE ORDER OF THE A.O. CAN ONLY BE REVISED DESPITE HIS APPLICATION OF MIND IF IT IS ESTABLISHE D THAT THE VIEW TAKEN BY THE ASSESSING OFFICER IS PERVERSE AND CONTRARY TO THE L EGAL POSITIONS. BUT THAT IS NOT THE CASE HERE. IT IS A QUESTION OF APPRECIATIO N OF FACTS AND THE DOCUMENTS AVAILABLE ON RECORD ALSO SPEAKS THAT THE AMOUNT RECEIVED BY THE ASSESSEES IS TOWARDS THE GOODWILL AND NOT A NON-COM PETITION FEES. THEREFORE, THE VIEW TAKEN BY THE ASSESSING OFFICER CANNOT BE C ALLED TO BE ERRONEOUS AND PREJUDICIAL TO THE INTEREST OF THE REVENUE. 12. WE HAVE ALSO EXAMINED THE CLAIM OF THE ASSESSEE ON MERIT AND WE FIND THAT IN THE MOU IN CLAUSE NO.6, IT HAS BEEN SPECIFI ED THAT THE SURVIVING PARTNERS WOULD PAY A GOODWILL OF ` 60 LAKHS IN TWO INSTALMENTS. THE FIRST INSTALMENT OF ` 40 LAKHS TO BE PAID ON OR BEFORE 15.7.2004 AND SEC OND INSTALMENT OF ` 20 LAKHS ON OR BEFORE 15.7.2005. NOWHERE IN THIS CLAUSE, IT HAS BEEN MENTIONED THAT THIS PAYMENT IS MADE TOWARD S THE NON-COMPETITION FEES. THERE IS ONLY A SEPARATE CLAUSE I.E. CLAUSE NO.8 WHICH SAYS THAT THE RETIRING PARTNERS SHALL NOT DIRECTLY OR INDIRECTLY INVOLVE IN THE STARTING OR RUNNING IN JUNIOR COLLEGE. THIS CLAUSE NO.8 DOES N OT HAVE ANY RELEVANCE WITH CLAUSE NO.6. MOREOVER, AFTER THE RECEIPT OF THE AF ORESAID AMOUNT, THE ASSESSEE HAS SET UP ITS EDUCATIONAL INSTITUTIONS AN D ENTERED INTO THE SAME ACTIVITIES IN WHICH THE SURVIVING PARTNERS ARE INVO LVED AGAINST WHICH A CIVIL SUIT WAS FILED FOR PERMANENT INJUNCTION RESTRAINING THE ASSESSEE FROM INVOLVING IN SAME ACTIVITIES. THIS CIVIL SUIT WAS DISMISSED BY A CIVIL COURT ON THE GROUND THAT THERE CANNOT BE A PROHIBITION AGAINST A PUBLIC POLICY. MEANING THEREBY, THOUGH THERE WAS AN INDEPENDENT CLAUSE IN THE MOU, BUT THE ASSESSEE HAD NO INTENTION NOT TO INVOLVE IN THE STARTING OR RUNN ING IN EDUCATIONAL INSTITUTIONS. THEREFORE, THE AMOUNT RECEIVED BY TH E ASSESSEE IS ON ACCOUNT OF RELINQUISHMENT OF HIS SHARE IN GOODWILL ACQUIRED BY THE EDUCATIONAL INSTITUTIONS OVER A PERIOD OF TIME IN FAVOUR OF SUR VIVING PARTNERS AND AS SUCH THE SAME IS NOT CHARGEABLE TO TAX. 13. IN THE CASE OF DCIT VS. VENKATA RAO (SUPRA), TH E TRIBUNAL HAS HELD RELYING UPON THE JUDGEMENT OF THE JURISDICTIONAL HI GH COURT IN THE CASE OF CIT VS. L. RAGHUKUMAR 141 ITR 674 (AP) AND CIT VS. P.H. PATEL 171 ITR 128 ITA NOS.296&297/V/2010 GOWTHAM RESIDENTIAL JUNIOR COL LEGE, KRISHNA DIST. 10 (AP) THAT THE AMOUNT RECEIVED OR RECEIVABLE BY A RE TIRING PARTNER IS NOT LIABLE TO BE TAXED IN VIEW OF THE LEGAL POSITION THAT THE WORD TRANSFER AS DEFINED IN SECTION 2(47) OF THE ACT, DOES NOT COVER THE CASE O F PARTNER RETIRING FROM THE FIRM AND RECEIPT OF ANY AMOUNT FROM RETIREMENT FROM PARTNERSHIP FIRM. 14. IN THE CASE OF CIT VS. L. LINGMALLU RAGHUKUMAR 247 ITR 801, THEIR LORDSHIP OF THE APEX COURT HAVE HELD THAT ON RETIRE MENT OF ASSESSEE PARTNER FROM THE FIRM THERE WAS NO ELEMENT OF TRANSFER OF I NTEREST IN PARTNERSHIP ASSET BY THE RETIRING PARTNER TO THE CONTINUING PARTNERS AND AMOUNT RECEIVED BY HIM WAS NOT ASSESSABLE TO CAPITAL GAINS. 15. IN THE CASE OF ITO VS. AMITABH SINGH 16 SOT 453 , THE TRIBUNAL HAS HELD THAT THE AMOUNT CREDITED TO THE CAPITAL ACCOUN T OF THE ASSESSEE PARTNER ON ACCOUNT OF GOODWILL AND RECEIVED BY HIM ON HIS R ETIREMENT FROM THE FIRM IS NOT TAXABLE AS CAPITAL GAINS AS THE GOODWILL WAS AC QUIRED BY THE FIRM OVER A PERIOD OF TIME AND ALL ALONG IT CONTINUED TO BELONG TO THE FIRM AND THERE WAS NO TRANSFER OF ANY GOODWILL BY THE ASSESSEE TO THE FIRM. THE RELEVANT OBSERVATION OF THE TRIBUNAL ARE EXTRACTED HEREUNDER : THE FIRM ACQUIRED GOODWILL OVER A PERIOD OF TIME, W HICH WAS BROUGHT INTO THE BOOKS AND DISTRIBUTED AMONGST EXISTING PAR TNERS BEFORE THE NEW PARTNERS WERE TAKEN IN AND SOME EXISTING PARTNERS R ETIRED. THE ASSET OF THE FIRM ALREADY EXISTED AND IT WAS QUANTIFIED AND CRED ITED TO THE ACCOUNTS OF EXISTING PARTNERS. WHEN THE ASSESSEE RETIRED FROM THE FIRM, HE DID NOT TRANSFER ANY GOODWILL TO THE FIRM AS HE DID NOT HAV E ANY INDIVIDUAL GOODWILL. THE GOODWILL BELONGED TO THE FIRM AND CONTINUED TO REMAIN WITH THE FIRM. AS CLARIFIED BY THE COUNSEL, NOTHING WAS CHARGED FROM THE INCOMING PARTNERS BY WAY OF GOODWILL AND, THUS, THERE IS NO QUESTION OF EVEN INDIRECT REALIZATION OF THE VALUE OF GOODWILL BY THE ASSESSEE FROM THE INCO MING PARTNERS THROUGH THE FIRM. THE FACT IS THAT A PROVISION CORRESPONDING T O SUB-S. (3) REGARDING LEVY OF CAPITAL GAIN TAX WHEN A PARTNER BRINGS IN A CAPITAL ASSET TO THE FIRM DOES NOT EXIST ON THE STATUTE BOOK IN CASE OF RETIREMENT OF THE PARTNER AND, THUS, GENERAL PROVISIONS OF LAW, NAMELY, THAT WHAT HE TAK ES IS HIS SHARE IN THE ASSETS OF THE FIRM CONTINUES TO APPLY WITH THE EXCE PTION THAT UNDER SUB-S.(4), WHEN A CAPITAL ASSET IS DISTRIBUTED TO THE PARTNER ON DISSOLUTION OF THE FIRM OR ON HIS RETIREMENT AT LESS THAN THE FAIR MARKET VALU E, THEN, THE FIRM BECOMES LIABLE TO PAY CAPITAL GAINS TAX. SUCH IS NOT THE CASE HERE, AS THIS IS THE CAS E OF A PARTNER. THEREFORE, NOTHING WAS TAXABLE IN TH E HANDS OF THE ASSESSEE. 16. IN THE LIGHT OF ABOVE PROPOSITION OF LAW IF TH E FACTS OF THE CASE ARE EXAMINED, WE WOULD FIND EVEN ON MERIT, THE AMOUNT R ECEIVED BY THE ASSESSEE IS ON ACCOUNT OF RELINQUISHMENT OF HIS SHARE IN GOO DWILL ACQUIRED BY THE EDUCATIONAL INSTITUTION OVER A PERIOD OF TIME. THE REFORE, THE AMOUNT RECEIVED BY THE ASSESSEES TOWARDS GOODWILL IS NOT CHARGEABLE TO TAX. MOREOVER, THERE IS NO SPECIFIC ASSERTION IN THE MOU OR ANYWHERE ELS E THAT THIS AMOUNT WAS GIVEN TOWARDS THE NON-COMPETITION FEES. THEREFORE, WE ARE OF THE VIEW THAT ASSESSING OFFICER HAS TAKEN A ONE OF THE PLAUSIBLE VIEW FOR WHICH THE ASSESSMENT ORDER CANNOT BE REVISED BY THE CIT AFTER TREATING IT TO BE ITA NOS.296&297/V/2010 GOWTHAM RESIDENTIAL JUNIOR COL LEGE, KRISHNA DIST. 11 ERRONEOUS AND PREJUDICIAL TO THE INTEREST OF THE RE VENUE. WE THEREFORE, SET ASIDE THE ORDER OF THE CIT. 17. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS ALLOWED. 12. SINCE WE HAVE TAKEN A VIEW IN THE CASE OF A REC IPIENT THAT THE AMOUNT RECEIVED IS ON ACCOUNT OF A GOODWILL AND NOT A NON- COMPETITION FEES, THE NATURE OF RECEIPT WILL REMAIN THE SAME IN THE HANDS OF THE PAYER. THEREFORE, WE ARE OF THE VIEW THAT THE AMOUNT PAID BY THE ASSE SSEE TO SHRI K. KOTESWARA RAO IS A GOODWILL AMOUNT AND NOT A NON-COMPETITION FEES. DURING THE COURSE OF HEARING, THE LD. COUNSEL FOR THE ASSESSEE HAS AL SO RAISED THE ARGUMENT THAT EVEN IF THE PAYMENT IS MADE TO RETAIN GOODWILL , IT IS ALSO AN ALLOWABLE EXPENDITURE AND IN SUPPORT OF THIS CONTENTION, HE H AS RELIED UPON THE VARIOUS JUDGEMENTS OF DIFFERENT HIGH COURTS. BEFORE ADVERT ING THIS ISSUE, WE HAVE EXAMINED THE RATIOS LAID DOWN BY DIFFERENT HIGH COU RTS THROUGH VARIOUS JUDICIAL PRONOUNCEMENTS. 13. WE HAVE EXAMINED THE JUDGEMENT OF MADHYA PRADES H HIGH COURT IN THE CASE OF CIT VS. DAILY BIDI SALES (SUPRA) REFERR ED TO BY THE ASSESSEE AND WE FIND THAT THEIR LORDSHIP HAVE CATEGORICALLY HELD IN THAT CASE THAT PAYMENT MADE TO OUTGOING PARTNERS FOR USE OF HER ASSETS AND GOODWILL IS A STATUTORY PAYMENT UNDER THE PARTNERSHIP ACT, HENCE ALLOWABLE AS REVENUE EXPENDITURE. 14. IN THE CASE OF VITHALDAS THAKURDAS AND COMPANY VS. CIT 14 ITR 822, THE HONBLE BOMBAY HIGH COURT HAVE ALSO TAKEN A SAM E VIEW AND HAVE HELD THAT AMOUNTS PAID BY AN ASSESSEE TO ANOTHER PERSON, AS A FEE OR RENT FOR THE USE OF GOODWILL (NOT BEING A LUMPSUM OF ACQUISITION OF GOODWILL OR PAYMENT OF AMOUNT FIXED FOR GOODWILL BY INSTALMENTS) ARE IN TH E NATURE OF REVENUE EXPENDITURE DEDUCTIBLE U/S 10(2)(XII). THEIR LORDS HIP HAVE FURTHER CLARIFIED THAT SHARE OF PROFITS PAID TO WIDOW OF MR. V FOR EX PLOITING VS GOODWILL THOUGH WIDOW WAS NOT TREATED AS A PARTNER OF THE ASSESSEE FIRM NOR MADE LIABLE TO ITS DEBTS OR LOSSES, IS NOT APPROPRIATION OF PROFIT S NOR CAPITAL EXPENDITURE BUT IS ALLOWABLE AS A REVENUE EXPENDITURE. THE VIEW OF THE BOMBAY HIGH COURT WAS APPROVED BY THE APEX COURT IN THE CASE OF DEVID AS VITHALDAS AND COMPANY VS. CIT 84 ITR 277 IN WHICH THEIR LORDSHIP OF THE APEX COURT HAVE HELD THAT DISBURSEMENT TO RETIRING PARTNERS COVENAN TED IN THE DEED OF RETIREMENT WERE, IN THE FACTS OF THE CASE, IN THE N ATURE OF ROYALTY AND NOT RELATED TO ANY LUMPSUM FIXED AS PURCHASE PRICE OF G OODWILL AND HENCE ADMISSIBLE AS REVENUE EXPENDITURE. ITA NOS.296&297/V/2010 GOWTHAM RESIDENTIAL JUNIOR COL LEGE, KRISHNA DIST. 12 15. IN THE CASE OF BHAKTI MALA BEEDI FACTORY VS. CI T 219 ITR 6, THE SIMILAR VIEW WAS ALSO TAKEN BY THE ANDHRA PRADESH HIGH COUR T IN WHICH THEIR LORDSHIP HAVE HELD THAT PAYMENT FOR USE OF GOODWILL BY FIRM WHICH WAS TRANSFERRED BY PARTNERS THEMSELVES TO THIRD PARTY W ITHOUT CONSIDERATION WAS ALLOWABLE EXPENDITURE IN THE FACTS AND CIRCUMSTANCE S OF THE CASE. THE RELEVANT OBSERVATIONS OF THE ANDHRA PRADESH HIGH CO URT ARE EXTRACTED HEREUNDER: IT IS TRUE THAT THE PRINCIPLE IS NOW WELL-SETTLED T HAT DURING THE SUBSISTENCE OF A PARTNERSHIP, NO PARTNER CAN CLAIM A SPECIFIC ITEM OF THE FIRMS PROPERTY AS HIS OWN NOR CAN HE ASSIGN HIS INTEREST IN ANY SPECIFIC ITEM OF PARTNERSHIP PROPERTY. BUT THERE IS NO LEGAL BAR AG AINST ALL THE PARTNERS BY MUTUAL AGREEMENT RELINQUISHING OR TRANSFERRING A PA RTICULAR ASSET OF THE PARTNERSHIP PROPERTY IN FAVOUR OF A THIRD PARTY. G OODWILL UNDOUBTEDLY CONSTITUTES PROPERTY OF THE FIRM AND IT IS A TRANSF ERABLE ASSET, VIDE S. 14 OF THE PARTNERSHIP ACT. IF ALL THE PARTNERS AGREE THAT AN ASSET OR PROPERTY OF THE FIRM SHALL CEASE TO BE SO AND IT SHOULD VEST WITH SOME O THER PERSON OR BODY, THERE IS NOTHING IN THE PARTNERSHIP ACT WHICH PROHIBITS S UCH ARRANGEMENT. THE VIEW EXPRESSED BY THE CIT(A) AND THE TRIBUNAL THAT THE G OODWILL OF A FIRM IS INCAPABLE OF VALUATION AND, THEREFORE, IT CANNOT BE THE SUB-MATTER OF TRANSFER IS NOT ACCEPTABLE. THE DIFFICULTY, IF ANY, IN EVAL UATING THE GOODWILL IS NOT A GROUND TO HOLD THAT IT IS NOT AN ASSET WHICH IS TRA NSFERABLE. BY EXECUTING THE INSTRUMENT TRANSFERRING AN ASSET OF THE FIRM, ALL T HE PARTNERS HAD AN INTENTION TO BIND THE FIRM. OTHERWISE, THE DOCUMENT DOES NOT CONVEY ANY SENSE. WHAT IS DONE BY ALL THE PARTNERS OF THE FIRM CAN BE TREA TED AS AN ACT OF THE FIRM WITHIN THE MEANING OF S. 2(A) OF THE PARTNERSHIP AC T. EVEN IF THE TRANSFER WAS MADE WITHOUT CONSIDERATION, IT COULD STILL BE REGAR DED AS A GIFT OF GOODWILL TO THE FAMILY TRUST. THERE IS NO FINDING THAT IT IS A COLOURABLE DEVICE SOLELY FOR THE PURPOSE OF DIVERTING THE INCOME OF THE FIRM TO ANOTHER BODY WITHOUT PAYMENT OF TAX OR THAT THERE WAS NO PRUDENT BUSINES S CONSIDERATION FOR THE ARRANGEMENT. IT IS NOT FOUND BY THE ASSESSING OR T HE APPELLATE AUTHORITIES THAT THE REASON GIVEN IN THE DEED IS A NON-EXISTENT OR A FALSE REASON, AND THE ASSESSEE WAS ONLY MOTIVATED BY THE OBJECT OF GIVING SOME TWIST TO THE WHOLE TRANSACTION TO AVOID TAX. IN THE ABSENCE OF A FIND ING OR DISCUSSION ON A QUESTION OF FACT, IT IS DIFFICULT FOR THE HIGH COUR T IN A REFERENCE CASE TO HOLD THAT THERE WAS NO LAWFUL TRANSFER OF GOODWILL. IT WAS CONTENDED THAT THE LUMP SUM PAYMENT MADE WAS ONLY FOR THE RIGHT TO USE THE GOODWILL AND EVERY YEAR PAYMENT HAS TO BE MADE ON PERCENTAGE BASIS DEPENDIN G ON THE SALES. IT IS, THEREFORE, CONTENDED THAT THE PAYMENT HAS INTEGRAL CONNECTION WITH THE BUSINESS. IT IS ALSO CONTENDED THAT THE ASSET IS N OT OF AN ENDURING NATURE AS ASSUMED BY THE TRIBUNAL. THERE IS FORCE IN THE CON TENTION ADVANCED BY THE COUNSEL FOR THE ASSESSEE. THE TRIBUNAL WAS NOT THE REFORE RIGHT IN LAW IN HOLDING THAT THE ROYALTY PAID FOR THE USE OF THE TR ADEMARK AND GOODWILL IS NOT ALLOWABLE AS A DEDUCTION. ITA NOS.296&297/V/2010 GOWTHAM RESIDENTIAL JUNIOR COL LEGE, KRISHNA DIST. 13 16. IN THE CASE OF CIT VS. DHARAMPAL SHANTISWAROOP 162 ITR 134 THE PUNJAB & HARYANA HIGH COURT HAVE ALSO TAKEN THE SAM E VIEW BY HOLDING THAT AMOUNT PAID TO THE LEGAL HEIRS OF DECEASED PARTNER FOR USER OF HIS GOODWILL IS A REVENUE EXPENDITURE WHERE THE FIRM IS NOT DISSOLV ED ON THE DEATH OF PARTNER AND IS CONTINUING AND THE AMOUNT IS PAID FOR THE US E OF THE GOODWILL. 17. IN THE CASE OF MOHANLAL HARGOVIND DAS VS. CIT 1 88 ITR 556, THE HONBLE MADHYA PRADESH HIGH COURT HAVE ALSO EXPRESS ED THE SAME VIEW BY HOLDING THAT PENDING FINAL SETTLEMENT OF ACCOUNT OF ERSTWHILE PARTNER, PAYMENT MADE TO HIM BY THE FIRM FOR USER OF HIS SHA RE IN THE GOODWILL OF PARTNERSHIP FIRM IS DEDUCTIBLE FOLLOWING THE JUDGEM ENT OF THE APEX COURT IN THE CASE OF DEVIDAS VITHALDAS AND COMPANY VS. CIT ( SUPRA). THE RELEVANT OBSERVATION OF THE HONBLE HIGH COURT IS EXTRACTED HEREUNDER FOR THE SAKE OF REFERENCE: ANY EXPENDITURE INCURRED BY THE ASSESSEE CAN BE CLA IMED AS ALLOWABLE DEDUCTION UNDER THE HEAD PROFITS AND GAINS OF BUSI NESS OR PROFESSION IF THE EXPENDITURE SATISFIED TWO TESTS: (I) THAT, THE EXPE NDITURE IS LAID OUT OR EXPENDITURE IS WHOLLY AND EXCLUSIVELY FOR THE PURPO SES OF THE BUSINESS AND/OR PROFESSION, AND (II) THAT IT IS NOT IN THE NATURE O F CAPITAL EXPENDITURE. IN THE PRESENT CASE, WHAT IS CLAIMED IS A PAYMENT TO AN ER STWHILE PARTNER OR CERTAIN AMOUNT IN LIEU OF HIS SHARE OF THE GOODWILL IN THE PARTNERSHIP WHEN, IN FACT, DESPITE SUCH WITHDRAWAL OF THE PARTNER, THE PARTNER SHIP CONTINUES, ACCOUNTS HAVE NOT BEEN SETTLED BETWEEN THE OUTGOING PARTNER AND THE REMAINING PARTNERS AND THE DUES TO THE OUTGOING PARTNER HAVE NOT BEEN ASCERTAINED AND PAID. SEC. 14 OF THE PARTNERSHIP ACT LAYS DOWN THA T THE PROPERTY OF THE FIRM SHALL INCLUDE THE GOODWILL OF THE BUSINESS. THIS, HOWEVER, IS SUBJECT TO ANY CONTRACT BETWEEN THE PARTNERS. THIS WHEN READ WITH SS. 29 AND 53 OF THE ACT, GIVES A CLEAR INDICATION THAT THE GOODWILL OF A PAR TNERSHIP FIRM IS AS MUCH A PROPERTY AS ANY OTHER PROPERTY AND HAS VALUE. IN T HIS STATE OF LAW, IT MAY BE SAID WITHOUT ANY HESITATION THAT SHARE OF P, THE OU TGOING PARTNER, IN THE GOODWILL OF THE PARTNERSHIP HAD MONEY VALUE WHICH O N PS WITHDRAWAL FROM PARTNERSHIP AND ON SETTLEMENT OF ACCOUNTS WOULD HAV E BEEN PAID TO HIM. INSTEAD, THE ARRANGEMENT MADE BETWEEN P AND THE REM AINING PARTNERS WAS TO PERMIT THE PARTNERSHIP TO HAVE THE FULL USE OF G OODWILL INCLUDING PS SHARE THEREIN AND TO PAY ` 50,000 IN LIEU OF HIS SHARE IN THAT GOODWILL. IT MUST, THEREFORE, BE HELD THAT THIS EXPENDITURE OF ` 50,000 PER YEAR WAS INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSES OF THE BUSI NESS OF THE PARTNERSHIP. FROM THE FACTS, IT IS CLEAR THAT THE YEARLY PAYMEN T OF ` 50,000 IN LIEU OF THE USE OF GOODWILL BY THE REMAINING PARTNERS OF TH E FIRM WOULD NOT AMOUNT TO ACQUISITION BY PURCHASE OF PS SHARE IN THAT GOO DWILL. INSTEAD, THE ARRANGEMENT FOR THE TIME BEING WAS ONLY TO PAY CERT AIN AMOUNT PERIODICALLY TO ENABLE THE PARTNERSHIP TO MAKE USE OF THAT GOODW ILL, THE PAYMENT WAS FOR ITA NOS.296&297/V/2010 GOWTHAM RESIDENTIAL JUNIOR COL LEGE, KRISHNA DIST. 14 INDEFINITE PERIOD WITHOUT ANY LIMITATION OF TIME AN D IT HAD NO RELATION TO THE CAPITAL VALUE OF THE ASSETS. THE PAYMENT, IN FACT, WAS TO ALLOW CONTINUANCE OF THE USE OF THE GOODWILL. APPARENTLY P HAD A DEFINI TE SHARE IN THE PARTNERSHIP. HE CONTRIBUTED ` 3 LACS AS SHARE CAPITAL IN THE PARTNERSHIP. THERE IS NO AGREEMENT TO THE CONTRARY THAT ON HIS RETIREMENT OR ON DISSOLUTION OF THE PARTNERSHIP, HE WOULD GET ANY SHARE IN THE GOODWILL , WHEN REGARDING ANOTHER PARTNER THERE WAS AN EXPRESS AGREEMENT THAT SHE WOU LD NOT BE ENTITLED TO ANY AMOUNT ON HER RETIREMENT ON ACCOUNT OF HER SHAR E IN THE GOODWILL. THAT BEING SO, EVEN IF P DID NOT INHERIT ANYTHING FROM T HE ERSTWHILE PARTNER, SMT. J, HE HAD INTEREST IN ALL THE ASSETS OF THE PARTNERSHI P INCLUDING GOODWILL. THE TRIBUNAL WAS NOT JUSTIFIED IN OBSERVING THAT SINCE P DID NOT CONTRIBUTE ANYTHING TOWARDS THE EARNING OF THE GOODWILL DURING HIS SHORT TENURE AS PARTNER OF THE FIRM, HE CANNOT BE HELD ENTITLED TO ANY SHARE IN THE GOODWILL. THE TRIBUNAL IS ALSO NOT RIGHT IN HOLDING THAT P LE FT THE FIRM FOR GOOD. THERE IS NO BASIS FOR TRIBUNALS OBSERVATION THAT QUESTION O F CLAIMING ANY SHARE IN THE GOODWILL OF THE FIRM BY P DOES NOT ARISE. THERE IS NO BASIS ALSO FOR OBSERVING THAT PAYMENT WAS MADE FOR ANY EXTRA COMMERCIAL CON SIDERATION. IT APPEARS THAT ON FACTS THE TRIBUNAL COMPLETELY MISDIRECTED I TSELF AND THE CONCLUSION REACHED CANNOT BE SUSTAINED. THEREFORE, THE CONTEN TION ADVANCED BY THE DEPARTMENT THAT THE TRIBUNALS CONCLUSIONS ARE REAC HED ON FINDINGS OF FACT AND, THEREFORE, CANNOT BE DISTURBED IS NOT ACCEPTAB LE. THE TRIBUNAL FAILED TO APPRECIATE THE CIRCUMSTANCES AND THE REAL NATURE OF TRANSACTION AND HAS ALSO NOT APPLIED THE CORRECT LAW APPLICABLE UNDER THE CI RCUMSTANCES OF THE CASE. IN VIEW OF AFORESAID FINDINGS, THE AMOUNT OF ` 36,292 PAID BY THE ASSESSEE FIRM TO P WAS NOT PROMPTED BY EXTRA COMMERCIAL CONS IDERATION. INSTEAD, IT WAS A REVENUE EXPENDITURE FOR PURPOSES OF BUSINESS OF THE FIRM AND IS ALLOWABLE IN COMPUTING THE INCOME OF THE ASSESSEE. 18. WE HAVE ALSO EXAMINED THE JUDGEMENT OF DELHI HI GH COURT IN THE CASE OF MEHRA KHANNA AND COMPANY VS. CIT 250 ITR 436 IN WHICH THEIR LORDSHIP HAVE TAKEN A CONTRARY VIEW AND HELD THAT PAYMENTS M ADE BY SURVIVING PARTNERS OF THE ASSESSEE FIRM TO LEGAL HEIRS OF THE DECEASED PARTNER IN LIEU OF RELINQUISHMENT OF THEIR RIGHT AND TITLE TO GOODWILL OF THE FIRM, WAS A CAPITAL EXPENDITURE. 19. HAVING CAREFULLY EXAMINED THE AFORESAID JUDGEME NTS RENDERED BY THE APEX COURT AND THE VARIOUS HIGH COURTS, WE FIND THA T EXCEPT DELHI HIGH COURT AND ALL HIGH COURTS HAVE HELD THAT THE PAYMENTS MAD E TO OUTGOING PARTNERS FOR CONTINUANCE OF USE OF GOODWILL IS AN EXPENDITUR E INCURRED EXCLUSIVELY FOR THE BUSINESS PURPOSE AND IS ALLOWABLE AS A REVENUE EXPENDITURE. IT IS A SETTLED POSITION OF LAW THAT WHENEVER CONTRARY VIEW S ARE EXPRESSED BY DIFFERENT HIGH COURTS, THE VIEW FAVOURABLE TO THE A SSESSEE SHOULD BE ADOPTED. THEREFORE, IN THE LIGHT OF JUDGEMENT OF THE APEX CO URT IN THE CASE OF ITA NOS.296&297/V/2010 GOWTHAM RESIDENTIAL JUNIOR COL LEGE, KRISHNA DIST. 15 VEGETABLE PRODUCTS 249 ITR 94 (SC), WE SHOULD FOLLO W THE LEGAL PROPOSITION LAID DOWN BY MAJORITY OF HIGH COURTS AND THAT TOO B Y THE JURISDICTIONAL HIGH COURT IN THE CASE OF BHAKTI MAL BEEDI FACTORY VS. C IT(SUPRA). 20. TURNING TO THE FACTS OF THE CASE, WE FIND THAT THE ASSESSEE HAS PAID A SUM OF ` 60 LAKHS TO SHRI K. KOTESWARA RAO FOR THE RELINQUI SHMENT OF HIS SHARE IN THE GOODWILL ACQUIRED OVER A PERIOD OF TIM E BY THE PARTNERSHIP FIRM. THEREFORE, THE EXPENDITURE INCURRED IN RETAINING TH E EXCLUSIVE RIGHT OVER THE GOODWILL IS PURELY FOR BUSINESS PURPOSE AND IS ALLO WABLE AS A REVENUE EXPENDITURE. IN THIS CASE THE CIT(A) HAS ALSO TREA TED THE AFORESAID PAYMENT AS A PAYMENT FOR NON-COMPETE FEES AND HELD IT TO BE ALLOWABLE EXPENDITURES. WE DO NOT AGREE WITH THIS PROPOSITION FOR THE REASO NS GIVEN IN FOREGOING PARAS. BUT IN ANY CASE THE AFORESAID PAYMENT IS AN ALLOWABLE EXPENDITURE THOUGH IT WAS PAID TOWARDS RETAINING OF GOODWILL AC QUIRED OVER A PERIOD OF TIME BY THE ASSESSEES. WE ACCORDINGLY, SET ASIDE T HE ORDER OF THE CIT(A) AND DIRECT THE A.O. TO TREAT THIS PAYMENT TO BE MADE FO R RETAINING OF GOODWILL AND ALLOW IT AS A REVENUE EXPENDITURE IN BOTH THE YEARS . SINCE THE RELIEF IS ALLOWED TO THE ASSESSEE THOUGH FOR DIFFERENT REASON S, THE REVENUES APPEALS DESERVE TO BE DISMISSED. 21. IN THE RESULT, THE APPEALS OF THE REVENUE ARE DISMISSED. PRONOUNCED IN THE OPEN COURT ON 24.8.2011 SD/- SD/- (BR BASKARAN) (SUNIL KUMAR YADAV) ACCOUNTANT MEMBER JUDICIAL MEMBER VG/SPS VISAKHAPATNAM, DATED 24 TH AUGUST, 2011 COPY TO 1 DCIT, CENTRAL CIRCLE, VIJAYAWADA 2 M/S. GOWTHAM RESIDENTIAL JUNIOR COLLEGE, GUDAVALLI, KRISHNA DIST. 3 THE CI T, VIJAYAWADA 4 THE CIT (A) , VIJAYAWADA 5 THE DR, ITAT, VISAKHAPATNAM. 6 GUARD FILE. BY ORDER SENIOR PRIVATE SECRETARY INCOME TAX APPELLATE TRIBUNAL VISAKHAPATNAM