Surendra Patel & Co. V. A.C.I.T.

TAXAP/132/2003

AI Insights

The case involves Surendra Patel & Co., the appellant, who contested the classification of a payment made under an agreement with Surendra Patel Family Trust for the use of Goodwill and other assets of a hotel and restaurant business named 'Vishala'. The primary legal question was whether this payment should be considered a capital expenditure, thus not deductible from income, or a revenue expenditure, which would be deductible. The Income Tax Appellate Tribunal had earlier ruled the payment as capital expenditure, a decision which was upheld by the Gujarat High Court.

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 798702 (HC-GUJARAT)
• Appeal Type: Others
• Pronouncement Date: 11-12-2014
• Assessment Year: misc
• Other Referred Cases: Devidas Vithaldas & Co. v. Commissioner of Income-tax, Mewar Sugar Mills Ltd. v. Commissioner of Income-tax
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Revenue
• Court: HIGH COURT
• Department Lawyers: M R BHATT; MAUNA M BHATT
• Assessee Lawyers: S N SOPARKAR; B S SOPARKAR
• Keywords: Assessment; Capital expenditure; Goodwill; Income Tax; Revenue expenditure
• Section: 143(3); 260A

Judgement Text

"O/TAXAP/287/2001 JUDGMENT IN THE HIGH COURT OF GUJARAT AT AHMEDABAD TAX APPEAL NO. 287 of 2001 With TAX APPEAL NO. 131 of 2003 TO TAX APPEAL NO. 138 of 2003 FOR APPROVAL AND SIGNATURE: HONOURABLE MR.JUSTICE KS JHAVERI and HONOURABLE MR.JUSTICE K.J.THAKER ================================================================ 1 Whether Reporters of Local Papers may be allowed to see the judgment ? 2 To be referred to the Reporter or not ? 3 Whether their Lordships wish to see the fair copy of the judgment ? 4 Whether this case involves a substantial question of law as to the interpretation of the Constitution of India, 1950 or any order made thereunder ? 5 Whether it is to be circulated to the civil judge ? ================================================================ SURENDRA PATEL & CO.....Appellant(s) Versus A.C.I.T.....Opponent(s) ================================================================ Appearance: MR SN SOPARKAR, SR. ADVOCATE WITH MR. BS SOPARKAR for the Appellant(s) No. 1 Page 1 of 7 O/TAXAP/287/2001 JUDGMENT MR M.R. BHATT, SR. ADVOCATE WITH MRS MAUNA M BHATT, ADVOCATE for the Opponent(s) No. 1 ================================================================ CORAM: HONOURABLE MR.JUSTICE KS JHAVERI and HONOURABLE MR.JUSTICE K.J.THAKER Date : 11/12/2014 ORAL JUDGMENT (PER : HONOURABLE MR.JUSTICE KS JHAVERI) 1. All these appeals involve common questions of law and facts and hence, they are decided by this common judgment. 2. These Tax Appeals have been filed u/s.260A of the Income Tax Act, 1961. In Tax Appeal No.287/2001, challenge is to the judgment and order dated 27.02.2001 passed by the Income Tax Appellate Tribunal, Ahmedabad Bench in ITA No.845/AHD/1999 whereas, in Tax Appeals No.131/2003 to 138/2003, challenge is to the common judgment and order dated 19.03.2002 passed by the Tribunal in ITA Nos.2141 to 2148/A/2000. For the purpose of narration of facts, T.A. No.287/2001 is taken as the lead matter. 3. The facts in brief are that the assessee is running a Hotel and Restaurant under the name “Vishala”, which was acquired in pursuance of an agreement dated 02.06.1983 entered into by and between the assessee-firm and Surendra Patel Page 2 of 7 O/TAXAP/287/2001 JUDGMENT Family Trust. Earlier, the aforesaid Trust was carrying on business under the name and style of “Vishala”. Even in the assessee-firm, the Trust is one of the Partners. 4. The assessee filed the return of income on 31.09.1996 declaring total income at Rs.3,775/-. Assessment scrutiny was undertaken. It was claimed by the assessee that the assessee had to pay recurring expense of Rs.1.00 Lac or 5% of its sale value, whichever if higher, per year for the use of Goodwill and other assets of the Trust under the Agreement dated 02.06.1983. It was claimed that the said payment is of revenue nature and therefore, is required to be deducted while computing the income of the assessee. Ultimately, the Assessing Office passed the order dated 31.10.1996 u/s.143(3) declaring the total income at Rs.1,03,755/-. 5. Aggrieved by the said order, the assessee filed appeal before the CIT(A). The CIT(A) dismissed the appeal of the assessee vide order dated 22.02.1999. Being dissatisfied with the said order, the assessee filed appeal before the Tribunal, who, rejected the appeal, vide impugned judgment and order dated 27.02.2001. Hence, this appeals. Page 3 of 7 O/TAXAP/287/2001 JUDGMENT 6. The appeals were admitted in respect of the following substantial question of law; “Whether, in the facts and circumstances of the case, the ITAT was right in law in holding that payment made for the user of Goodwill is a capital expenditure and not deductible from income as revenue expenditure?” 7. Mr. Soparkar learned Senior Counsel appearing for the assessee took us through the Agreement dated 02.06.1983 and also through the books of accounts for the relevant Assessment Years. It was submitted that the Tribunal seriously erred in not appreciating the fact that the amount of Rs.1.00 Lac was paid for the use of Goodwill and capital assets of the running business and therefore, is a revenue expenditure and allowable as such. 7.1 In support of his submission, reliance is placed on the decisions of the Apex Court in the case of Devidas Vithaldas & Co. v. Commissioner of Income-tax, [1972] 84 ITR 277 (SC) and Mewar Sugar Mills Ltd. v. Commissioner of Income-tax, [1973] 87 ITR 400 (SC). He, therefore, requested that the impugned judgment rendered by the Tribunal deserves to be quashed and set aside. Page 4 of 7 O/TAXAP/287/2001 JUDGMENT 8. Mr. M.R. Bhatt learned Senior Standing Counsel appearing for the Revenue supported the impugned judgment of the Tribunal and submitted that the payment has been rightly held to be of capital nature since the amount in question was paid for acquiring an asset of enduring nature. He, therefore, requested the Court that the present appeals deserve to be dismissed. 9. We have heard learned counsel for both the sides. While entertaining the appeal filed by the assessee, the Tribunal observed in Paras – 4.7 & 4.8 as under; “4.7 Shri Soparkar was not right in contending that payment is being made for use of Goodwill or other assets. The payment stipulated in clause 8 is clear consideration for acquiring on permanent basis the running business of “Vishala” with all its assets movable and immovable including Goodwil. It is clearly stipulated in agreement that there is nothing in any of the clauses to suggest that consideration is being paid for use of any asset. It is the price of the capital asset transferred by party of first part to the party of the second part. The agreement under consideration is very different from the agreement in Devidas Vithaldas and Co. (supra) where the assignor had retained with him the right to share profit so long as the name of Devidas Vithaldas and Co. was used. The payment was clearly for use of name and goodwill. But party of the first part here has not retained any such or similar right Page 5 of 7 O/TAXAP/287/2001 JUDGMENT with it and therefore, no inference can be drawn from the agreement that the consideration as per clause (8) was for use of capital assets. The running business has been transferred for a consideration which is not paid once and for all but is to be paid through annual installments. 4.8 The transferor trust has no right to terminate the contract but the transferee had a right to terminate the same. In other words, there is a clause giving the party of the second part a right to terminate the contract and stop annual payment. In that case, lumpsum amount of compensation as the said party would be entitled under the law in substitution for the amount provided in clause 8, would be payable by party of the second part to party of the first part. There is no provision to indicate that the running business transferred under the agreement, would, in any event, go back to party of first part. There is further no indication that goodwill or any part thereof remained with party of first part after the agreement in question came into operation. Clause (7) of the agreement also indicates the ownership of assets was transferred and not merely use of the assets. As noted earlier, the only right vested with party of the first part is to get determined correctly on the basis of accounts maintained by party of second part, the annual sum payable to the party of first part. On building and other assets the assessee claimed depreciation as owner for the consideration paid as per clause (8) of the agreement. Having regard to the fact that amount in question is paid for acquring an asset of enduring nature, the payment was rightly held to be of capital nature and not deductible.” Page 6 of 7 O/TAXAP/287/2001 JUDGMENT 10. From the aforesaid reasonings of the Tribunal, it is evident that only the right to use was given, which has been rightly distinguished by the Tribunal as the amount in question was paid for acquiring an asset of enduring nature. The judgments relied upon by learned counsel for the assessee shall be of no help to the assessee since the facts in that case were different. In that case, the complete right was given to the party concerned wherein, in this case, only the right to use was given. On the facts of the present case, the Tribunal was right in law in holding that payment made for use of capital asset is a capital expenditure and not a revenue expenditure. 11. In view of the aforesaid, the question raised in these appeals is answered in the affirmative in favour of the Revenue and against the assessee. The appeals are, accordingly, dismissed. (K.S.JHAVERI, J.) (K.J.THAKER, J) Pravin/* Page 7 of 7 "