M/S.SURENDRA PATEL & CO. vs. JOINT COMMISSIONER OF INCOME- TAX(ASSTT.)

Facts

The assessee, Surendra Patel & Co., runs a hotel and restaurant named "Vishala," which it acquired through an agreement dated 02.06.1983 with the Surendra Patel Family Trust. The Trust was previously operating the business. The assessee filed a return for Assessment Year 1996-97 declaring an income of Rs. 3,775/-. The assessee claimed a recurring expense of Rs. 1.00 Lac or 5% of its sale value, whichever was higher, for the use of Goodwill and other assets of the Trust as per the agreement, deeming it a revenue expenditure. The Assessing Officer assessed the total income at Rs. 1,03,755/-. The CIT(A) and the Income Tax Appellate Tribunal (ITAT) upheld the Assessing Officer's view, leading to the present appeals before the High Court.

Held

The High Court held that the ITAT was right in law in holding that the payment made for the use of Goodwill and capital assets was a capital expenditure and not deductible as revenue expenditure. The Tribunal's reasoning was that the payment stipulated in clause 8 of the agreement was consideration for acquiring on a permanent basis the running business of "Vishala," including its assets and Goodwill. The Tribunal distinguished the present case from Devidas Vithaldas & Co. by noting that the transferor had not retained any right to share profits or use the name, indicating a transfer of capital asset rather than mere use. The right to terminate the contract by the assessee also did not alter the nature of the initial acquisition. The High Court agreed that the payment was for acquiring an asset of enduring nature. The question of law was answered in the affirmative in favour of the Revenue. The appeals were dismissed.

Key Issues

1. 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? (Question of law) Assessee's contentions: The assessee argued that the payment of Rs. 1.00 Lac was for the use of Goodwill and capital assets of a running business, thus constituting revenue expenditure and being allowable as such. Reliance was placed on the Supreme Court decisions in Devidas Vithaldas & Co. v. Commissioner of Income-tax and Mewar Sugar Mills Ltd. v. Commissioner of Income-tax. Revenue's contentions: The Revenue supported the ITAT's judgment, arguing that the payment was rightly held to be of a capital nature as it was paid for acquiring an asset of enduring nature. The High Court requested the appeals be dismissed.