Law:

Section:

Section 37(1) of the Income-tax Act, 1961 [Corresponding to section 10(2)(xv) of the Indian Income-tax Act, 1922] - Business expenditure - Allowability of - Assessee, a registered accountant, was taken as working partner of a branch where 'S' was doing business - Subsequently, in terms of agreement entered into between assessee and 'S', assessee became sole proprietor of said branch - Under said agreement, goodwill was to be valued at half of net profits of said branch for three years ending with relevant accounting year; no case of said branch was to be taken by 'S' without consent of assessee and without an office being opened by 'S' and without repayment of half fee collected for such case during period goodwill had been paid by assessee to 'S' - Whether assessee had acquired not merely user of name but goodwill itself in consideration of paying amount in question and, therefore, amount paid by assessee was capital expenditure - Held, yes FACTS The assessee, a registered accountant, was doing some business. Subsequently, he was employed by one 'S' who was also doing similar business at 'K'. After some time, the assessee was taken as a working partner of the 'K' branch. Subsequently, under an agreement, evidenced by a letter addressed by the assessee to 'S', the assessee became the owner of the 'K' branch. The letter which evidenced the agreement between 'S' and the assessee stated that the goodwill was to be valued at half the net profits (book profits) of the 'K' office for the three years ending with 31-3-1949 and that no case of the 'K' office was to be taken by 'S' without the consent of the assessee and without an office being opened by 'S' and without repayment of half fee collected for such case during the period the goodwill had been paid by the assessee to 'S'. 'S' in pursuance of this agreement, received a sum from the assessee. The assessee claimed that that sum should be deducted as a revenue expenditure. However, the department and the Tribunal held that the aforesaid sum was a capital expenditure. On reference: HELD The test to be applied in such cases is to find out whether the assessee became the owner of the goodwill or was merely a user of…

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