GOLDEN CHEMICAL WORKS VS COMMISSIONER OF INCOME-TAX
1994 P T D 651
[203 I T R 87]
[Punjab and Haryana High Court (India)]
Before A.P. Chowdhri and N.K Sodhi, JJ
GOLDEN CHEMICAL WORKS
Versus
COMMISSIONER OF INCOME-TAX
Income-tax Reference No. 5 of 1981, decided on 23/07/1992.
(a) Income-tax-----
----Firm---Goodwill---Goodwill constitutes property of firm. Goodwill of a business is as much a property of the firm as the property originally brought into the stock of the firm or acquired by purchase or otherwise by the firm. Subsection (1) of section 55 of the Partnership Act, 1932, makes it clear that goodwill of a firm not only constitutes property of the firm but can also be dealt with separately or alongwith other property of the firm.
(b) Income-tax---
----Firm---Assessment---Deduction---Rent paid for user of goodwill is deductible.
Originally, the concern styled as GCW was a Hindu undivided family concern with six members including G and his two sons, J and GU. The said Hindu undivided family partitioned its business and thereafter a partnership deed was executed. It was agreed at that time that G and his two sons, J and GU, would carry on the business of the firm, GCW. The concern carried on by the Hindu undivided family had a goodwill, which with the consent of all concerned was acquired by G and his two sons, J and GU. G bequeathed his share in the goodwill of the firm in favour of the Hindu undivided families of his two sons, J and GU, under his will. After the death of G, a second partnership deed was executed. In April, 1975, a third partnership deed was executed which provided for payment of rent to J (Hindu undivided family) and GU (Hindu undivided family) for allowing the firm to utilise the goodwill. For the assessment year 1977-78, the assessee claimed deduction of Rs.12,000 as having been paid as rent for the goodwill to J (Hindu undivided family) and GU Hindu undivided family). The claim was disallowed by the Income Tax Officer and this was confirmed by the Tribunal. On a reference:
Held, (i) that the Tribunal was not justified in holding that the goodwill did not belong to the two retiring Hindu undivided families, J and GU.
(ii) that the Tribunal was not legally correct in disallowing the claim of the appellant-firm for payment of rent for the goodwill to the two Hindu undivided families, J and GU, especially because the Commissioner of Income- tax (Appeals) had held that the amount claimed on account of rent in this behalf was reasonable and the said finding had not been disturbed by the Tribunal.
S.S. Mahajan and Ms. Aparna Mahajan for the Assessee.
R.P. Sawhney for the Commissioner.
JUDGMENT
A.P. CHOWDHRI, J.---This is a reference under section 256(1) of the Income Tax Act, 1961 (hereinafter referred to as "the Act"), made by the income-tax Appellate Tribunal, Amritsar, at the instance of the assessee.
Briefly stated, the relevant facts are that a partnership firm was constituted by a deed of partnership, Annexure A-1, dated April 13, 1956, between Gopal Singh (individual) and his two sons representing their smaller Hindu undivided families, namely, Jagit Singh Hindu undivided family and Gurcharan Singh Hindu undivided family, under the name and style of Messrs Golden Chemical Works. Gopal Singh died on September 4, 1970. By virtue of a registered will dated March 29, 1968, his share in the goodwill of the said firm came to Jagjit Singh Hindu undivided family and Gurcharan Singh Hindu undivided family who were the surviving partners in the firm. A new firm was constituted with Sint. Kulwant Kaur (individual) joining Jagjit Singh Hindu undivided family and Gurcharan Singh Hindu undivided family under a new partnership deed dated September 5, 1970, Annexure A-II. This was followed by a partial partition in the two Hindu undivided families of Jagjit Singh and Gurcharan Singh, which was recognised by the Income Tax Officer; vide order dated January 7, 1976. A new partnership deed was executed on April 14,1975, Annexure A-III. The partners of the newly-constituted' firm were Jagjit Singh (individual), Gurcharan Singh (individual), Hindu undivided family Baldev Singh: son of Jagjit Singh, and Hindu undivided family Jatinder Singh, son of Gurcharan Singh.
For the assessment year 1977-78, the assessee claimed deduction of Rs.12,000 as having been paid as rent of goodwill to Hindu undivided family Jagjit Singh and Hindu undivided family Gurcharan Singh. The claim was disallowed by the Income Tax Officer on the ground that it was only a device adopted by the assessee for bringing down the incidence of tax. It was also held by the Income Tax Officer that all along the same individuals continued as partners and that being so, there was no question of claiming any rent. On appeal filed by the assessee, the Commissioner of Income-tax (Appeals) reversed the decision of the Income Tax Officer and allowed the claim of the assessee holding that the goodwill belonged to the two Hindu undivided families, namely, Hindu undivided family of Jagjit Singh and Hindu undivided family of Gurcharan Singh, and the amount claimed on account of rent was reasonable. The Revenue fled an appeal against the decision of the Commissioner of Income-tax (Appeals) before the Income-tax Appellate Tribunal. It was urged before the Tribunal that goodwill continued to be an asset of the going concern and the same never vested in the two Hindu undivided families of Jagjit Singh and Gurcharan Singh. It was further contended before the Tribunal that the goodwill could not be separated from a going concern. Further, it was urged that the two Hindu undivided families of Jagjit Singh and Gurcharan Singh not being partners, they could not claim ownership of the goodwill. Lastly, it was argued that - the firm having not been dissolved, none of the partners could predicate his share and, therefore, there was no question of payment of rent on account of use of the goodwill. These contentions prevailed with the Tribunal, with the result that the Revenue's appeal was allowed, as already stated. Hence, this reference.
The questions referred are as under:
"(1) Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was legally justified in holding that the goodwill did not belong to the two retiring Hindu undivided families, S. Jagjit Singh and S. Gurcharan Singh?
(2) Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was legally correct in disallowing the claim of the appellant firm for the payment of rent of goodwill to the two Hindu undivided families, S. Jagjit Singh and S. Gurcharan Singh?"
We have heard Mr. S. S. Mahajan, learned counsel for the assessee, and Mr. R.P. Sawhney, learned counsel for the Revenue.
The contention of Mr. Mahajan is that goodwill of a firm is a valuable asset of the firm and it can be dealt m-7th as such by the partners. According to Mr. Mahajan, the view taken by the learned Tribunal could not be supported in law. He submitted that goodwill being an asset of the firm; the same could not in law belong to a person who is not a partner. For the same reason, it was not necessary that the firm must first be dissolved in order that the goodwill can be separately dealt with. The contention of Mr. Sawhney, on the other hand, is that, as long as the partnership continued, the goodwill of the partnership continued to be its asset and it does not vest in the partners constituting the firm.
We have given our anxious consideration to the respective submissions of learned counsel.
We find ourselves in agreement with the contention of Mr. Mahajan. There can be no doubt that goodwill of the business is as much property of the firm as the property originally brought into the stock of the firm or acquired by purchase or otherwise by the firm. Section 14 of the Indian Partnership Act, 1932 lays down as under:
"14. The property of the firm. --Subject to contract between the partners, the property of the firm includes all property and rights and interests in property originally brought into the stock of the firm, or acquired by purchase or otherwise, by or for the firm, or for the purposes and in the course of the business of the firm, and includes also the goodwill of the business. .
Unless the contrary intention appears, property and rights and interests in property acquired with money belonging to the firm are deemed to have been acquired for the firm."
(Emphasis added, here in italics).
Section 55 of the said Act makes a provision for the sale of goodwill after dissolution. It lays down as under:
"55. Sale of goodwill after dissolution. ---(I) In settling the accounts of a firm after dissolution, the goodwill shall, subject to contract between the partners, be included in the assets, and it may be sold either separately or alongwith other property of the firm.
Rights of buyer and seller of goodwill.
(2) 'Where the goodwill of a firm is sold after dissolution, a partner may carry on a' business competing with that of the buyer and he may advertise such business, but, subject to agreement between him and the buyer, he may not---
(a) use the firm name.
(b) represent himself as carrying on the business of the firm, or
(c) solicit the custom of persons who were dealing with the firm before its dissolution..."
Subsection (1) of section 55 leaves no room for doubt that goodwill of a firm not only constitutes property of the firm but also can be dealt with separately or alongwith other property of the firm.
A perusal of the first partnership deed dated April 13,1956, Annexure A-1, shows that originally the concern styled as Messrs Golden Chemical Works was a Hindu undivided family concern with six members, including Gopal Singh and his two sons, Jagjit Singh and Gurcharan Singh. The said Hindu undivided family partitioned its business on April 12, 1956, and thereafter the partnership deed dated April 13, 1956, Annexure A-1, was executed. It was at that time agreed that 6opal Singh and his two sons, Jagjit Singh and Gurcharan Singh, shall carry on the business of the firm Golden Chemical Works. This was agreed to by the remaining partners, namely Joginder Singh, Balwant Singh and Dhanwant Singh. It would be seen that the concern, Golden Chemical Works, had been carried on by the Hindu undivided family prior to the coming into being of the partnership deed in question. The said concern had a goodwill, which with the consent of all concerned, was acquired by Gopal Singh and his two sons, Jagjit Singh and Gurcharan Singh.
It is not disputed that Gopal Singh bequeathed his share in the goodwill of the firm in favour of the Hindu undivided families of his two sons, Jagjit Singh and Gurcharan Singh, under his will dated March 29, 1968. After the death of Gopal Singh, the second partnership deed dated September 5, 1970, was executed. It was stated in para 7 thereof that the business premises; goodwill and the machinery belonged to the parties of the first and the second part, namely, Jagjit Singh and Gurcharan Singh. The third partnership deed dated April 14, 1975, Annexure A-III, contained the following provision with regard to goodwill:
"4. That the goodwill of the business belongs to S. Jagjit Singh (Hindu undivided family) and S. Gurcharan Singh (Hindu undivided family). This will belong to them and the said Hindu undivided families may charge any rent, etc., for allowing the firm to utilize the goodwill."
From the inception up to the date of assessment, therefore, the goodwill of the concern was treated as a separate asset belonging to - Gopal Singh (individual) and the Hindu undivided families of Jagjit Singh and Gurcharan Singh in the first instance and later on to the two Hindu undivided families of Jagiit Singh and Gurcharan Singh by virtue of the will left by Gopal Singh deceased.
In view of the above discussion, we would answer the questions referred by the Tribunal as follows:
(1) The Tribunal was not justified in holding that the goodwill did not belong to the two retiring Hindu undivided families of Jagjit Singh and Gurcharan Singh.
(2) .In view of our answer to question No. (1), it follows that the Tribunal was not legally correct in disallowing the claim of the appellant firm for payment of rent for the goodwill to the two Hindu undivided families of Jagjit Singh and Gurcharan Singh, especially because the Commissioner of Income-tax (Appeals) had held that the amount claimed on account of rent in this behalf was reasonable and the said finding had not been disturbed by the Tribunal.
We dispose of the reference accordingly.
M.B.A./147/T.FOrder accordingly.