1. The first four issues in this appeal filed by the assessee relate to partial sustenance of disallowances out of certain items of expenses.
2. The assessee-firm is the owner of several Biri factories at different places. In the assessment order, the AO disallowed an amount of Rs. 10,000 out of travelling expenses at Tinsukia claimed at Rs. 31,644 on ground of inclusion of personal expenses relating to the air tickets of wife of one of the partners and some other persons unconnected with the business of the assessee-firm. The CIT(A) reduced the said disallowance to Rs. 5,000. On the facts of the case, we uphold the order of the CIT(A).
3. The AO also disallowed an amount of Rs. 8,000 out of telephone charges claimed at Tinsukia and Rs. 6,000 out of similar telephone charges claimed at Calcutta on the ground of personal user of the telephone. The CIT(A) allowed relief of Rs. 3,000 out of each of the expenses items. Although he states that he restricted the disallowance in respect of the telephone charges at Calcutta of Rs. 5,000 actually, however, sustenance of that expenses appears to have been made Rs. 5,000 only. Looking into the facts of the case, we uphold the order of the CIT(A).
4. Disallowance of an amount of Rs. 4,000 was also made out of car running expenses claimed in respect of Laxmipur factory on the ground that petrol was found to have been purchased from pumping stations situated in and around Salt lake area where the partners of the assessee-firm and their family members were residing. The CIT(A) allowed relief of Rs. 2,000 sustaining the disallowance at Rs. 2,000 only taking into consideration the facts of the case, we uphold the order of the learned CIT(A).
5. The other ground relates to the disallowance of the claim of payment of royalty at Rs. 60,000. The AO discusses in this connection that Shri Nani Gopal Paul, one of the partners of the assessee-firm was originally the proprietor of the business, namely, M/s. Mukta Biri Factory. He was also the registered holder of the patent granted for manufacturing the Biris under the brand name "Mukta Biri", During the period corresponding to the asst. yr. 1988-89 the aforesaid proprietorship business was converted into a partnership firm consisting of Shri Nani Gopal Paul and his two major sons as partners.
The AO discusses certain recitals in the said partnership deed to the effect that as Shri Nani Gopal Paul had become aged and unable to shoulder strains of business, he inducted his two sons in the business.
The AO, thus, was of the view that the conversion of the proprietary concern into a partnership one was towards the advantage of Shri Nani Gopal Paul.
As regards the transfer of assets and liabilities of the proprietorship business of Shri Nani Gopal Paul to the partnership concern, the AO discusses Clause 5 of the partnership deed in accordance with which all the assets and liabilities of the said business excluding, however, the trade mark and patent right, were transferred to the new firm. The AO, however, discusses in this connection that as the patent right was an integral part of the manufacturing process of Biri, the said patent right must be considered to have automatically been transferred by Shri Nani Gopal Paul to the assessee-firm. The AO, thus, ultimately came to the conclusion that as per the real intent of the partnership deed even the trade mark and the patent right should also be considered as having been transferred by Shir Nani Gopal Paul to his new firm and, therefore, the question of making any payment of royalty for using such trade mark and patent right cannot arise. The AO thus, considers the payment of Rs. 60,000 to Shri Nani Gopal Paul, a partner, to be gratuitous in nature and prompted by consideration other than business.
Accordingly, the AO has disallowed the payment of Rs. 60,000 claimed as above.
The CIT(A) held that there cannot be any denying of the amount claimed as having been paid by the assessee-firm as copyright royalty to Shri Nani Gopal Paul. At the same time, again he agreed with the findings of the AO and upheld the addition of Rs. 60,000 in the hands of the assessee-firm remarking at the same time that relief should be given in respect of the same amount in the hands of Shri Nani Gopal Paul 5.1. At the time of hearing of the present appeal before us, the learned counsel for the assessee draws our attention to the provisions of Clause 5 of the partnership deed which clearly mentions that all the assets and liabilities of the erstwhile proprietary business were transferred by Shir Nani Gopal Paul to the new partnership firm except the patent right and trade mark. It is, therefore, difficult to understand how the AO can say that even the trade mark and the patent right were also transferred by Shri Nani Gopal Paul for which a separate claim towards payments has been made by the assessee-firm and also acknowledged by Shri Nani Gopal Paul.
It is certainly not the Departmental case that no payment was made in this regard to Shri Nani Gopal Paul. In this connection, the learned counsel for the assessee firstly relies on the discussions made by the Hon'ble Calcutta High Court at p. 756 of the reported judgment in the case of Narayan Prasad Vijaivargiya v. CIT (1976) 102 ITR 748 (Cal) to the effect that a deed is required to be read and construed as a whole and, if possible, effect should be given to all parts thereof. The partnership deed clearly mentions not only the exclusion in respect of trade mark and copyright out of transfer of assets of the erstwhile proprietary business (Clause 5 of the partnership deed) but also the requirement of payment of royalty by the partnership firm to Shri Nani Gopal Paul at the rate of Rs. 5,000 per month for the user of the trade mark (Mukta) (Clause 8 of the partnership deed).
The learned counsel for the assessee also relied on a judgment of Gujarat High Court in the case of CIT v. Ambika Mills Ltd. In that case it was held that payment made by the business for user of trade mark constituted a revenue expenditure.
We also find that similar issue was decided by the Hon'ble Supreme Court in the case of Bharat Beedi Works (P) Ltd. & Am. v. CIT (1993) 201 ITR 1063 (SC). In that case also the assessee-company had purchased Beedi business from a partnership firm and royalty was paid to the erstwhile partners of the partnership firm for use of the trade name.
The Hon'ble Supreme Court held in the case as follows: "The payments were made in consideration of a valuable right parted with by the firm in favour of the company. Even assuming that the payments were to the partners, so long as the agreement whereunder the payments were made was not held to be a mere device or a mere screen, the payments could not be treated as payments made to directors and the payments would not fall within Section 40(c)." It may be mentioned in this connection that the erstwhile partners of the firm were directors of the new company in that case, 6. So far as the present case before us is concerned, the partnership deed clearly says that Shri Nani Gopal Paul did not transfer the patent right and the trade name to the newly constituted partnership firm and merely allowed the firm to use the same, for which he was entitled to royalty at the rate of Rs. 5,000 per month. The Department does not challenge the reasonableness of the quantum of payment in this regard by resorting to the provisions of Section 40A(2) or otherwise. Since the property in the patent right and the trade mark remained with Shri Nani Gopal Paul, the payment of royalty to him for the user of the said patent right and trade name by the assessee-firm, has got to be considered as a deductible business expense in the hands of the partnership firm. We, therefore, reverse the order of the lower authorities and delete the disallowance of the claim of Rs. 60,000 in this regard.
7. Although the Department has not raised any specific ground in this regard, for the sake of equity, we also order that this amount of Rs. 60,000 received by Shri Nani Gopal Paul should be included within his income. The learned counsel for the assessee appearing before us also made consent in that regard.
8. In the result, the appeal filed by the assessee is partially allowed to the above mentioned extent.