BHAKTIMALA BEEDI FACTORY Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) The Tribunal, Hyderabad Bench "A", referred the following two questions to the High Court for its opinion, viz. :

(2.) Before answering the reference, it is necessary to refer to a few facts relating to the issue which ultimately led to the above reference. Bhaktimala Beedi Factory, Tirupati (hereinafter called "the assessee") is a registered firm. The said firm filed its returns of income for the asst. yr. 1987-88 and for the accounting period ending on 31/03/1987, showing a total income of Rs. 6,54,075. The ITO 'A' Ward, Tirupati, by his order dt. 3/03/1988, determined the total income at Rs. 8,79,560. The assessee claimed that a sum of Rs. 2,00,000 was payable to the Srinivasula Reddy Family Trust towards goodwill of the business and the trademark and, accordingly, a sum of Rs. 2,00,000 was credited to the account of Srinivasula Reddy Family Trust on 31/03/1987, itself which was disputed by the Assessing Officer (AO). Therefore, the grievance of the assessee is about the inclusion of a sum of Rs. 2,00,000 for purpose of assessing the firm's income. The claim of the assessee for deduction of the said sum arises in the following circumstances : Bhaktimala Beedi Factory was started by one Sri C. Srinivasula Reddy way back in 1940 and the trademark was registered in 1944 and in 1946 in the name of the partners of Bhaktimala Beedi Factory. After the family partition, a partnership was formed w.e.f. 1/04/1964, comprising Sri Srinivasula Reddy and his three sons. On 2/07/1986, an agreement-cum-trust deed was executed by all the four partners where under they agreed that the goodwill of the business together with the registered trademarks should cease to be the assets of the assessee-firm w.e.f. 2/07/1986, and become the property of the trust known as "Sri Srinivasula Reddy Family Trust". The sole trustee shall be C. Srinivasula Reddy during his lifetime and thereafter Sri C. Venkatrama Reddy shall be the sole trustee. The survivor of either of them shall have a right to nominate by will or otherwise his successors not more than four in number. It is provided in the trust deed that the property and income of the trust shall belong to the three sons of C. Srinivasula Reddy and the minor sons of those three sons in the proportions mentioned in the deed. Clause 4 of the deed provides that in spite of the goodwill and the trademarks ceasing to be the partnership asset of Bhaktimala Beedi Factory, the said firm shall have the continued right to use the goodwill and the trademark up to the period ending on 31/03/1992. For such user of goodwill and trademarks by the assessee-firm, the deed provides that a sum of Rs. 2,00,000 shall be paid to the trust in a lump sum on or before 31/03/1987, and a royalty thereafter at the rate of three percent of the sale value of beedies for each financial year commencing from 1/04/1987. As per the directions of the trust deed, a sum of Rs. 2,00,000 was credited to the trust from out of the profits of the assessee. As already stated, the ITO disallowed this item of Rs. 2,00,000 on the ground that the goodwill was an asset of the firm and the partners had no right to deal with it except at the time of dissolution of the firm. Aggrieved by the said assessment order, the assessee unsuccessfully filed an appeal before the AAC and further appeal to the Tribunal, Hyderabad Bench "A". However, the assessee approached the Tribunal seeking for a reference of the above questions for the opinion of the High Court and the Tribunal referred questions Nos. 4 and 5 about which a reference was already made.

(3.) Learned counsel for the petitioner submits that the partnership being a creature of the agreement among the partners can be varied or modified by the partners in any manner as they like at any time. The trademark and the goodwill being an asset of the partnership can be transferred to the family trust and the assessing authority cannot take exception to such a course under the impression that it is a device to avoid tax. It is also the contention of learned counsel for the petitioner that the assessee is entitled to reduce the tax liability by making suitable adjustments permissible under law. Sri S. R. Ashok, learned standing counsel for Income-tax, submits that the family trust is only a device to evade tax. Inasmuch as there is no consideration for transfer of the goodwill and the trademark in favour of the family trust, the same cannot be lawful. He further submits that the partners alone are parties to the trust deed and since the partnership firm is not a party to the document, the assets belonging to the partnership firm cannot be legally transferred in favour of the family trust, more so when all the beneficiaries are not partners of the firm.