1998 (3) TMI 10 - HC - Wealth-tax

Whether, on the facts and circumstances of the case, the Tribunal was right in holding that goodwill, not purchased for a price but built up over a period of years, was liable to be taken into consideration in determining the net value of the assets of the business as a whole on a global basis and the value thereof is to be included having regard to the provisions of rule 2C of the Wealth-tax Rules, 1957? we hold that the Tribunal was not correct in holding that the goodwill, though not purchased, is liable to be taken into account in determining the net value of the assets of the business. - we answer the common question of law in the negative and in favour of the assessee

Summary

Issues:
Interpretation of Wealth-tax Rules regarding inclusion of goodwill in determining net value of assets in a partnership firm.

Analysis:
The judgment pertains to the interpretation of the Wealth-tax Rules concerning the treatment of goodwill in determining the net value of assets in a partnership firm for assessment years 1974-75 to 1978-79. The primary issue revolves around whether self-generated goodwill, not purchased for a price, should be considered in calculating the net value of assets as per rule 2C of the Wealth-tax Rules.

The case involved a partner in a firm who paid an excess amount to a retiring partner, which the Wealth-tax Officer treated as the value of goodwill. The Appellate Assistant Commissioner disagreed, stating that unless goodwill was paid for, no value could be added as per rule 2C(b) of the Wealth-tax Rules. The Appellate Assistant Commissioner also highlighted that the excess payment did not represent any share in the appreciated value of the firm's assets. The Revenue appealed this decision before the Appellate Tribunal.

The Appellate Tribunal held that goodwill must be included in determining the value of the partners' interest in the firm, even if not disclosed in the balance sheet. The Tribunal emphasized the necessity of valuing goodwill in the context of the business as a going concern. It also referenced rule 2C of the Wealth-tax Rules, stating that if goodwill does not fall under specific clauses, rule 2C(d) would apply. The Tribunal set aside the previous orders and directed the Wealth-tax Officer to reevaluate the assessee's interest in the firm.

The High Court analyzed the Gujarat High Court's decision, which held that self-generated goodwill should not be included under rule 2C(d) of the Wealth-tax Rules. The High Court agreed with this interpretation, stating that where goodwill was not purchased, it should not be covered by clause (d) of rule 2C. The High Court emphasized the principle that goodwill should only be considered if purchased for a price, as per standard accountancy practices. Consequently, the High Court ruled in favor of the assessee, stating that self-generated goodwill should not be factored into the net value of assets, contrary to the Tribunal's decision.

In conclusion, the High Court's judgment clarified that self-generated goodwill, not purchased for a price, should not be included in determining the net value of assets in a partnership firm as per rule 2C of the Wealth-tax Rules. The decision aligned with the principle that goodwill should only be accounted for if acquired for a cost, as per standard accounting practices.