1998 (1) TMI 15 - HC - Income Tax

Summary

Issues Involved:
1. Entitlement to deduction of goodwill cost from sale consideration.
2. Application of Section 45 read with Section 2(47) of the Income-tax Act, 1961.
3. Treatment of goodwill in the sale of business assets.
4. Reopening of assessment due to audit objection.
5. Determination of capital gains and losses.

Issue-wise Detailed Analysis:

1. Entitlement to Deduction of Goodwill Cost from Sale Consideration:
The primary issue was whether the assessee was entitled to deduct Rs. 2,00,000, the cost of goodwill, from the sale consideration of the cinema theatre. The assessee had initially claimed this deduction, which was accepted by the Assessing Officer but later withdrawn upon reassessment due to an audit objection. The Tribunal upheld the assessee's claim, stating that the goodwill was an integral part of the business assets sold.

2. Application of Section 45 read with Section 2(47) of the Income-tax Act, 1961:
The court examined whether the transaction constituted a "transfer" under Section 2(47) of the Act and if Section 45, which deals with capital gains, was applicable. The Tribunal found that the sale of the cinema theatre, including its goodwill, machinery, and other assets, constituted a transfer under the Act. Consequently, the provisions of Section 45 were applicable, allowing the deduction of the goodwill cost.

3. Treatment of Goodwill in the Sale of Business Assets:
The court discussed the nature of goodwill, citing precedents like CIT v. B. C. Srinivasa Setty and Rustom Cavasjee Cooper v. Union of India. It was established that goodwill is an intangible asset arising from the business's reputation and connections. The court noted that goodwill is inseparable from the business and transfers with it, supporting the assessee's claim for deduction.

4. Reopening of Assessment Due to Audit Objection:
The initial assessment allowed the deduction, but it was reopened due to an audit objection. The reassessment disallowed the deduction, leading to the appeal by the assessee. The Tribunal and the High Court both found that the reassessment was incorrect and that the initial assessment's allowance of the deduction was justified.

5. Determination of Capital Gains and Losses:
The court evaluated the capital gains and losses arising from the sale transaction. It was found that the assessee had not received any consideration for the goodwill, leading to a capital loss of Rs. 2,00,000. This loss was deductible from the sale consideration under the provisions of the Income-tax Act.

Conclusion:
The High Court upheld the Tribunal's decision, affirming that the assessee was entitled to the deduction of Rs. 2,00,000 for the cost of goodwill from the sale consideration of the cinema theatre. The court answered the referred question of law in the affirmative and against the Revenue, with no order as to costs.