1986 (4) TMI 3 - HC - Income Tax

Summary

Issues Involved:
1. Whether the consideration for goodwill amounting to Rs. 71,918 received by the assessee was assessable as capital gains.
2. Whether the sale deed included the sale of goodwill.
3. Whether goodwill is considered a capital asset under section 45 of the Income-tax Act.
4. Whether self-generated goodwill is liable to be taxed as capital gains.

Issue-wise Detailed Analysis:

1. Whether the consideration for goodwill amounting to Rs. 71,918 received by the assessee was assessable as capital gains:
The Tribunal held that the value of the consideration received by the assessee for the transfer of goodwill was not liable to capital gains tax under section 45 of the Income-tax Act. The Tribunal observed that the capital value of goodwill is charged to wealth-tax under the Wealth-tax Act, 1957, and it would be unfair to levy another tax calling it capital gains tax on the same value of the goodwill in the same assessment year merely because the goodwill had been transferred for a consideration.

2. Whether the sale deed included the sale of goodwill:
The sale deed did not explicitly mention the sale of goodwill. The Appellate Assistant Commissioner, however, treated the amount as being on account of goodwill of the shop "New Chaibasa Cycle Stores". A letter dated May 26, 1971, showed an offer of Rs. 73,000 on account of goodwill, including quota rights from certain manufacturers and suppliers of cycles and cycle parts. The Tribunal, however, did not apply itself to the question of whether there was a transfer of goodwill or not but accepted it as such.

3. Whether goodwill is considered a capital asset under section 45 of the Income-tax Act:
The Tribunal's view that tax on capital gains was not attracted to the transfer of goodwill was not sound. Reference was made to Artex Manufacturing Co. v. CIT [1981] 131 ITR 559 (Guj), where it was held that if there is any surplus in the sense of excess of the consideration for the transfer of the business over the cost of acquisition of the business, there would be capital gain taxable in the hands of the assessee. The Supreme Court in CIT v. Mugneeram Bangur and Co. [1965] 57 ITR 299 also laid down that where there is a slump transaction, anything apart from the value of the stock-in-trade must be taxed as a capital gain.

4. Whether self-generated goodwill is liable to be taxed as capital gains:
The Appellate Assistant Commissioner and the Tribunal both held that the goodwill was self-generated and therefore not liable to capital gains tax. This position aligns with the Supreme Court's ruling in CIT v. B. C. Srinivasa Setty [1981] 128 ITR 294, where it was held that goodwill generated in a newly commenced business cannot be described as an "asset" within the terms of section 45 of the Act and therefore its transfer does not give rise to a capital gain for the purposes of income-tax.

Separate Judgments Delivered:
Uday Sinha J.:
Held that the Tribunal was not justified in holding that the consideration for goodwill amounting to Rs. 71,918 received by the assessee was not a capital gain assessable to tax. He emphasized that goodwill is a capital asset and should be taxed under section 45 of the Income-tax Act.

Nazir Ahmad J.:
Disagreed with Uday Sinha J., holding that the Tribunal was justified in law in holding that the consideration for goodwill amounting to Rs. 71,918 received from the vendee by the assessee was not a capital asset and as such is not assessable to capital gains tax. He emphasized that the goodwill was self-generated and therefore not taxable under section 45 of the Act.

G. G. Sohani C. J.:
Agreed with Nazir Ahmad J., concluding that the Tribunal was right in holding that the consideration for goodwill amounting to Rs. 71,918 received by the assessee from the vendee was not liable to be taxed as capital gains under section 45 of the Act. He emphasized that the question of the correctness of the Tribunal's finding that the amount represented the value of the goodwill was not before the court.

Order of the Court:
In accordance with the opinion of the majority, the answer to the question referred to the court by the Tribunal is in the affirmative and against the Revenue. The consideration for goodwill amounting to Rs. 71,918 received by the assessee was not a capital asset assessable to capital gains tax.