1988 (7) TMI 8 - HC - Wealth-tax

Summary

Issues Involved:
1. Inclusion of the value of the assessee's share in the goodwill of the firm in the assessee's wealth for assessment years 1964-65 to 1974-75.
2. Classification of the annual payment of Rs. 50,000 as an annuity and its commutability under section 2(e)(iv) of the Wealth-tax Act.
3. Applicability of Rule 2C(b) of the Wealth-tax Rules, 1957, and Circular No. 5-D(WT) of 1966 regarding the valuation of goodwill.

Detailed Analysis:

1. Inclusion of the Value of the Assessee's Share in the Goodwill:
The court examined whether the value of the assessee's share in the goodwill of the firm, Mohanlal Hargovinddas, should be included in the assessee's wealth for the specified assessment years. The assessee had retired from the firm but retained ownership of half of the firm's goodwill, for which he received Rs. 50,000 annually. The Wealth-tax Officer included the value of the assessee's share in the goodwill in his net wealth, estimating it at Rs. 18,00,000 less Rs. 50,000 received annually, resulting in a net inclusion of Rs. 17,50,000. The Commissioner of Wealth-tax (Appeals) and the Income-tax Appellate Tribunal upheld this inclusion, determining that the goodwill remained an asset of the assessee.

2. Classification of the Annual Payment as Annuity:
The assessee argued that the annual payment of Rs. 50,000 was an annuity exempt from wealth tax under section 2(e)(iv) of the Wealth-tax Act. The court analyzed the definition of "annuity" as per judicial interpretations and found that the payment did not meet the criteria for an annuity, which requires (i) a money payment, (ii) made annually, (iii) of a fixed sum, and (iv) a personal charge on the grantor. The court emphasized that the agreement did not preclude the commutation of the Rs. 50,000 payment, as the assessee retained the right to rejoin the firm, implying potential commutation. Therefore, the payment was not considered an annuity and was includible in the assessee's net wealth.

3. Applicability of Rule 2C(b) and Circular No. 5-D(WT):
The assessee contended that since the goodwill was not purchased for a price, it could not be valued as an asset under Rule 2C(b) of the Wealth-tax Rules, 1957, and Circular No. 5-D(WT) of 1966. The court clarified that these provisions set norms for determining the net worth of business assets and did not imply that non-purchased goodwill could not be included in net wealth. The court held that the assessee's share of goodwill, from which he derived income, was an asset and includible in his net wealth.

Conclusion:
The court concluded that the value of the assessee's share in the goodwill of the firm was includible in the assessee's wealth for the assessment years in question. The annual payment of Rs. 50,000 was not an annuity exempt under section 2(e)(iv) of the Wealth-tax Act, and the goodwill, being an asset from which income was derived, was correctly included in the net wealth of the assessee. The judgment was in favor of the Revenue and against the assessee, with no order as to costs.