1979 (9) TMI 48 - HC - Income Tax

Summary

Issues Involved:
1. Taxability of the amount received by the assessee from M/s. G.W. Lawrie & Co.
2. Definition and treatment of goodwill as a capital asset.
3. Applicability of Section 2(47) and Section 45 of the Income Tax Act.

Summary:

1. Taxability of the Amount Received:
The primary issue was whether the amount of Rs. 11,250 received by the assessee from M/s. G.W. Lawrie & Co. was liable to tax. The Tribunal held that the amount was not liable to tax, relying on the decision of the Gujarat High Court in CIT v. Mohanbhai Pamabhai [1973] 91 ITR 393 and the Supreme Court in CIT v. Bankey Lal Vaidya [1971] 79 ITR 594, concluding that the amount was exempt u/s 47(ii) of the Act.

2. Definition and Treatment of Goodwill as a Capital Asset:
The department argued that the goodwill of a firm is a capital asset and that the amount paid to a retiring partner for his share in the goodwill constitutes a transfer of a capital asset as defined in s. 2(47). However, the Tribunal found that the payment received by the assessee was not compensation for surrendering his profits but was his share of the partnership assets, including goodwill. The Tribunal's view was supported by the Gujarat High Court's decision in Mohanbhai Pamabhai and the Allahabad High Court's decision in Addl. CIT v. Smt. Mahinderpal Bhasin [1979] 117 ITR 26.

3. Applicability of Section 2(47) and Section 45:
The department contended that s. 2(47) defines transfer in broad terms, including the extinguishment of any right, and that the amount received by the retiring partner should be taxable under s. 45. However, the court held that when a partner retires and receives his share of the partnership assets, there is no element of sale, exchange, relinquishment, or extinguishment of rights. The court distinguished this case from others where lump sum payments were made without accounting, which could be considered transfers. The court concluded that the amount received by the assessee did not fall within the purview of s. 2(47) and, therefore, s. 45 was inapplicable.

Conclusion:
The court answered the question in the affirmative, in favor of the assessee and against the department, holding that the amount received was not liable to tax. The assessee was entitled to costs assessed at Rs. 200, with counsel's fee assessed at the same figure.