1976 (7) TMI 59 - HC - Income Tax

Summary

Issues:
Interpretation of section 12B(2) of the Indian Income-tax Act, 1922 regarding the substitution of fair market value for goodwill.

Analysis:
The case involved a reference under section 66(1) of the Indian Income-tax Act, 1922, regarding the entitlement of the assessee to substitute the fair market value of goodwill on January 1, 1954, under the third proviso to section 12B(2). The assessee, along with seven partners, was engaged in a business taken over by a limited company, resulting in the firm receiving a sum towards goodwill. The Income-tax Officer held the entire amount as capital gain without allowing any deduction under section 12B(2) due to the absence of an "actual cost" for the goodwill. The Appellate Assistant Commissioner and the Tribunal, however, accepted the contention that the fair market value could be substituted for the actual cost, determining no capital gain on the sale of goodwill at Rs. 5 lakhs.

The crux of the issue revolved around the interpretation of the provisions of section 12B(2) and its third proviso. The argument put forth was that since the goodwill was a self-generating asset, there was no actual cost to the assessee, leading to the contention that section 12B(2) and its proviso did not apply. However, the court rejected this argument, emphasizing that the expression "became the property of the assessee" in the proviso did not necessitate acquisition from a third party or payment of a price. The court highlighted that the provision in sub-section (3) of section 12B allowed for substitution of fair market value in cases of inheritance or succession, where no price was paid, indicating a broader interpretation of the expression in the proviso. Consequently, the court held that the assessee and partners were entitled to substitute the fair market value of the goodwill as on January 1, 1954, under the third proviso to section 12B(2).

In conclusion, the court answered the question in the affirmative, ruling in favor of the assessee and directing the revenue to pay the costs of the reference. The judgment clarified the interpretation of the relevant provisions, affirming the entitlement of the assessee to substitute the fair market value for goodwill under the specified conditions.