1976 (3) TMI 64 - AT - Income Tax

Summary

Issues:
1. Exclusion of a sum of Rs. 21,000 from the total income of the assessee by the AAC.
2. Classification of the sum of Rs. 21,000 as goodwill and its treatment as business profit by the ITO.
3. Dispute regarding the treatment of the sum of Rs. 21,000 as part of business profit or capital gains.
4. Interpretation of the agreement between the parties regarding the consideration for goodwill.

Detailed Analysis:
1. The appeal before the Appellate Tribunal ITAT Bangalore concerns the exclusion of a sum of Rs. 21,000 from the total income of the assessee, which was initially included by the Income Tax Officer (ITO). The dispute arises from the transfer of a business as a running concern by the assessee firm to a purchaser, as outlined in the agreement dated March 31, 1973.

2. The primary issue revolves around the classification of the sum of Rs. 21,000 mentioned in the agreement as goodwill. The ITO treated this amount as part of the business profit, asserting that goodwill is an asset purchased by the purchaser and does not warrant any deduction from the profit on the sale of the business. However, the reasoning behind this treatment was not clearly articulated in the ITO's order.

3. Upon appeal, the Appellate Authority Commissioner (AAC) disagreed with the ITO's classification and exclusion of the sum of Rs. 21,000 from the total income. The AAC held that the amount received for goodwill should not constitute business income and could not be assessed as capital gains, citing a judgment by the Karnataka High Court.

4. The Tribunal analyzed the arguments presented by both the Departmental Representative and the counsel for the assessee. The Departmental Representative relied on Supreme Court judgments to support the contention that the mere mention of goodwill in the agreement does not bind the Department. However, the Tribunal found that there was no evidence to suggest that the sum of Rs. 21,000 did not represent the value of goodwill transferred to the purchaser. The Tribunal agreed with the AAC's decision, emphasizing that goodwill is a capital asset and not a revenue asset, and there was no justification to treat it as business profit.

5. Ultimately, the Tribunal dismissed the appeal, upholding the AAC's decision to exclude the sum of Rs. 21,000 from the total income of the assessee. The judgment reaffirmed the distinction between goodwill as a capital asset and the lack of grounds to assess it as revenue profit, in line with the principles established in relevant legal precedents.