1991 (4) TMI 212 - AT - Wealth-tax

A Firm, A Partner, Assessing Officer, Assessment Proceedings, Original Assessment, Reassessment Proceedings, Valuation Date

Summary

Issues:
Assessment of escaped wealth tax due to valuation of goodwill in a partnership firm without actual purchase or disclosure in balance sheet.

Detailed Analysis:
The judgment pertains to an appeal against an order by the Dy. Commissioner (Appeals) regarding the assessment of wealth tax for the assessment year 1979-80. The assessee was a partner in a firm named 'Femina' and had a share in the firm's profit/loss. A codicil dated 17-7-1978 valued the firm's goodwill at Rs. 5 lakhs, which was later adopted during the firm's dissolution. The assessing officer initiated reassessment proceedings, asserting that the assessee's share in the goodwill had escaped assessment.

The counsel for the assessee challenged the reassessment on two grounds. Firstly, it was argued that the reassessment was a mere change of opinion and hence invalid. Secondly, on the merits, it was contended that Rule 2C of the Wealth-tax Rules only applies to purchased goodwill disclosed in the balance sheet. The firm had not purchased goodwill for a price or shown it in the balance sheet, as evidenced by the submitted balance sheets.

The Tribunal opined that goodwill is a realizable business asset, and a partner's interest in a firm includes a share in the firm's goodwill. However, in cases where goodwill was not purchased, its valuation is complex and prone to disputes. Executive instructions and Rule 2C(b) mandate that goodwill should not be included unless purchased and disclosed. As the firm had not purchased goodwill by 31-3-1979, the reassessment was deemed unjustified, and the addition of Rs. 2,50,000 was deleted.

The judgment highlighted that reassessment proceedings can fall into various categories based on their validity and sustainability. In this case, the assessing officer was barred by executive instructions from valuing the goodwill, rendering the reassessment invalid. It was noted that the amount paid by the other partner towards the goodwill would be taxable under Rule 2C(b).

In conclusion, the Tribunal allowed the assessee's appeal, emphasizing that without the actual purchase of goodwill by the firm, there was no basis for assessing the amount in question. The judgment clarified the importance of following legal provisions and executive instructions in determining the tax liability related to goodwill in partnership firms.