1970 (10) TMI 9 - HC - Income Tax

Assessee s business was taken over - amount paid on account of transfer of goodwill - assesability u/s 12B - not assessable as capital gain

Summary

Issues Involved:
1. Whether the sum of Rs. 83,624 was rightly assessed under section 12B of the Indian Income-tax Act, 1922.
2. Whether the transfer of goodwill amounting to Rs. 50,000 should be considered as capital gain under section 12B of the Act.

Issue-wise Detailed Analysis:

1. Assessment of Rs. 83,624 under Section 12B of the Indian Income-tax Act, 1922:
The primary question referred to the court was whether the sum of Rs. 83,624 was rightly assessed under section 12B of the Indian Income-tax Act, 1922. The case pertains to the assessment year 1947-48, with the assessee being an individual who transferred his business to a private limited company. The Income-tax Officer initially held that there was a capital gain of Rs. 83,624 in the hands of the assessee, stating that the assets were acquired by the company at an enhanced price compared to their book value.

The Tribunal considered whether converting a proprietary business into a limited company and receiving shares in lieu of business assets constituted a realization of capital gains. The Tribunal remanded the case to the Appellate Assistant Commissioner for an enquiry into the market value of the assets. The Appellate Assistant Commissioner reported that the market value of the assets was the same as disclosed, and the value of the shares was Rs. 100 each.

Upon review, the Tribunal agreed that the assessee "sold" the assets and received adequate compensation in the form of shares, thus constituting a capital gain. The court upheld this view, emphasizing that a company is a separate legal entity distinct from its members. It was concluded that the machinery and furniture acquired by the company at a price exceeding their book value by Rs. 33,624 constituted a capital gain and was liable to tax under section 12B of the Act.

2. Transfer of Goodwill Amounting to Rs. 50,000:
The court examined whether the amount of Rs. 50,000 received for the transfer of goodwill should be considered a capital gain under section 12B. Goodwill was defined as an intangible asset, representing the advantage acquired by a business due to public patronage and reputation. The court referred to the Madras High Court's decision in Commissioner of Income-tax v. K. Rathnam Nadar, which held that the amount received on the transfer of goodwill was not liable to tax under section 12B, as goodwill does not have an actual cost in terms of money.

The court agreed with this reasoning, stating that goodwill is created by the trading activities and reputation of the business, and does not have a tangible cost. Therefore, the amount of Rs. 50,000 received for the transfer of goodwill could not be taxed as capital gain under section 12B.

Conclusion:
The court concluded that out of the Rs. 83,624 assessed, only Rs. 33,624 was rightly assessed under section 12B as capital gain. The remaining amount of Rs. 50,000, received for the transfer of goodwill, was not liable to be taxed as capital gain under section 12B. The reference was answered accordingly, and the parties were directed to bear their own costs.