1972 (2) TMI 5 - HC - Income Tax

Gift Tax Act, 1958 - share of the goodwill of the firm - assessee retired from the business without obtaining any consideration for the value of the goodwill of the business and that this amounted to a gift of the goodwill to his son determination of value of goodwill

Issues Involved:
1. Whether there was a gift or deemed gift chargeable under the Gift-tax Act.
2. If there was a gift, whether it was only of a 10 annas share of the goodwill of the firm.
3. Whether there was any material for the Tribunal to hold that the value of the goodwill was Rs. 2,00,000 only.

Issue-wise Detailed Analysis:

1. Whether there was a gift or deemed gift chargeable under the Gift-tax Act:
The court examined the nature of the transaction under which the assessee retired from the partnership business and transferred the goodwill to his son. The court noted that goodwill is an intangible asset and a property which could be transferred. The dissolution deed provided that the assessee shall have no manner of right or interest in the business, and the son undertook to discharge all obligations and liabilities. The court held that the transfer of goodwill without consideration amounted to a taxable gift within the meaning of section 2(xxiv)(d) and section 4(c) of the Gift-tax Act. The court further stated that the transaction involved a "transfer" from one person to another of an interest in property, and an unilateral act is not a gift under section 2(xii) and (xxiv) of the Act. The court concluded that there was a gift of the goodwill by the assessee to his son.

2. If there was a gift, whether it was only of a 10 annas share of the goodwill of the firm:
The court analyzed clause 14 of the partnership deed, which provided that on dissolution, the junior partner shall be entitled to his capital and share of profits, while the goodwill and other assets shall vest in the senior partner. The court rejected the contention that clause 14 applied only when the junior partner retired. The court held that clause 14 dealt with dissolution as such, and the senior partner was entitled to the goodwill and trade marks. The court concluded that the entire goodwill vested in the assessee on dissolution, and the gift was of the entirety of the goodwill, not just the 10 annas share.

3. Whether there was any material for the Tribunal to hold that the value of the goodwill was Rs. 2,00,000 only:
The court reviewed the Tribunal's method of valuing the goodwill based on 18 months' purchase of the average super profit. The Tribunal considered factors such as the son's familiarity with the secret formula and the expenses of management. The Tribunal rejected the contention that provision for taxes should be deducted before arriving at the super profits. The Tribunal determined the super profit at Rs. 1,27,814 and concluded that 18 months' purchase was a fair value, rounding up to Rs. 2,00,000. The court held that there was material for the Tribunal to hold that the value of the goodwill was Rs. 2,00,000 and answered this question against the revenue.

Conclusion:
The court answered the first question in favor of the revenue, holding that there was a gift of the goodwill chargeable under the Gift-tax Act. The court answered the second question, stating that the gift was of the entirety of the goodwill and not just the 10 annas share. The court answered the third question against the revenue, affirming that there was material for the Tribunal to hold that the value of the goodwill was Rs. 2,00,000. The applicant was entitled to costs in T.C. No. 268 of 1965, and the assessee was entitled to costs in T.C. No. 131/67.

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