1972 (7) TMI 3 - HC - Income Tax

Sale of a firm of chartered accountants - Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is correct in law in holding that the amount of Rs. 32,000 cannot be subjected to tax as capital gains held that amount received on account of goodwill does not give rise to capital gains - Question answered in the affirmative

Issues Involved:
1. Whether the amount of Rs. 32,000 received by the assessee towards the value of goodwill is assessable to tax as capital gains.
2. Interpretation and applicability of sections 45, 48, and 55 of the Income-tax Act, 1961.
3. The relevance of the cost of acquisition and cost of improvement in computing capital gains.
4. Applicability of section 47(ii) of the Income-tax Act, 1961 for exemption.

Issue-Wise Detailed Analysis:

1. Assessability of Rs. 32,000 as Capital Gains:
The primary issue was whether the amount of Rs. 32,000 received by the assessee towards the goodwill of his firm could be subjected to tax as capital gains. The assessee argued that the amount was not liable to be taxed, while the Income-tax Officer considered it taxable under "capital gains." The Appellate Tribunal ruled in favor of the assessee, stating that the amount was not taxable as capital gains, drawing support from the Madras High Court's decision in Commissioner of Income-tax v. Rathnam Nadar.

2. Interpretation and Applicability of Sections 45, 48, and 55 of the Income-tax Act, 1961:
Section 45 of the Act states that any profits or gains arising from the transfer of a capital asset shall be chargeable to income-tax under the head 'Capital gains.' Section 48 provides the method for computing capital gains by deducting the cost of acquisition and cost of improvement from the full value of the consideration received. Section 55 defines 'cost of acquisition' and 'cost of improvement.' The court noted that the definitions in section 55 did not provide a clear method for determining the cost of acquisition of self-created goodwill, making it difficult to compute capital gains.

3. Relevance of Cost of Acquisition and Cost of Improvement:
The court emphasized that for capital gains to be computed under section 48, the cost of acquisition and cost of improvement must be ascertainable. In the case of self-created goodwill, such as the one in question, it was impossible to determine these costs because the goodwill was built through the personal efforts and reputation of the assessee over several years. The court cited the Madras High Court's view that goodwill did not cost anything in terms of money for its creation or acquisition, making it challenging to compute capital gains.

4. Applicability of Section 47(ii) of the Income-tax Act, 1961 for Exemption:
The assessee also argued for exemption under section 47(ii) of the Act. However, the court found it unnecessary to delve into this argument since it had already concluded that the amount received towards goodwill could not be taxed as capital gains due to the inability to compute the cost of acquisition and cost of improvement.

Conclusion:
The court held that the amount of Rs. 32,000 received by the assessee towards the value of goodwill was not assessable to tax under section 48 because the profits or gains arising from the transaction in relation to the goodwill could not be computed in accordance with the provisions of section 48. The court affirmed the decision of the Appellate Tribunal, though on different grounds, and answered the question in the affirmative, against the revenue. The assessee was entitled to costs, and a copy of the judgment was to be sent to the Appellate Tribunal.

Final Judgment:
The court concluded that the amount received by the assessee towards the value of goodwill is not assessable to tax under section 48 of the Income-tax Act, 1961, due to the inability to compute the cost of acquisition and cost of improvement. The question referred was answered in the affirmative and against the revenue.

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