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1968 (9) TMI 16 - HC - Income TaxAssessee transferred all his rights in the firm of which he was a partner and received a sum towards his share of the goodwill - assesable as capital gains
Issues Involved:
1. Whether the sum of Rs. 65,898 should be assessed in 1960-61 as capital gains. 2. Whether the assessee was entitled to the benefit of the substitution of the fair market price of the goodwill as on January 1, 1954. 3. Whether there was any capital gains at all in respect of goodwill liable for assessment under section 12B of the Indian Income-tax Act, 1922. Issue-wise Detailed Analysis: 1. Assessment of Rs. 65,898 as Capital Gains in 1960-61 The Tribunal held that the right to receive the amounts arose only on the three dates referred to earlier and only a sum of Rs. 21,966 can be taxed in the current assessment year. The Tribunal also noted that the assessee was entitled to adopt the fair market value of the goodwill as on January 1, 1954. The revenue argued that the goodwill of the firm had been ascertained on December 31, 1958, and the assessee's share thereof quantified, making the capital gains taxable on that date. The Tribunal's decision was based on the fact that the right to receive each installment arose on specific dates, thus only a portion could be taxed in the relevant year. 2. Substitution of the Fair Market Price of Goodwill as on January 1, 1954 The Tribunal allowed the assessee to adopt the fair market value of the goodwill as on January 1, 1954, before fixing the quantum. The revenue contended that there was no valuation on that date, and hence the assessee was not entitled to it. The Tribunal, however, ruled in favor of the assessee, allowing the substitution of the fair market price. 3. Capital Gains on Goodwill under Section 12B The Tribunal mentioned, "We are not aware how capital gains can arise when the assessee himself built the goodwill or, rather to put it in other words, the goodwill grew with the assessee's carrying on of the business. Further, no asset had been acquired, sold or relinquished, so as to invite the application of section 12B." Despite this, the Tribunal did not travel further on this point as it was not pressed much by the learned counsel for the assessee. Preliminary Objection by Revenue The revenue raised a preliminary objection to the maintainability of the reference directed by the court at the instance of the assessee. The court upheld this objection, stating that the jurisdiction under section 66(2) is conditional on an application under section 66(1) being refused by the Appellate Tribunal. The assessee had not applied under section 66(1) in the prescribed form, nor was it accompanied by the fee of Rs. 100. Therefore, the court had no jurisdiction to direct the Tribunal to state a case. Transfer of Goodwill The court examined whether the document dated December 31, 1958, transferred the assessee's share in the goodwill. The court concluded that the assessee had released all his rights in the partnership firm to the continuing partners on that date. The obligation to pay the assessee what was agreed upon was the only remaining aspect. Taxability of Capital Gains on Goodwill The court discussed whether capital gains tax is payable on the transfer of goodwill. Goodwill is considered a capital asset, but the court noted that the actual cost in terms of money for its creation or acquisition is difficult to ascertain. The court held that the Indian Act did not contemplate taxing self-created assets like goodwill under section 12B. Therefore, capital gains on the transfer of goodwill are not liable to be taxed under section 12B. Final Observations The court noted that if capital gains on goodwill were taxable, the value of the goodwill as on January 1, 1954, should be taken into account. The court also addressed the revenue's contention that the question of taxability of capital gains was implicit in the referred questions. The court agreed that the question of assessability of capital gains arising out of the transaction was implicit in the question referred. Conclusion Both questions referred to the court were answered in favor of the assessee. The court did not make any order as to costs in this case.
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