1971 (9) TMI 56 - HC - Income Tax

Scope and ambit of the charging provision in relation to capital gains tax - Whether relinquishment of interest in partnership assets due to retirement of partner from the firm attract capital gains tax also whether goodwill is a capital asset

Issues Involved:
1. Whether the goodwill of the firm is a self-acquired asset of the firm.
2. Whether the amount received by the assessee by way of his share in the goodwill of the firm is liable to be assessed to tax.
3. Whether the retirement of the assesses as partner from the firm amounted to dissolution of the firm, and therefore, the capital gain, if any, is chargeable to tax in view of the provisions of section 47(ii) of the Act.

Detailed Analysis:

Issue 1: Goodwill as a Self-Acquired Asset
The Tribunal held that the goodwill of the firm is a self-acquired asset, which had cost nothing to the firm and its partners in terms of money. This view was supported by the argument that goodwill is a self-created asset and its transfer does not fall within the ambit of the charging provision contained in section 45 of the Income-tax Act, 1961. The court agreed with the Tribunal's view, stating that the goodwill of the firm is indeed a self-acquired asset.

Issue 2: Taxability of Amount Received for Goodwill
The court examined whether the amount received by each assessee for their share in the goodwill of the firm is liable to be assessed to tax as capital gains. The court considered two main contentions:
1. The amount received was part of the assessee's share in the net partnership assets and not consideration for the transfer of interest in the goodwill.
2. Goodwill, being a self-created asset that cost nothing to the firm and its partners, does not attract capital gains tax.

The court concluded that the first contention was well-founded. It was held that when a partner retires from a partnership, the amount received represents their share in the net partnership assets after deducting liabilities and prior charges, and not consideration for the transfer of interest in the goodwill. The court referenced the Supreme Court decisions in Narayanappa v. Bhaskara Krishnappa and Commissioner of Income-tax v. Dewas Cine Corporation, which clarified that a partner's interest in a partnership is not in any specific item of the partnership property, but in the net partnership assets after liabilities. Therefore, the amount received by the retiring partner is not taxable as capital gains.

Issue 3: Retirement vs. Dissolution of Firm
The Tribunal included a third question regarding whether the retirement of the assessees amounted to the dissolution of the firm, which would invoke section 47(ii) of the Act, making the capital gain, if any, non-taxable. However, the court decided that it was unnecessary to address this question due to the conclusions reached on the first two issues.

Conclusion:
The court answered the questions as follows:
- Question No. (1): Affirmative. The goodwill of the firm is a self-acquired asset.
- Question No. (2): Affirmative. The amount received by the assessee by way of his share in the goodwill of the firm is not liable to be assessed to tax.
- Question No. (3): Does not arise.

The Commissioner was directed to pay the costs of each reference to the assessee.

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