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TMI Blog1982 (12) TMI 69X X X X Extracts X X X X X X X X Extracts X X X X ..... irm was reconstituted and the share of the assessee in the profits was reduced from 17 per cent to 15.25 per cent. The ITO, in completing the assessment on 31-3-1978, subjected to charge an amount of Rs. 3,242 computed as capital gains on surrender of 1.75 per cent share in the firm by the assessee for consideration. 3. The assessee preferred appeal against such addition before the AAC contending that after the assessee joined as partner in 1956 there had been an improvement in the profession of the firm ; the cost of improvement for each percentage of the shares after its acquisition cannot be evaluated and, therefore, no capital gains can be computed or subjected to charge. The assessee relied on the decision of the Kerala High Court in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r of 1.75 per cent of the profits from his share of profits. This has been treated as capital gain by the Income-tax Officer. This action of the Income-tax Officer is questioned in the appeal before me ......" The AAC distinguished the decision in E.C. Jacob's case and rejected the assessee's contention stating that this is a case where the assessee has incurred cost of acquisition for his share of goodwill and where a portion of his share of goodwill is transferred for consideration, the difference is liable to tax as capital gains. The AAC also held the view that there is no tangible investment for improvement of the profession and there is no cost of improvement to be adjusted. In this view he dismissed the appeal. 5. In further appe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... money the cost of acquisition of goodwill, it is equally impossible to ascertain in terms of money the cost of addition or alteration to the quality of goodwill which led to the increase in its value. The assessee's representative argued that for chargeability to capital gains tax, capital asset in question must be such that it is capable of improvement at an ascertainable cost in terms of money, and the goodwill in the profession having been augmented by further self-generation, it is not possible to evaluate in terms of money the cost of such improvement and, therefore, it does not fall under the computation provision of section 48(ii) of the Act and no capital gains tax can be charged. The decision of the Bombay High Court in the case o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ll as a result of the reconstitution of the firm and the re-allocation of shares is subject to the charge of capital gains tax under section 45 of the Act. 8. There is no controversy on the fact that the goodwill of the profession is a capital asset. It is also not now disputed that on re-allocation of the shares there had been a diminution in the profit sharing ratio of the assessee which resulted in extinguishment of a portion of the right in the goodwill. Transfer in relation to a capital asset, as defined in section 2(47) of the Act, includes relinquishment of the asset or the extinguishment of any right therein. It cannot, therefore, be disputed that there had been transfer of a capital asset on re-allocation of the shares when the f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was valued at Rs. 32,000 and V paid to the assessee Rs. 8,000 for his share of the goodwill. The firm was dissolved on 19-10-1965 and the assessee received Rs. 24,000 towards his share of goodwill of the firm . The ITO held that the entire amount of Rs. 32,000 received by the assessee was taxable as capital gains. On second appeal, the Tribunal held that the amount was not taxable. On a reference, the High Court held that the Tribunal was correct in holding that the amount could not be subjected to capital gains tax. The High Court observed thus : ". . What is charged under section 45 of the Income-tax Act, 1961, is the 'profits or gains arising from the transfer of a capital asset'. In computing the 'profit and gain' in accordance with t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... putation of 'capital gains' under section 48. Without computation of 'Profits or gains', no tax can be levied under section 45 of the Act of 1961. That precisely is the situation obtained in relation to the goodwill in dispute." It was accordingly held that the amount of Rs. 32,000 received by the assessee towards value of goodwill is not assessable to tax under section 48 in so far as the profits or gains arising from the transaction in relation to the goodwill cannot be and has not been computed in accordance with the provisions of section 48. It is the above view of the High Court that is approved in the case of B.C. Srinivasa Setty. 9. The ratio of the decision applies to the facts of the present case. The assessee herein has acqui ..... X X X X Extracts X X X X X X X X Extracts X X X X
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