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TMI Blog1978 (5) TMI 55X X X X Extracts X X X X X X X X Extracts X X X X ..... rporated is not given to us but it is assumed that it was 25th Aug., 1972, or thereabout. An agreement was entered into between the firm and the limited company providing for the take over of the assets and liabilities of the firm. One of the asset taken over by the limited company form the firm was goodwill of the value of Rs. 2,24,500. In the account books of the firm, there was no goodwill, but it was created for the first time on 23rd Aug., 72, by debiting goodwill account with Rs. 2,24,500 and crediting the accounts of the partners in their respective profit sharing proportions. At the time of making the assessments of these assessees for the asst. yr. 1973-74, the ITO was of the opinion that the value credited to their accounts by way of goodwill represented the capital gain received by the assessees on the transfer of goodwill and was therefore liable to tax as capital gain. This is what he observed in the assessment order, which is common to all the cases: " Capital gains : the assessee received a sum of Rs. 10,205 towards sale of his shares of goodwill in the firm of M/s Vijayawada Bottling Co., Vijayawada. Since the value of the goodwill was originally nil, the entire a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the firm there was no transfer involved. He was only receiving his share. In such an event, no capital gain can arise. For capital gain to arise there should be a transfer. For this proposition he placed a strong reliance upon the decision of the Gujarat High Court reported in 91 ITR 393. For the main proposition on that there was no capital gain involved in the case of transfer of goodwill if at all there was a transfer he relied upon a series of decisions starting from 76 ITR 566 (Calcutta) and ending with 112 ITR 315 (Bombay). 7. The Departmental Representative, on the other hand contended that the firm came into existence on 14th Dec., 1967 that on 23rd Aug.,1972., it drew up a balance sheet creating the goodwill account for the first time that the object of drawing up of a balance sheet in the middle of an accounting year is only to create goodwill that such an amount has been transferred to the limited company that therefore the amount realised was sale proceeds of certain assets sold to the limited company and the amount realised on such a sale has to be taxed as capital gains and that the ITO s action in taxing it is, therefore, just and valid in law. Relying upon the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in. What seemed to have happened was that the firm created the goodwill account for the first time 23rd Aug., 72 on the eve of its take over by the limited company, When goodwill was created the goodwill account had to be debited and the partners accounts credited with their corresponding share in the profits. There was nothing to indicate that the partners had transferred the goodwill to the firm when the firm subsists the assets of the partnership collectively belong to all the partners and no partner can predicate his share in the partnership. The interest of a partner in a partnership is not interest in any specific item of the partnership. It is right to obtain his share of the profits from time to time during the subsistence of the partnership and on dissolution of the partnership or on his retirement from the partnership to get the value of this share in the net partnership assets which return after satisfying the debts and liabilities of the partnership. If a partner during the continuance of the partnership, therefore, receives any amount what he receives is a share in the partnership and not a consideration for transfer of his interest in the partnership either to the con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re in the goodwill which is a property of the firm as their own so that it can be said that on such a deal they transferred it and derived some capital gain. The line of action taken by the Revenue does not, therefore, seem to be correct in view of this enunciation of law by the Supreme Court. This is exactly what the Gujarat High Court held in CIT vs Mohanbhai Pamabhai (3) relied upon Sri M.J. Swamy. When the interest of the assessees in the firm is not an interest in any specific item of partnership property it is difficult to see how such an unspecified interest could be sold or transferred so that it may be said that there was a capital gain. 10. Secondly, the asset has been created in the books of the firm for the first time 23rd Aug., 1972., Assuming for the sake of argument that it was not the partners who transferred their interest in the goodwill but the firm to the limited company formed for the purpose then the asset has been transferred by the firm if at all it could be said to be a transfer to the limited company at book value, So far as the firm is concerned therefore it did not received anything in excess of the bookvalue. Unless something is received in excess of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he company amounted to a transaction for consideration transferring the rights of the firm to the company and that any excess resulting in the realisation over the written sown value should be considered at a profit arising on the transfer of the assets and therefore liable to be taxed under s. 10(2) (vii). The Supreme Court there rejected the argument that in this process of transfer the interest of the partners in the machinery was substituted by the interest in the shares of the company which held the machinery and by the same persons as shareholders instead of as partners. is also a case for the proposition that the taxing authorities are entitled to ignore the legal character of a transaction which is the source of the receipt and they could proceed on the substance of the matter was determining the true legal relation resulting from the transactions which is the source of the receipt and they could proceed on the substance of the matter by determining the true legal relation resulting from the transaction and that it was open to the taxing authority to unravel the device adopted by the parties to cover a transaction and to determine the true character of the realisation. Base ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Then his Lordship observed: " We have been taken through the other sections of the Act relating to the capital gains tax but we do not find anything in those sections which compel us to give a narrow and constricted meaning to the charging provision enacted in s. 45 by excluding self-created capital assets or capital assets which have cost nothing to the assessee in terms of money in acquiring them." The attention of their Lordships of the Gujarat High Court was drawn to the decision of the Madras High Court in CIT vs. K. Rathinam Nadar (6) where an opposite view and had been expressed which perhaps is the first case on the subject Bhagawati, C.J, (as he then was), did not agree with the view of the Madras High Court and expressed his dissent. The attention of the High Court was also drawn to a decision of the Calcutta High Court in the case of CIT vs. Chunnilal Prabhudas Co.(7) where also a decision contrary to the one expressed by the Gujarat High Court was taken, but he Gujarat High Court did not assent to follow this. 13. The reasoning of the Gujarat High Court in dissenting from the Calcutta and Madras High Court decisions was that goodwill being property is a capital ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Calcutta and Delhi High Courts". The Bombay High Court, thus differing from the views expressed by the Gujarat High Court, preferred to follow the view expressed by the other High Courts, viz., Madras, Calcutta, Delhi Karnataka and also Kerala (Full Bench) High Courts. 15. It would, therefore, appear that the view expressed by the Gujarat High Court in which strong reliance has been placed by the Departmental Representative cannot be accepted as the correct law because the majority view is in favour of the view that goodwill, if it is a self-generated asset costing nothing to the assessee except efforts to build it over a period of years, could not be regarded as a capital asset, on the transfer of which any capital gain could be said to arise. Same view has been followed by the Bombay High Court in a very recent decision reported in 112 ITR 315 as Commissioner of Income tax, Bombay vs. Michel Postel (9). Here again, the Bombay High Court reiterated the view that if the capital asset be such that it has cost nothing in terms of money to the assessee, the charging provision of s. 44 must be interpreted in such a way as not referable to such capital asset and goodwill being such ..... X X X X Extracts X X X X X X X X Extracts X X X X
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