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TMI Blog1968 (9) TMI 16X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessment in relation to the facts of the case pertaining to section 12B of the Indian Income-tax Act, 1922 ? " The reference at the instance of the revenue was made by the Tribunal; but the Tribunal having refused to refer the question wanted to be referred by the assessee, he applied to this court in T.C.P. No. 56 of 1965 under section 66(2). This court directed the Tribunal to refer to it the question already mentioned, reserving however the preliminary objection raised by the revenue to the maintainability of the application and the maintainability of the reference. At that stage, the counsel for the assessee had also indicated that he would not raise any objection to the revenue raising a preliminary objection and this court deciding the matter. Before deciding the other questions that arise in this case we shall deal with the preliminary objection to the question referred at the instance of the assessee. The facts which give rise to these questions are as follows : The assessee was a partner in a firm by name, Ar. A. Shenbaga Nadal and P. V. P. Valasubramania Nadar Co., since its inception in 1943. The business of the firm was dealing in automobiles, automobile spare pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... therefore, it had no value either before or after January 1, 1954. In the result, he dismissed the appeal. Before the Tribunal, the assessee contended that there was an extinguishment of the right of the assessee in the firm of which he was a partner, and, therefore, no capital gains tax was exigible. He contended that the amount representing the goodwill was to be paid in three equal installments without interest, and, therefore, the right to receive each installment arose on the 20th of August of the subsequent year. He urged that the accounting year in the present assessment ended on August 16, 1959, but that the first installment of the goodwill was payable only on August 20, 1959, and so on for subsequent years and even if the whole sum was liable to tax, the value of the asset as on January 1, 1954, should be taken into consideration before fixing the quantum. The contention of the revenue, on the other hand, was that the goodwill of the firm had been ascertained on December 31, 1958, and the assessee's share thereof quantified and that the capital gains, therefore, arose on that date. It was also contended that the fact that the payment had been postponed would not make an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Commissioner, as the case may be, may apply to the High Court, and the High Court may, if it is not satisfied with the correctness of the decision of the Tribunal, require it to state a case and refer it and, on such requisition, the Appellate Tribunal shall state the case and refer it accordingly. It is under this provision that the assessee had applied to this court in T. C. P. No. 56 of 1965. The right of the assessee---we are not concerned in this case with the right of the Commissioner - under this sub-section arises only when he is served with a notice of refusal under this sub-section, and such a notice of refusal can arise only on an application being made under sub-section (1) of that section. Under sub-section (1), as already noticed, the assessee in this case should have applied in the prescribed form, accompanied by a fee of Rs. 100 and required the Appellate Tribunal to refer to the High Court any question of law. The assessee in this case did not apply under section 66(1) to the Tribunal. The application was not in the prescribed form, nor was it accompanied by the fee of Rs. 100. The assessee required a question of law to be referred only in his counter statemen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the total absence of an application under section 66(1) is a complete bar to an application under section 66(2). Therefore, in this case, as there was no application by the assessee under section 66(1) and it was not refused by the Appellate Tribunal, this court had no jurisdiction to direct the Tribunal to state a case. Nor are we able to accept the contention on behalf of the assessee that the words " as the case may be " found in sub-section (2) can lead to the inference that, where an application has been made by either the assessee or the Commissioner, it is open to a party other than the one which has made the application under section 66(1) to apply to the High Court under sub-section (2) of section 66. Sub-section (2) only means that, where the assessee had made the application and his application has been refused, he can apply to the High Court and the Commissioner can apply to the High Court if he has made an application under section 66(1) and it has been refused. The assessee cannot make an application to the High Court under section 66(2) by making in the course of an application made by the Commissioner under section 66(1) a request to refer a question he want ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arge of its functions, including the places at which the Benches shall hold their sittings." The right of the Appellate Tribunal to regulate its own procedure cannot confer on it the power to frame a rule conferring a substantive right not contemplated by or conferred by section 66. Naturally, the same considerations would apply if in an application made by the assessee under section 66(1) the Commissioner sought to raise a new question for being referred to the High Court, without himself having made an application under section 66(1) and such application having been refused. Reliance was, however, placed on behalf of the assessee on the decision of the Bombay High Court in Girdhardas Co. Ltd. v. Commissioner of Income-tax , where it was held that, where a party which has lost the case before the Tribunal applies for a reference and a reference is determined upon, the party which has won may apply for reference of other questions of law which arise from the order of the Tribunal. The question is discussed as follows: " Another question has been submitted to us by the Tribunal which was raised by the Commissioner, and Mr. Palkhivala has a preliminary objection to take to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by Mr. Palkhivala. " The court relied upon its own earlier decision which is referred to therein. The Bench does not consider the actual wording of section 66, nor do they refer to it as supporting the view which they have taken. The Gujarat High Court has taken a similar view in Smt. D. R. Amin v. Commissioner of Income-tax . The only reason which that court gave for following the decision of the Bombay High Court was that they were bound by the decision of the Bombay High Court which was delivered prior to the bifurcation of the State of Bombay in 1960 and, therefore, they followed the Bombay High Court. The Madhya Pradesh High Court in Mis. Civil Case No. 195 of 1964 referred to the decision of the Bombay High Court and it was unable to agree with that High Court, and it held that a question cannot be referred to the High Court without an application under section 66(1) duly made by the party which wanted the reference to be made. This decision is also referred to by the Gujarat High Court. Naturally, being bound by the decision of the Bombay High Court, it had no occasion to consider which of the two views was preferable. With respect, we find ourselves unable to agree with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ovisions of the deed of dissolution of partnership and till the retiring partner has also executed a separate document, releasing in favour of the continuing partners, releasing, extinguishing, abandoning and otherwise cancelling his respective rights, claims and demands, there was no actual transfer. We are unable to accept this contention. Paragraph 1 of that document clearly says that the partnership was dissolved from December 31, 1958, and that the continuing partners shall be jointly and severally liable to the retiring partner for the payments mentioned in paragraph 2 and that the retiring partner shall accept the payments in full discharge of his rights on retirement in the partnership. Therefore, the assessee had released all his rights and the effect of the document taken as a whole is to transfer all his rights in the partnership firm to the continuing partners. What remained was only an obligation arising out of the document on the part of the continuing partners to pay the assessee what they had undertaken to pay under that document. The document seems to have been copied from some standard form; paragraph 6 is merely a surplusage. We are not persuaded that the decis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... respect of the transfer of a capital asset. " Capital asset " means property of any kind held by an assessee whether or not connected with his business, profession or vocation but does not include (i) any stock-in-trade, consumable stores or raw materials held for the purposes of his business, profession or vocation; (ii) personal effects, that is to say, movable property (including wearing apparel, jewellery and furniture) held for personal use by the assessee or any member of his family dependent on him and (iii) any land from which the income derived is agricultural income. Lawson in his introduction to the Law of Property has this to say on it "goodwill": Goodwill is property of a highly peculiar kind. It is the right to enjoy all the advantages of an established trade connexion. Customers who have been in the habit of dealing with a business will probably continue to do so, even if the business changes hands, and this probability is regarded as so valuable that large sums of money are commonly paid for it. So well established a head of property is it that its value must be taken into account for purposes of taxation. Yet it is an odd kind of property since only the person ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the following terms: " What is a goodwill ? It is one of those terms which is better understood than comprehensively and clearly described. Broadly speaking, it is the magnetic quality of a particular trade or business which attracts custom to it as a matter of course. This quality springs from and is developed by various contributing factors that earn a reputation for honest dealing, quality and standard. Goodwill is founded on the belief and faith of the customer. It is commonly built up in relation to a particular type of manufacture or production of articles identified by a trade-mark which becomes widely known to the public and by which the custom takes it for granted that it represents what they wish for. No trade-mark gains reputation overnight. Naturally the standing of the business is necessarily one of the contributing factors. The personalities who are, engaged in the business, the location in which it is carried on and the like are other features which go into the goodwill. Where a business involves no distinguishable features and deals in standard articles manufactured by someone else which one can get from anywhere, not merely from a particular dealer, there is h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a variety of circumstances or a combination of them. The location, the service, the standing of the business, the honesty of those who run it, and the lack of competition and many other factors go individually or together to make up the goodwill, though locality always plays a considerable part. Shift the locality, and the goodwill may be lost. At the same time, locality is not everything. The power to attract custom depends on one or more of the other factors as well. In the case of a theatre or restaurant, what is catered, how the service is run and what the competition is, contribute also to the goodwill. " In the sense used by this court in that case it cannot be said that there was any goodwill which this firm had. It was dealing in ordinary automobiles, spare parts and petroleum products. As mentioned in Attorney-General v. Boden , referred to above, one machine is practically as good as another; and the product is so uniform that anyone can buy the goods in any shop. But by the definition which the Supreme Court gave in S. C. Cambatta Co. Private Ltd. v. Commissioner of Excess Profits Tax it may be said that this firm had a goodwill. In any case the question referred to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s to correspond to sub-section (2) of section 12B of our Act. Thus, the British Act contemplates and provides for assets of the kind now under consideration, whereas our Act does not. In the United States Taxation Laws, " Capital asset " is defined as property held by the taxpayer ". This definition is recognised to be of a sweeping kind; but that definition also specifies certain exceptions like inventory, stock-in-trade, property used in taxpayer's trade or business, and particularly copyrights, literary, musical or artistic compositions and similar properties, if the taxpayer created that property by his personal efforts or acquired that property from the creator by gift or in a tax-free exchange. In the World Tax Series, in the volume relating to Taxation in the United States, published by the Harvard Law School, at page 691 the position with regard to goodwill is stated as follows : " Goodwill, that is, the excess of the value of the business considered as a whole and as a going concern over the aggregate value of all identifiable individual assets, tangible or intangible, which are held by the business . . . is regarded as a capital asset. In some circumstances, there is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 12B supports such a contention. We therefore hold, though not without hesitation, that capital gains on the transfer of a goodwill are not liable to be taxed under section 12B. We may also mention that, if it was so taxable, we would be disposed to take the view that the value of the goodwill as on January 1, 1954, should be taken into account for this purpose. It is finally urged on behalf of the revenue that on the questions that have been referred to us for decision it is not open to us to consider the question whether capital gains can be taxed as such, and that we are bound to deal only with the question whether the sum of Rs. 65,898 should not be assssed in 1960-61 as capital gains. In other words, the only question to be answered is whether that sum is assessable in 1960-61 or one-third of that sum is assessable in each year as and when it is paid to the assessee. But, as the question referred to us for decision is whether this sum should not be assessed in 1960-61 as capital gains, the question whether it is taxable as capital gains is implicit in that question. If it is not taxable as capital gains, the question whether it is assessable in 1960-61 or whether the whole ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re the question itself was under issue, there is no further limitation imposed by the section that the reference should be limited to those aspects of the question which had been argued before the Tribunal. It will be an over-refinement of the position to hold that each aspect of a question is itself a distinct question for the purpose of section 66(1) of the Act. That was the view taken by this court in Commissioner of Income-tax v. Ogale Glass Works Ltd. and in Zoraster Co. v. Commissioner of Income-tax and we agree with it. As the question on which the parties were at issue, which was referred to the court under section 66(1) and decided by it under section 66(5), is whether the sum of Rs. 9,26,532 is liable to be included in the taxable income of the rcspondents, the ground on which the respondents contested their liability before the High Court was one which was within the scope of the question, and the High Court rightly entertained it. It is argued for the appellant that this view would have the effect of doing away with limitations which the legislature has advisedly imposed on the right of a litigant to require references under section 66(1), as the question might be f ..... X X X X Extracts X X X X X X X X Extracts X X X X
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