9911796707
TMI Blog1969 (9) TMI 17X X X X Extracts X X X X X X X X Extracts X X X X ..... ws : " Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that no capital gains could arise under section 12B of the Indian Income-tax Act, 1922, out of the transfer by the firm of its goodwill to the two private limited companies ? " The facts giving rise to this question are as follows : The assessment year is 1957-58 with the corresponding accounting year ending on November 3, 1956. During this accounting year the assessee was a registered firm of six partners deriving income from import and export business. Its head office was in Calcutta and two branches in Bombay. On the very last day of this accounting year the assessee transferred its assets and liabilities and also the goodwill of its Calcutta business to a private limited company under the name, Messrs. Chunilal Prabhudas & Co., Calcutta, Private Ltd. and the assets and liabilities and also the goodwill of its Bombay business to another company under the name, Messrs. Chunilal Prabhudas & Co., Bombay, Private Ltd. These transfers were made by two registered deeds both dated the 3rd November, 1956. The assessee valued its goodwill for the Calcutta business and the Bombay busine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... could not be regarded as a commercial transaction and no profits or gains could be said to arise out of such transfer. The Tribunal followed the case of Commissioner of Income-tax v. Mugneeram Bangur & Co. and certain decisions of other High Courts relied on by the assessee before the Tribunal and held that the transfer by the firm of its goodwill to the two private limited companies did not amount to a commercial transaction and no assessable profits or gains could be said to arise out of such transfer. The result followed and the Tribunal directed the deletion of the amount of Rs. 46,114 assessed as capital gains of the assessee-firm for the assessment year 1957-58. The Commissioner thereupon asked for this reference finally resulting in the statement of the case raising the question quoted above. The argument for the revenue in this case is briefly this : Section 2(4A) of the Income-tax Act, 1922, defines capital asset as meaning " property of any kind held by an assessee whether or not connected with his business, profession or vocation ". The definition excludes certain properties to which I shall make a reference later on. The contention on this point for the revenue is tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me of the previous year in which the sale, exchange, relinquishment or transfer took place." It is followed by certain provisos to which I shall come later. The expression " capital asset " in section 12B, according to the definition of section 2(4A), as already noticed, means property of any kind; but it expressly does not include (i) any stock-in-trade, consumable stores or raw materials held for the purposes of business, profession or vocation; (i) 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 ; (iii) any land from which the income derived is agricultural income." In this kind of definition of capital asset in section 2(4A), if the exclusion of the different types of properties mentioned under the three heads is any index or indication of the intention of the legislature, then the type or nature of exclusion would seem to indicate that Parliament was thinking only of tangible properties like stock-in-trade, personal effects or land from which agricultural income was derived. The question is whether goodwill is a capital asset within ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n their express words and tenor, goodwill does not come within the obvious meaning of capital assets. To bring goodwill within the meaning of capital asset and make it taxable would be to tax by implication or by analogy or by a forced and artificial construction. There is neither any express provision nor any necessary implication which brings goodwill within the meaning of " taxable capital gains " under section 12B of the income-tax Act. On the second test about profit or gains arising in connection with a sale or exchange or relinquishment or transfer many questions arise. In the first place, there may be a sale or exchange or relinquishment or transfer but if it does not produce any profit or gain then there would be no taxable capital gains within the meaning of section 12B of the Income-tax Act. It is not a question of whether the particular transaction is a trading transaction or not a trading transaction. There can certainly be capital gains outside the trading transaction so long as it satisfies the test laid down in section 12B. But the primary question in the present circumstances is whether there is any profit or gain. Assuming that there has been a sale or an exchange ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd adequate consideration and in full settlement of its/their joint and/or several rights, title or interests in the goodwill of the said vendor and its/their business and firm styled as Chunilal Prabhudas & Co. " Finally clause 7 of the agreement provides : " The purchaser company shall have the sole and exclusive right of use and own the name Chunilal Prabhudas & Co. in connection with the said business or any other business or businesses and/or for any other purposes whatsoever as the purchaser-company from time to time initiate, run or develop, or may decide upon. " On these facts the question is, is this transfer producing any profit or gain for practical purposes or even for legal notion ? There is no obvious profit or gain in money or material. The shares of the partners are converted into shares of the company. No money in cash or in kind passes according to ordinary or even remote acceptation of these terms. It is a kind of a conversion of partners' share into a shareholders' share. It is at best a transformation of one kind of property into another. If for an equivalent amount of money paid, a cheque for the same amount of cash given is issued, or vice-versa, then ther ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n (2) of section 12B provides how the amount of a capital gain shall be computed after making certain deductions from the value of the consideration for which the sale or exchange or relinquishment or transfer of the capital asset is made. Looking at the list of deductions, as for instance in section 12B(2)(i), there is, " expenditure incurred solely in connection with such sale, exchange, relinquishment or transfer ". It means that only that deduction is allowable which is in respect of an expenditure incurred solely for this purpose. Can there be an expenditure in this connection for transfer of goodwill which can be separate from other expenditure to say that this is an expenditure incurred solely for the transfer of goodwill ? The answer can only be in the negative. Again in sub-clause (ii) of section 12B(2) there is the mention of the actual cost to the assessee of the capital asset including any expenditure of a capital nature incurred and borne by him in making additions or alterations thereto. It is difficult to imagine from the practical point of view or even in legal notion how there can be an expenditure which will separate the actual cost of a goodwill in the assessee's ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business. " In addition to the principles of construction, there is the authority of a Division Bench of the Madras High Court in Commissioner of Income-tax v. K. Rathnam Nadar, which supports the conclusion to which we have arrived. It is an authority for holding that section 12B(2)(ii) of the Income-tax Act, 1922, suggests that capital gain arises only on the transfer of a capital asset which has actually cost to the assessee something, and that such actual cost in the context of the Income-tax Act is cost in terms of money, and it cannot apply to transfer of capital assets which did not cost anything to the assessee in terms of money in its creation or acquisition. The present reference stands on a stronger footing than that. In that case there was cash consideration for the goodwill but here there is only substitution of the partner's share in the company's share without any cash or without any money from the ordinary point of view. After an exhaustive review of the nature of goodwill, found in different authorities and cases, and a comprehensive survey and analysis of the section of the Income-tax Act, the learned judges of the Madras High Court came to the conclusion at pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with profits and gains of business and allowances for expenditure of a residuary nature, but not being in the nature of capital expenditure or personal expenses laid out or expended wholly or exclusively for the purpose of the said business. Lord Bowen in City of London Contract Corporation Ltd. v. Styles expressed the view that money expended not for the purpose of carrying on a concern, but to acquire the concern is a capital expense. It is significant that in that case money was paid by a limited company to buy the business of a firm and that was held to be a capital gain. The Privy Counsel in Tata Hydro-Electric Agencies Ltd. v. Commissioner of Income-tax came to the conclusion that payment made in consideration of the acquisition of the right to earn profits, that is, of the right to conduct the business, and not for the purpose of producing profits, could not be allowed as a deduction in such cases. All these authorities were concerned really with the question of acquiring the concern or goodwill or the right to earn profit under section 110(2)xv or similar provision on the point of capital or revenue expense and these authorities did not turn really on the interpretation of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me to the person who keeps it, and stays in the old home although the person who has kept the home leaves, and so it represents the customer who goes to the old shop whoever keeps it and provides the local goodwill The faithful dog is attached to the person rather than the place, he will follow the outgoing owner if he does not go too far. The rat has no attachments, and is purely casual. The rabbit is attracted by mere propinquity. He comes because he happens to live close by and it would be more trouble to go elsewhere. These categories serve as a reminder that the goodwill of a business is a composite thing referable in part to its locality, in part to the way in which it is conducted and the personality of those who conduct it and in part to the likelihood of competition, many customers being no doubt actuated by mixed motives in conferring their custom." In the Division Bench decision of this court in Dula'l Dus Mullick v. Ganesh Das Damani this is what I observed : " The law of goodwill is often misunderstood because I think jurisprudence not infrequently treats it as an abstract notion, which in fact it is not. Goodwill must always be understood in relation to facts. Goodw ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t necessary to deal with those questions. That they are different legal entities or different juristic personalities when a partnership becomes a limited company, has been copiously supported by many references cited from the Bar as Salomon v. Salomon. Again in Doughty v. Commissioner of Taxes the question was, two partners carrying on business in New Zealand sold their partnership business to a limited company in which they became the only shareholders. The sale was also of the entire assets including goodwill and the consideration was fully paidup shares in the company. The Privy Council came to the conclusion that if the transaction was to be treated as a sale, there was no separate sale of the stock and no valuation of it as an item forming part of the aggregate sold and that the transaction was a mere readjustment of the business position of the partners resulting in no profits and a mere book-keeping entry could not be taken as a conclusive evidence of profit. But the case on which the greatest reliance was placed on behalf of this revenue was on the Supreme Court decision in Commissioner of Income tax v. B. M. Kharwar. But here again this does not help the revenue because t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he purpose of the case and was apparently recorded without any debate on the question in Kikabhai's case, was in fact not casual but the ratio itself for the decision of the Supreme Court in Kikabhai's case, and he drew our attention to the principle and ratio in Kikabhai's case, at page 509 of the report. In fact Mr. Banerjee drew our attention to a larger Bench decision of the Supreme Court of seven judges in Bai Shirinbai K. Kooka at page 91, where the Full Bench affirmed the principle and the ratio in Kikabhai's case. In the view that we are taking it will no longer be ecessary to discuss the characteristics of the four different types of transactions, namely, (1) sale, (2) exchange, (3) relinquishment, and (4) transfer in section 12B of the Income-tax Act. Here the sale or transfer or exchange or relinquishment was to lead to the complete extinction of the partnership or, the firm. The entire partnership with its goodwill was being taken over by the two limited companies. One of the points made before us is whether such a transaction could come within the meaning of either a sale or a transfer or an exchange or a relinquishment and whether when there is complete extinction th ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
