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TMI Blog1972 (7) TMI 3X X X X Extracts X X X X X X X X Extracts X X X X ..... s partner, another chartered accountant, Sri. Venkatanarayanan, on July 15, 1965 ; and annexure " D " is the deed of partnership dated July 15, 1965, entered into between the two partners. The main item in the assets of the assessee which were taken over by the newly constituted firm was the goodwill which was valued at Rs. 32,000. As between the assessee and his partner, the net profit or loss of the business of the partnership was agreed to be divided in the proportion of 75% and 25%, respectively. Towards his share in the goodwill obtained by the firm, the partner paid the assessee an amount of Rs. 8,000. The firm continued only till October 19, 1965, when the assessee was appointed as Accountant Member of the Kerala Sales Tax Appellate Tribunal. There was a consequent dissolution of the firm ; and the assessee received Rs. 24,000 towards his share of the goodwill of the firm. During the assessment proceedings, the assessee took up the stand that the aforesaid Rs. 32,000 received by him in two instalments was not liable to be taxed. The Income-tax Officer, on the other hand, proceeded on the basis that with the formation of the partnership the assessee must be deemed to have t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ely in connection with such transfer ; (ii) the cost of acquisition of the capital asset and the cost of any improvement thereto. " The expressions " cost of improvement " and " cost of acquisition " are dealt with in section 55 ; and the definitions so far as they are relevant for the purpose of this reference are extracted below : Section 55(1) : " For the purposes of sections 48, 49 and 50,-..... (b) 'cost of any improvement', in relation to a capital asset,- (i) where the capital asset became the property of the previous owner or the assessee before the 1st day of January, 1954, and the fair market value of the asset on that day is taken as the cost of acquisition at the option of the assessee, means all expenditure of a capital nature incurred in making any additions or alterations to the capital asset on or after the said date by the previous owner or the assessee, and (ii) in any other case, means all expenditure of a capital nature incurred in making any additions or alterations to the capital asset by the assessee after it became his property. . . . (2) For the purposes of sections 48 and 49, 'cost of acquisition', in relation to a capital asset,-- (i) wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lt to say that it costs anything in terms of money for its coming into existence. Goodwill of a firm can probably be compared to a seed which is planted on the day that the firm begins its business and sprouts and grows as the firm grows in its dealings, in its stature and in its reputation. " The court then proceeded to consider certain decisions which deal with of " goodwill " and came to the following conclusion : " We have, therefore, to proceed on the basis that, while the British and the American taxation laws proceed on the footing that capital gains are assessable in the case of transfer of goodwill, the Indian Act did not have in contemplation, when enacting section 12B, that self-created assets like copyright, patents and goodwill should be subjected to capital gains arising on their transfer. It is enough to say that, complex and difficult as this question is, we are not satisfied that either the legislature intended to include property of the kind now in question for the purpose of taxation of capital gains, or that the wording of section 12B supports such a contention. We therefore hold, though not without hesitation, that capital gains on the transfer of a goodwil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f a business or profession for a definite amount and without any further addition to its value by his own efforts later on sells it for a higher price and thereby secures a determinate profit or gain. In such a case, goodwill is hardly distinguishable from any other capital asset and there is nothing in section 45 or other relevant provisions of the Income-tax Act that excludes such profits or gains from liability to assessment. We may not, however, be understood as doubting the high persuasive value of the aforesaid decisions inasmuch as the reasoning adopted therein has considerable bearing on the taxability of the sale proceeds of one category of goodwill, of which the case on hand is a good illustration. There cannot be any doubt that what is charged under section 45 of the Act is the " profits or gains arising from the transfer of a capital asset " and not any and every amount received on such transfer. For the purpose of determining the liability, the " profit or gain " so accruing has to be computed in accordance with the provisions of section 48 of the Act of 1961. Under that section, the tax shall be computed by deducting from the full value of the consideration received ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ition or alteration to the capital asset. " Here again, just as in the case of " cost of acquisition ", the expenditure contemplated is expenditure in terms of money. It cannot be disputed that, normally, "goodwill " also is an asset that gains in value by lapse of time ; and in the case of the goodwill of a profession, such augmentation is essentially attributable to the personal efforts, skill or sacrifice of the owner. It is not possible in such cases to evaluate the increase in value in terms of money. Thus, in the case of certain categories of transfers of " goodwill ", it is not possible to determine the " cost of acquisition " and the " cost of improvement " referred to in section 48(ii) for the purposes of computation 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. We, therefore, hold that the amount of Rs. 32,000 received by the assessee towards the 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 c ..... X X X X Extracts X X X X X X X X Extracts X X X X
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