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TMI Blog1981 (8) TMI 42X X X X Extracts X X X X X X X X Extracts X X X X ..... the circumstances of the case, the transfer of the business along with its assets and liabilities by the assesseecompany to Evans Fraser and Company (India) Ltd. had resulted in any capital gain liable to tax under section 12B of the Indian Income-tax Act, 1922 ? " The two questions referred to this court in. Income-tax Reference No. 66 of 1979 are as follows : " (1) Whether, on the facts and in the circumstances of the case, the sale and transfer of the goodwill of the assessee-company can in law be said to have taken, place on April 23, 1947, and thus assessable to capital gains under section 12B of the Indian Income-tax Act, 1922 ? (2) Whether the Tribunal was justified in not allowing the assessee to raise the question as to whether goodwill was property assessable to capital gains under section 12B of the Indian Income-tax Act, 1922 ? " The assessees owned a departmental store situate at Fort House, Hornby Road (now Dr. Dadabhai Nowroji Road), Fort, Bombay. This departmental store had been opened in the last decade of the previous century. In 1942, the owners of the said departmental store were a partnership firm consisting of certain Englishmen. In 1942, the said ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssets over liabilities on the basis of the assessees' accounts as on May 31, 1946, and Rs. 4,98,987 as the value of the name and goodwill of the assessee-company. The said shares had been purchased by the said Shroff and others with the intention and for the purpose of transferring all the assets and business of the assessee-company at cost to a public limited company to be promoted by them in the name and style of Evans Fraser and Company (India) Ltd. After the aforesaid purchase of the shares by them the said Shroff and others made an application dated December 13, 1946, to the Examiner of Capital Issues, Finance Department, New Delhi, for permission to issue capital of Rs. 25,00,000 under rule 94(a) of the Defence of India Rules, 1939, which permission was granted to them. On April 19, 1947, a meeting of the board of directors of the assesseecompany was held and the said meeting resolved that a majority of the directors of the assessee-company should make the necessary declaration of solvency as required by s. 207 of the Indian Companies Act, 1913, and that the duly verified declaration together with the report of the auditors be filed with the Registrar of Companies immediat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e proposed new public limited company, namely, Evans Fraser and Company (India) Ltd., was incorporated, and thereafter held a meeting of its board of directors at 3 p.m. at its registered office which was also at the said Fort House. At the said meeting the said Shroff who had been appointed chairman of the board of directors at this meeting informed the board that the company had been registered on that day. Amongst other work that was done at the said board meeting was to approve the draft agreement made between the assessee-company of the first part, the said Shroff and others of the other part and the proposed new company of the third part for the acquisition and purchase by the said public company of the business, property and assets of the assesseecompany as a going concern, and it was resolved that the said draft agreement be approved and adopted and that the same be executed and the common seal of the company be affixed thereto in the presence of the said Shroff and another director of the company. At the said meeting a draft agreement appointing D. N. Shroff and Company Ltd., as the managing agents of the said public company, was considered and adopted. It was also resolve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Finance Act, 1956, and when the Indian I.T. Act, 1922, came to be repealed and replaced by the I.T. Act, 1961, the levy was continued. So far as the present references are concerned, capital gains tax would be leviable only if the sale of the business undertaking of the assessee-company had taken place after March 31, 1946, and before April 1, 1948. Any capital gains on this transaction made on or after April 1, 1948, would not be chargeable to tax under this head. It will also be convenient now to set out such of the provisions of the above amendments as are relevant for our purpose. The relevant part of the said cl. (4A) of s. 2 provided as follows: "(4A) 'Capital asset' means property of any kind (other than agricultural land) 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; ..........." The amendments made in s. 6 of the said Act by insertion of cl. (vi) introduced a new head of income chargeable to income-tax, namely, " Capital gains ". The only provisions of s. 12B which require to be r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rgeable under the head 'Capital gains' shall be computed by deducting from the full value of the consideration received or accruing as a result of the transfer of the capital asset the following amounts, namely : (i) expenditure incurred wholly and exclusively in connection with such transfer ; (ii) the cost of acquisition of the capital asset and the cost of any improvement thereto." The expression " cost of any improvement " occurring in cl. (ii) of the said s. 48 is defined in s. 55(1)(b) and is as follows: " (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, and, where the capital asset became the property of the assessee by any of the modes specified in sub-section (1) of section 49, by the previous owner ........" To proceed with the narrative, in its assessment proceedings for the assessment year 1948-49, the assessee-company contended that it was not liable to pay any capital gains tax. It was also contended by the assesseecompany that there was no sale by the assessee-company to the said public company because the members of both ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r held that the shareholders of the assessee-company received nothing as also lost nothing by reason of the said sale but continued to remain the owners of the business and there was, therefore, no capital gain. He, however, did not accept the assessees' contention that the sale had taken place in the course of liquidation, and held that the sale had taken place in April, 1947. The judicial Member differed from the Accountant Member. He held that the transaction between the original shareholders and the said Shroff and others was distinct and separate from the transaction between the assessee-company and the said public company and there was, therefore, a transfer of the business of the assessee-company together with its assets, liabilities and goodwill by the assessee-company to the said public company which had resulted in a capital gain and such capital gain was, therefore, liable to tax. With respect to the assessees' contention that the transfer, if any, had not taken place during the assessment year, he observed that the finding of the AAC that the sale took place on April 23, 1947, was no longer in dispute when the matter was argued before the Tribunal, but that if necessary ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he amount shown in the first balance-sheet of the assessee-company. He computed the capital gains as being Rs. 3,64,414 less the said sum of Rs. 47,781, namely, at Rs. 3,16,633. Against this order the assessee-company went in appeal to the Tribunal, this appeal being numbered as I.T.A. No. 64 (Bom) of 1968-69. Meanwhile, the Madras High Court had given a judgment reported as CIT v. K. Rathnam Nadar [1969] 71 ITR 433, in which it held that from the nature of goodwill and the manner in which it is treated, goodwill did not fall within the scope of s. 12B because there could be no cost of acquisition of goodwill in terms of money. At the hearing of its appeal, before the Tribunal, the assessee-company wanted to raise a contention based upon this judgment. The assessee-company was not allowed to do so by the Tribunal. The Tribunal then held that the goodwill of the said business of the assessee-company was transferred along with its business. According to the Tribunal, the business of the assessee-company was in general merchandise and as the stock owned by the assessee-company was transferred on April 23, 1947, the entire business including the goodwill of its business was transferred ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ribunal to hear arguments thereon and decide the point. On the merits Mr. Joshi submitted that the decision of the Supreme Court in CIT v. B. C. Srinivasa Setty [1981] 128 ITR 294 had no application to the present case because here there was actually a cost of acquisition and that the ratio of the decision of the Supreme Court applied only where there was no cost of acquisition of goodwill, that is to say, when a business which had been newly started came to be sold for the first time and not when the purchaser of a business, which had a goodwill, sold it thereafter in his own turn. Dealing first with the preliminary objection taken by Mr. Joshi, in our opinion, it is not sustainable either on authority or on principle. All throughout the contention of the assessee-company was that they were not liable to pay any capital gains tax on the sale or transfer of goodwill. The assessees had raised various contentions with respect thereto, and what they are seeking to do now is merely to rely upon an additional argument in support of their main substantial contention that goodwill is not liable to capital gains tax under the said s. 12B. It is not as if the assesseecompany had sought be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cal with the one raised before us or very similar thereto have time and again been taken on behalf of the department before various High Courts and have all met with the same fate. Before the Karnataka High Court in CIT v. Sujirkar's Tile Works P. Ltd. [1975] 99 ITR 482, both before the ITO and the AAC, the assessee's contention was that the amount in question was not taxable as capital gains as there was complete identity between the sellers and the purchasers. Before the Tribunal the assessee sought to raise an additional plea that the said amount represented consideration for goodwill. This plea was accepted by the Tribunal. The High Court held that the Tribunal had acted within its jurisdiction in allowing the assessee to raise this additional plea. In CIT v. Home Industries and Co. [1977] 107 ITR 609 (Bom), an identical contention based on the case of Sir Homi Mehta's Executors [1955] 28 ITR 928 (Bom), referred to earlier, was taken before the taxing authorities and was negatived, but found favour with the Tribunal. A case was stated to this High Court at the instance of the department. The question referred to the High Court was, " whether, on the facts and in the circumstanc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... first time before the High Court, it would be permissible to the High Court to allow such aspect being argued before it even if that aspect has not been argued before the Tribunal. If necessary, a reference may be made to two decisions of the Supreme Court, one in Ogale Glass Works Ltd.'s case [1954] 25 ITR 529 (SC) and the other in Scindia Steam Navigation Co. Ltd.'s case [1961] 42 ITR 589 (SC) and in particular the following observations of the Supreme Court in the latter case appearing at page 612 are apposite: 'Now a question of law might be a simple one, having its impact at one point, or it may be a complex one, trenching over an area with approaches leading to different points therein. Such a question might involve more than one aspect, requiring to be tackled from different standpoints. All that section 66(1) requires is that the question of law which is referred to the court for decision and which the court is to decide must be the question which was in issue before the Tribunal. Where 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 befor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ees and because before the Tribunal stress was not pointedly laid upon the ingredients which enable an expenditure to be claimed and allowed, it could not be said that the question did not arise out of the order of the Tribunal. The Supreme Court further held that the matter in dispute before the Tribunal was whether the company was entitled to the allowance under s. 10(2)(xv) of the Indian I.T. Act, 1922, and the High Court was, therefore, in error in refusing to allow an argument to be raised by the Commissioner that the requirements of s. 10(2)(xv) were not satisfied. As, however, the determination of this question involved certain facts to be before it, the Supreme Court was not able to decide that question on the record as it stood. In this context the Supreme Court said that there were two courses open to it, namely, either to call for a supplementary statement of the case from the Tribunal or to decline to answer the question raised by the Tribunal and to leave the Tribunal to adjust its decision under s. 66(5) in the light of the answer given by the Supreme Court. The Supreme Court further observed, that to ask for a supplementary statement of the case would restrict the Tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld that the charging section and the computation provisions together constitute an integrated code and that when there is a case to which the computation provisions cannot apply at all, it is evident that such a case was not intended to fall within the charging section. The case before the Supreme Court was one where a new partnership took over all the assets including the goodwill and liabilities of a dissolved firm which had carried on the business of manufacture and sale of agarbattis, and the question was whether any capital gains could arise under s. 45 of the I.T. Act, 1961, on the transfer by the assessee-firm of its goodwill to the newly constituted firm. With reference to the corresponding sections of the 1961 Act, which we have reproduced above for facility of comparison with the section of the 1922 Act, with which we are concerned, the Supreme Court held, that all transactions encompassed by s. 45 of the 1961 Act, must fall under the governance of its computation provisions and a transaction to which those provisions cannot be applied must be regarded as never intended by s. 45 to be the subject of the charge, for, what is contemplated by cl. (ii) of s. 48 is an asset in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... odwill has been variously described. It has been horticulturally and botanically viewed as 'a seed sprouting' or an 'acora growing into the mighty oak of goodwill'. It has been geographically described by locality. It has been historically explained as growing and crystallising traditions in the business. It has been described in terms of a magnet as the 'attracting force'. In terms of comparative dynamics, goodwill has been described as the 'differential return of profit'. Philosophically it has been held to be intangible. Though immaterial, it is materially valued. Physically and psychologically, it is a 'habit' and sociologically it is a 'custom.' Biologically, it has been described by Lord Macnaghten in Trego v. Hunt [1896] AC 7, as the 'sap and life' of the business. Architecturally, it has been described as the 'cement' binding together the business and its assets as a whole and a going and developing concern. It has been zoologically explained by Rich J. in Federal Commissioner of Taxation v. Williamson [1943] 7 ATD 272, quoted at pages 39-40 of the 4th Edn. of The Valuation of Company Shares and Business by Adamson and Coorey in these terms: 'In Whiteman Smith Motor Compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... no account in value of the factors producing it. It is also impossible to predicate the moment of its birth. It comes silently into the world, unheralded and unproclaimed and its impact may not be visibly felt for an undefined period. Imperceptible at birth it exists enwrapped in a concept, growing or fluctuating with the numerous imponderables pouring into, and affecting the business. Undoubtedly, it is an asset of the business, but is it an asset contemplated by s. 45 ?" To the question posed in the last sentence of the passage extracted above the answer which the Supreme Court gave was in the negative, for the reasons set out earlier, that it is not possible in the case of goodwill to determine either the date when it came into existence or the cost of acquisition. Mr. Joshi, learned counsel for the department, however, submitted that the ratio of this decision applied only to the case of a new business and that it cannot apply, where the purchaser of a business has paid for the acquisition of the goodwill of that business and after some time tells that business along with its goodwill to another. In Mr. Joshi's submission the assessee-company had paid a sum of Rs. 47,781 f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f goodwill have been pinpointed. Does this, however, make any difference ? As we have seen earlier, goodwill is a fluctuating thing. It increases and it decreases, but such increase or decrease is not like the periodic waxing and waning of the moon nor is it like the tide which regularly ebbs and flows twice in twenty-four hours. Goodwill built up over the years can be destroyed in a matter of days, if not much less. Goodwill is never constant. Proteus-like it changes constantly, and as goodwill changes from time to time so does its value. It is possible to ascertain the value of goodwill at a particular point of time, and the modes of calculating such value can easily be found in any standard book on accountancy. Our attention has been drawn to several of them. It is, however, needless to burden the judgment with reference to any one of them. That, however, is not decisive of the matter. Merely because goodwill of a business which had been started by someone else had been acquired, and at the time of acquisition its value ascertained, it does not mean that some time or some years later the goodwill enjoyed by that business in the hands of the purchaser is qualitatively the same ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tioned in its judgment the decisions of High Courts which had earlier taken the same view as the Supreme Court did, and obviously approved of the view expressed by these High Courts. Amongst them is the decision of this High Court in CIT v. Home Industries Co. [1977] 107 ITR 609, which has already been referred to by us earlier in another context. In that case, Tulzapurkar Actg. C.J. (as he then was), speaking for the court, said as follows (at pp. 631-2): " However, the aspects that in the case of self-created or self-generated goodwill it is impossible to say that it has been acquired at any particular point of time and that the acquisition of such capital assets costs nothing to the owner of business in terms of money seem to us to be a very important aspect which have a bearing on the question as to whether the transfer of such capital asset should give rise to chargeable capital gains or not. Similarly, the aspect that the capital asset in question must be such that it is capable of improvement at an ascertainable cost in terms of money would be equally important. " (The emphasis has been supplied by us.) Another case, also approved as aforesaid by the Supreme Court, is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to'. The mode of computation provided in section 48 shows that the capital asset, a transfer of which is taxable under section 45, is one which costs in terms of money to the assessee, and is also one which can be improved by investing money. " The above four decisions have been referred to by the Supreme Court in B. C. Srinivasa Setty's case [1981] 128 ITR 294 (SC), as laying down the correct law. Mr. Joshi, however, submitted that since the Supreme Court's decision referred only to the cost of acquisition, it should follow that the Supreme Court only partially approved of these decisions, that is to say, it approved of these decisions, in so far as they held that the cost of acquisition cannot be ascertained, but did not approve of these decisions in so far as they said that the cost of improvements cannot be ascertained. We find no warrant for this argument in the judgment of the Supreme Court. These reasons are integral reasons given by the above four High Courts for arriving at their conclusion that transfers of goodwill were not subject to the charge of capital gains tax under s. 12B of the 1922 Act or s. 45 of the 1961 Act. For the reasons given above, we hold that there w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3, 1947, was no longer in dispute when the case was argued before the said Bench. We have already referred to this observation of the judicial Member while setting out the history of this litigation, and have pointed out why this observation does not appear to be correct and cannot be accepted. To recapitulate, had that been the position, the Accountant Member would not have given an express finding thereon that the sale was effected in April, 1947, and was not made in the course of liquidation of the assesseecompany, and further the President while disposing of the rectification application filed by the assessee-company would not have said that the date of transfer was a matter which related to the question of the quantum of capital gains and could be argued when the quantum came to be decided. What is, however, more important is that had the correct position been as Mr. Joshi contends, question No. 1 in Income-tax Reference No. 66 of 1979, would never have been referred to this High Court by the Tribunal. For the above reason we find that this preliminary objection taken on behalf of the department is as untenable as the earlier one was. Before dealing with the rival submissio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and approved the said draft agreement. This draft agreement was actually executed on April 5, 1948 . It is expressed to be made between the assesseecompany of the first part, the said Shroff and four others who were all the then members of the assessee-company as the party of the second part and the said public company as the party of the third part. After reciting that the total cost of the purchase of the shares of the assessee-company by the said Shroff and the said four others was Rs. 12,57,804 and that the said public company had been formed with a view amongst other things to the acquisition and taking over as a going concern of the assets and business belonging to and carried on by the assessee-company at the total cost incurred by the said Shroff and the said four others, the agreement proceeded to provide in cl. 1 as follows : " The vendor company (that is, the assessee-company) shall sell and the party of the second part shall confirm and the purchaser company (that is, Evans Fraser and Company (India) Limited) shall purchase as from the 1st day of April, 1947... " Then follows a list of what has been agreed to be purchased as from April 1, 1947. This includes: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expense of the purchaser company execute and do all such assurances and things for vesting the said premises in the purchaser company and giving to it the full benefit of this agreement as shall be reasonably required. 6. Until possession of the said premises is given to the purchaser company and until payment and satisfaction to the vendor company of the consideration aforesaid the vendor company shall carry on the said business in the same manner as heretofore and maintain the same in the proper state of efficiency as a going concern and shall from the 1st day of April, 1947, be deemed to carry on such business on behalf of the purchaser company and shall account and be entitled to be indemnified accordingly." It was because cl. 1 of the said agreement of sale provided that the assessee-company should sell and the said public company should purchase the said business, etc., as from April 1, 1947, that the ITO and the AAC, on remand held that the sale took place on April 1, 1947. It is also by reason of this clause that the contention that this was the date of sale, was advanced on behalf of the Revenue. We are wholly unable to understand how any one with any idea of legal n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment it was not possible to alter the actual state of affairs, namely, the carrying on of the business by the appellant-company, and to hold that it was being carried on by the purchasing company. Another case which may usefully be looked at is a decision of the King's Bench Division in Waddington v. O'Callaghan (H. M. Inspector of Taxes) [1931] 16 TC 187. In that case the appellant who was practising as a solicitor desired to take his son as his partner with effect from January 1, 1929. He instructed another firm of solicitors to draw up a partnership deed. The partnership deed was executed on May 11, 1929, and was expressed to have effect as from January 1, 1929. It was held that the partnership constituted by the deed commenced on the date of the deed and not as from an anterior date. In support of his submission that because the parties had agreed that the sale would be effective from April 1, 1947, the sale should be considered to have taken place on that day. Mr. Joshi, learned counsel for the Revenue, relied upon a passage in William Pickles' Accountancy, 4th Edn., pp. 23156-7. The passage reads as follows: "Profit Prior to incorporation. A company cannot make profits nor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he public company was incorporated cannot be said to be an acceptance of that offer. Though looked at from a very narrow legalistic view this argument may be correct if one looks at the transaction in its entirety, the passing of the resolution by the board of directors of the public company when they had before it the draft agreement approved by the assessee-company must be taken to result in an agreement. It is also pertinent to note that there has been further implementation of this agreement by the fact that the very next day a circular resolution was passed to pay Rs. 1,50,000 to the vendors towards the purchase price. From this, however, it cannot follow that this agreement amounted to a transfer or a sale. The agreement arrived at was to execute a formal agreement in terms of the said draft agreement and to implement the same with such modifications as the liquidator of the assessee-company may think proper. In CIT v. B. M. Kharwar (1969] 72 ITR 603 (SC), referred to earlier, the Supreme Court has observed that it is well settled that the taxing authorities are not entitled to ignore the legal character of the transaction and to proceed on what they regard as " the substance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rofits be considered by the parties inter se as carried on behalf of the said public company, but that cannot alter the legal incidence of a transfer. The agreement which was executed on April 5, 1948, was itself an executory agreement. Had after April 23, 1947, the provisions of the said agreement been implemented or carried out, the agreement would have so recited it and recorded the said fact. In this connection, it should be borne in mind that this was not an agreement drafted by a layman but by reputed and an experienced firm of solicitors. Unless and until, therefore, the entire business was transferred, the goodwill of the business of the assessee-company could not be said to have been transferred to the said public company. A somewhat similar situation came up before the Supreme Court in the case of Alapati Venkataramiah v. CIT [1965] 57 ITR 185 (SC). In that case the appellant, who owned certain lands and buildings, plant and machinery thereon, and carried on the manufacture of tiles and bricks, entered into an agreement on March 17, 1948, with another person to sell those assets including the stocks and the goodwill of the business for a certain sum of money. On March 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y. It is difficult to understand on what basis or on what materials the Tribunal came to the conclusion in the assessees' appeal that the stock was transferred on April 23, 1947, because we do not find any material whatever on the record to bear out or substantiate this observation. It is also pertinent to note that it was only the board of directors of the said public company which had approved the said draft agreement on April 5, 1948, and that there is nothing to show that the said agreement was approved by the said company in any general meeting. It is true that the said agreement dated April 5, 1948, has been executed on behalf of the said public company, but from that it does not follow either that it was approved by the said public company in a general meeting or if it was in fact so approved, that such general meeting took place prior to April 1, 1948, assuming even it were possible to construe the said agreement dated April 5, 1948, as a transfer. In the result, we answer the one question referred to us in Income-tax Reference No. 146 of 1970 and the two questions referred to us in Incometax Reference No. 66 of 1979 in the negative, that is, in favour of the assessees an ..... X X X X Extracts X X X X X X X X Extracts X X X X
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