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TMI Blog1975 (7) TMI 20X X X X Extracts X X X X X X X X Extracts X X X X ..... thin the meaning of Explanation 2(iv)(a) to section 23A of the Indian Income-tax Act, 1922 ? 2. Whether, on the facts and in the circumstances of the case, the amounts written off from goodwill account by debiting capital reserve account and profit and loss account constituted 'accumulated profits and reserves' within the meaning of Explanation 2(iv)(a) of section 23A of the Indian Income-tax Act, 1922 ? 3. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that in determining the commercial profits the write off of goodwill made in each of the relevant accounting periods was not a legitimate business expenditure ? 4. If the answer to question No. 3 is in the affirmative, whether the Tribunal was right in holding that having regard to the commercial profits a larger dividend than that declared by the company could reasonably have been distributed ? " The facts found as appearing in the statement of the case and the annexures thereto can be shortly stated as follows : The relevant assessment years are 1955-56, 1958-59, 1959-60 and 1960-61, the corresponding previous years being the preceding calendar years. Bird Co. (Private) Lt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the assessment years. The assessee appealed to the Appellate Assistant Commissioner. In disposing of the appeals the Appellate Assistant Commissioner held that goodwill was a fixed asset. He further held that to the extent the goodwill of the assessee was reduced by debiting the profit and loss account, the same could not be held to be nor did the same constitute a reserve. But he found that in the assessment year 1954-55 when the goodwill was written off to the extent of Rs. 30,00,000 a corresponding reduction was made in the capital reserve account on the liabilities side of the balance-sheet. He held that as the said amount had been treated as a reserve all along and in the assessment year in question though the same was deducted from the goodwill it still constituted reserve within the meaning of section 23A. He held, however, that the other amount of Rs. 22,00,000 debited in the profit and loss account of the assessee at the rate of Rs. 3 lakhs each year really came out of accumulated profits which was available for debiting against the goodwill. In the premises, he held that this amount should also be treated as accumulated profits for the purpose, of the said section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... om), the Tribunal further held that, as the reduction in the value of the goodwill was not without justification, the amounts written off from the goodwill account did not form part of the accumulated profits and reserves of the assessee in the respective assessment years. A new ground of appeal, viz., that having regard to the financial position, the declaration of a larger dividend would have been unreasonable, was also urged on behalf of the assessee before the Tribunal. The Tribunal found that, except for the assessment year 1955-56, the dividends exceeded the available surplus (as computed by the assessee) in all the years. The Tribunal, however, found that the commercial profit had been worked out by the assessee after charging a sum of Rs. 5 lakhs towards the writing off of the goodwill in each of the years. The Tribunal held that this was not a legitimate business expenditure. According to the Tribunal the commercial profit had to be enhanced by Rs. 5 lakhs in each of the assessment year in question and, in that view, there was no paucity of profits in the said assessment years except the year 1957-58. For the said assessment year 1957-58, the contentions of the departmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or transfer. It is difficult to apply these tests to the case of goodwill. Goodwill fails in the test of capital asset. To begin with, goodwill is not any kind of usual capital asset with which a business is started. It is not a capital asset which can be divided into parts, fragments or fractions or entered on the stock book or register of capital assets nor can it, like capital asset, exist independently without the business itself and have any value apart from business usually associated with capital asset. Unlike capital assets goodwill as an asset is indivisible and cannot be sold, transferred or dealt with in fragments or fractions. On the interpretation of section 2(4A), section 2(4C) and section 12B and on their express words and tenor, goodwill does not come within the obvious meaning of capital asset. 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." This Bench had occasion to consider the above decision of this court in I.T.R. Reference No. 5 of 1972 (K. N. Daftary v. Commissioner of Income-tax [1977] 106 ITR 998 (Cal)). In Chunilal's case [1970] 76 ITR 5 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pe of assets upon which the subscribed capital has been expended and which assets either themselves produce income independently of any further action by the company, or, being retained by the company, are made use of to produce income or gain profits... Goodwill is also part of the fixed capital. " Coming to the Companies Act, 1956, the statutory form of the balance-sheet set out in Part I of Schedule VI to the said Act has, under the heading " assets " a sub-heading " fixed assets ". It is stated that the items under this sub-heading should be distinguished as far as possible between expenditure upon, (a) " goodwill ", and (b) " land ", etc. From this it appears that so far as the law relating to companies in India is concerned, the statute also recognises goodwill to be a fixed asset. In such view of the law as noted above we hold that the goodwill of the assessee in the instant case constituted a fixed asset within the meaning of Explanation 2(iv)(a) to section 23A of the Indian Income-tax Act, 1922. On question No. 2 which has been raised for all the assessment years, Mr. Pal could not cite any authority supporting the contentions of the revenue. Nor could he distinguish ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s not to be included in any reserves. We find a similar provision in Schedule VIII, Part IV, of the English Companies Act of 1948. Clause 27(1)(b) gives the same interpretation of 'reserve' as is to be found in our Companies Act. Mr. Pal drew our attention to the case of Commissioner of Income-tax v. Bibhuti Bhusan Dutt [1963] 48 ITR 233 (Cal). where a portion of the profits of a company was set apart for meeting depreciation of the fixed assets and this depreciation fund was added to year after year and was shown as a reserve in the balance-sheet. There it was held that it formed part of the accumulated profits for the purpose of section 2(6A) of the Income-tax Act. It was, said in that case that the assessee might not have created a reserve fund in respect of the depreciation but having done so, it was bound by its own act. If the company is not obliged to show depreciation in its balance-sheet by way of reserves and indeed ought not to do so under the form prescribed by section 211, depreciation cannot be considered in the context of reserves." Mr. Pal next sought to argue within the ambit of the question that, in any event, the amount of rupees five lakhs which had been deduc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r. Ray pointed out that the decision of the Supreme Court in the case of Commissioner of Income-tax v. Gangadhar Banerjee and Co. (P.) Ltd. [1965] 57 ITR 176 (SC) was in fact cited before the Tribunal and the Tribunal duly noted the propositions laid down in the decision, including the proposition that capital gains or losses should be taken into account in deciding the reasonableness of the dividends declared. Mr. Ray submitted that in any view of the matter the depreciation of the dividend for the said three assessment years had to be taken into account either as a business expenditure to be debited from the profit or loss account or as purely capital loss. In the case of Commissioner of Income-tax v. Gangadhar Banerjee and Co. (P.) Ltd. [1965] 57 ITR 176 (SC) the Supreme Court approved the law as laid down by the judicial Committee in the case of Commissioner of Income-tax v. Williamson Diamonds Ltd. [1959] 35 ITR 290, 297 (PC). In that case, the judicial Committee had construed section 21(1) of the Tanganyika Income-tax (Consolidation) Ordinance which is in pari materia with section 23A of the Indian Income-tax Act, 1922. Their Lordships of the judicial Committee observed a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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