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TMI Blog1984 (5) TMI 59X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee and in confirming the addition of the difference, i.e., Rs. 88,000 as 'short-term' capital gains. " 2. The facts of the case may be summarised as follows : The assessee, Shri G.N. Kamath, a qualified mechanical engineer, carried on the business of manufacturing mechanical drivers and couplings under the style and name Handling and Processing Equipment. This business, which was his proprietary concern till 30-11-1976, was, with effect from 1-12-1976, taken over by a partnership firm (constituted under a deed of partnership dated 14-2-1977) consisting of Shri G.N. Kamath, the assessee (holding 30 per cent share) and four other partners. The firm in its turn, by a deed of assignment dated 31-7-1977, transferred this business as a go ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uitable in the context of the nature of the business and the fact that it was carried on for six years (prior to its transfer to the company) and had shown increase in profits from year to year. He computed the average profits taking into account depreciation as per the Income-tax Rules, 1962, reasonable remuneration to Shri G.N.K. Kamath and interest on the capital of the proprietor and of the partners. On this basis, the super profits for the period from 1-4-1974 to 31-3-1977 worked out to Rs. 4,91,683 and the average annual profit came to Rs. 1,43,880. At three years purchase price the value of goodwill amounted to Rs. 4,31,640 or say Rs. 4,32,000. Having arrived at this value of the goodwill, the ITO observed, that the value of the good ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... incorrectly linked the value of goodwill with the transfer of immovable property on surmises and conjectures. A statement giving the basis for computing the goodwill in question at Rs. 5,20,000 was also submitted before the Commissioner (Appeals). The latter found the said working of the value of goodwill to be 'thoroughly unsatisfactory'. He observed that the assessee had taken the profit for the assessment year 1979-80 at Rs. 2,61,648 and capitalised it at two years purchase amounting to Rs. 5,23,296 which was rounded off to Rs. 5,20,000. He pointed out that the period relevant for the assessment year 1979-80 was taken from 1-5-1977 to 31-7-1977, which was incorrect. That besides, it was not clear how the profit was determined at Rs. 2,61 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e goodwill. He pointed out that the firm was assessed to income-tax for the assessment years 1978-79 and 1979-80 on profits as under : (i) 1-12-1976 to 30-4-1977 -- 5 months Rs. 2,25,498 (ii) 1- 5-1977 to 31-7-1977 -- 4 months ------------------- 9 months Rs. 3,49,721 ------------------- That after providing for partners' salary and interest on partners' capital, the ITO had come to aggregate profits for the said nine months of Rs. 4,04,863 and in that context, the profit for twelve months would work out to (4,04,863 / 9) x 12 = 5,39,817 which when capitalised at three years purchase would yield the value of goodwill of Rs. 16,19,451. Shri Lalchandani urged that, in these circumstances, the value of goodwill received by the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any rate it was, to say the least, naive on the part of the assessee's counsel to suggest that only the profit of the accounting year relevant for the assessment year 1979-80 should be taken into consideration for valuing the goodwill ; for, it is a well accepted principle that 'goodwill' builds up over years of performance of a business and in the present case especially the business which was founded by Shri G.N. Kamath in 1971 had progressed from year to year by dint of his efforts. It was in this context significant that by an amendment deed dated 28-3-1977 the goodwill of the business was declared to belong to Shri G.N. Kamath exclusively. In these circumstances, the argument that the partnership firm being the assignor of the busines ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rial estate. Since the assessee could not overtly charge a premium, he has thought it fit to include it in the value of the 'goodwill' which has the added advantage of being exempt from tax in view of the principles laid down by the Supreme Court regarding self-generated assets. We, therefore, hold that there was good reason for the ITO to treat the excess amount of Rs. 88,000 as compensation for the rise in the value of the leasehold rights shown to have been transferred at cost. Since the transfer of the said leasehold rights was effected within three years of their acquisition, the 'capital gains' were rightly assessed as 'short-term' capital gains. Accordingly, we confirm the decision of the Commissioner (Appeals) whereby he has upheld ..... X X X X Extracts X X X X X X X X Extracts X X X X
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