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1990 Supreme(Pat) 31
PATNA HIGH COURT
G.G.Sohani, Uday Sinha and Nazir Ahmad JJ.
Commissioner Of Income Tax
Versus
Shanti Goswami
Taxation Case No. 177 of 1976 ;
Decided On : JANUARY 19, 1990
Goodwill generated in a newly commenced business is not a capital asset and its transfer is not subject to capital gains tax.
Headnote:
Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the consideration for goodwill amounting to Rs. 71,918 received from the vendee by the assessee was not a capital asset and as such is not assessable to capital gains?
Fact of the Case:
The assessee, a Hindu undivided family, sold during the assessment year 1970-71, its business carried on under the name and style of "New Chaibasa Cycle Stores" to Shri Narendra Prasad Ahuja for a consideration of Rs. 1,00,000. The sale deed disclosed that the goodwill of the concern was transferred for a sum of Rs. 71,918. While framing the assessment, the Income-tax Officer treated the sum of Rs. 71,918 as a long-term capital gain and levied tax on it accordingly. Aggrieved by the order passed by the Income-tax Officer, the assessee preferred an appeal before the Appellate Assistant Commissioner who held that goodwill not being a capital asset was not liable to be taxed as capital gains. In this view of the matter, the Appellate Assistant Commissioner allowed the appeal. Aggrieved by the order passed by the Appellate Assistant Commissioner, the Revenue preferred an appeal before the Tribunal. The Tribunal held that the value of the consideration received by the assessee for transfer of goodwill was not liable to capital gains tax under Sec. 45 of the Act. The Tribunal, therefore, upheld the order passed by the Appellate Assistant Commissioner. Aggrieved by the order passed by the Tribunal, the Revenue sought a reference and it is at the instance of the Revenue that the aforesaid question of law has been referred to this court for its opinion.
Finding of the Court:
The Tribunal was justified in law in holding that the consideration for goodwill amounting to Rs. 71,918 received from the vendee by the assessee was not a capital asset and as such is not assessable to capital gains.
Issues: ['Whether the Tribunal was justified in law in holding that the consideration for goodwill amounting to Rs. 71,918 received from the vendee by the assessee was not a capital asset and as such is not assessable to capital gains?']
Ratio Decidendi: The Supreme Court has held that the goodwill generated in a newly commenced business cannot be described as an "asset" within the meaning of Sec. 45 of the Act and, therefore, its transfer is not subject to income-tax under the head "Capital gains".
Final Decision: The answer to the question referred to this court by the Tribunal is in the affirmative and against the Revenue.
Uday Sinha, J.
1. This is a reference under Sec. 256(1) of the Income-tax Act, 1961, in relation to the assessment year 1970-71. The assessee was assessed in the status of a Hindu undivided family in relation to his shop styled "New Chaibasa Cycle Stores, Sadar Bazar, Chaibasa". The concern was sold to one N.P. Ahuja by a sale deed dated April 30, 1969, for Rs. 1,00,000. This was made up, according to the statement of the case, of closing value of stock-in-trade at Rs. 23,867.84. The outstanding dues with others was to the tune of Rs. 2,257.48. Rs. 71,918.90 was taken as long-term capital gain. The sale deed did not mention sale of any goodwill. The assessee did not state before the Income-tax Officer about the sale of any goodwill nor did the Income-tax Officer make any reference about goodwill. Surprisingly somehow the Appellate Assistant Commissioner treated this amount as being on account, of goodwill of the shop "New Chaibasa Cycle Stores". Describing the said sum as representing goodwill, the whole matter received a twist. Before the Appellate Assistant Commissioner, a letter dated May 26, 1971, was filed. This letter showed that there was an offer of Rs. 73,000 on account of goodwill including the quota rights from certain manufacturers and suppliers of cycles and cycle parts. The vendee in its books showed purchase of goodwill in its balance-sheet. Relying upon a decision of the Calcutta High Court in CIT v. Chunilal Prabhudas and Co. [1970] 76 ITR 566, the Appellate Assistant Commissioner held that "the quantum of goodwill" was of the value of Rs. 71,920, but he deleted this item wholly on the footing that goodwill was not a capital asset for purpose of computation of capital gains. The Revenue, being aggrieved by the order of the Appellate Assistant Commissioner deleting the said sum, appealed to the Appellate Tribunal. The Tribunal, finding divergence of views propounded by the Madras, Delhi and Kerala High Courts on the one hand and the Gujarat High Court on the other, held that capital gains tax was not attracted to transfer of goodwill. The Tribunal observed that the capital value of goodwill is charged to wealth-tax under the Wealth-tax Act, 1957, which is an annual recurring tax. Being an annual recurring tax on the capital value of goodwill, it will be unfair to levy another tax calling it capital gains tax on the same value of the goodwill in the same assessment year merely because the goodwill had been transferred for a consideration. In that situation, the Department failed. Hence, the present reference under Sec. 256(1) of the Income-tax Act. The question referred to us for our opinion is as follows :
"Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the consideration for goodwill amounting to Rs. 71,918 received from the vendee by the assessee was not capital gain assessable to tax?"
2. Learned counsel for the Revenue contended that, in the instant case, the sale deed itself did not contain any reference to sale of goodwill. It was rather surprising how matters got messed up and the question of goodwill cropped up. He submitted that the business of the shop was sold as a going concern, lock, stock and barrel. The consideration received on that account was, therefore, a revenue receipt. Whatever, therefore, was minus the stock-in-trade was liable to capital gains tax in terms of Sec. 45 of the Income-tax Act. Sec. 45 was introduced in 1964 by the Twelfth Finance Act with effect from April 1, 1964. Sub-sections (2) to (4) were deleted by the Thirteenth Finance Act with effect from April 1, 1966. On the basis of Sec. 45, learned senior standing counsel has urged that the sale was not item wise, but was lock, stock and barrel and since the sale included capital assets as well as non-capital assets, the balance after setting aside the value of stock-in-trade had to be assessed as capital gains. The submission urged on behalf of the Revenue se
