Goodwill is not a capital asset within the meaning of Section 12-B of the Income-tax Act, 1922.

( 1 ) THE statement of the case raises the following question for an answer by this Court :--"whether on the facts and in the circumstances of the case the Tribunal was right in holding that no capital gains could arise under Section 12-B of the Indian Income-tax Act, 1922 out of the transfer by the firm of its assets and goodwill to the two private limited companies?"

( 2 ) BEFORE proceeding to answer this question it will be appropriate to reframe the question by dropping the words "assets and" from the question because no argument has been advanced before us either on behalf of the assessee or the Commissioner on assets other than goodwill. The controversy is confined in this case only to goodwill and nothing else. In fact, no question arises with regard to other assets from the order of the Tribunal. The question re-framed, therefore, for the answer by this Court is as follows :--"whether on the facts and in the circumstances of the case the Tribunal was right in holding that no capital gains could arise under Section 12-B of the Indian Income-tax Act, 1922 out of the transfer by the firm of its goodwill to the two private limited companies?"

( 3 ) THE facts giving rise to this question are as follows : The assessment year is 1957-58 with the corresponding accounting year ending on 3-11-56. During this accounting year the assessee was a registered firm of six partners deriving income from import and export business. Its head office was in Calcutta and two branches in Bombay. On the very last day of this accounting year the assessee transferred its assets and liabilities and also the goodwill of its Calcutta business to a private limited company under the name Messrs. Chunilal Prabhudas and Co. , Calcutta Private Ltd. , and the assets and liabilities and also the goodwill of its Bombay business- to another company under the name Messrs. Chunilal Prabhudas Si Co. , Bombay Private Ltd. These transfers were made by two registered deeds both dated the 3rd November 1956, The assessee valued its goodwill for the Calcutta business and the Bombay business at Rs. 60,000/- each and received the total amount of Rs. 1,20,000/- in respect of the transfer of such goodwill. About the composition of the two companies to which this transfer was made the fact is that there were altogether 13 shareholders in the two companies consisting only of the six partners and their sons and wives. The consideration for the goodwill of the firm was not paid in cash but was paid for by the two companies by allocation of companies' shares representing the share of the each partner. In other words, the shareholder got as many shares of the company as his share in the partnership would justify. These are the basic and relevant facts.

( 4 ) THE Income-tax Officer included the entire amount of this sum of Rs. 1,20,000/- allocated towards the goodwill of the firm as the firms' capital gain under Section 12-B of the Income-tax Act, 1922. The Income-tax Officer rejected the assessee's contention that the goodwill being an intangible asset did not come within the definition of a capital asset in Section 2 (4a) of the Income-tax Act, 1922. The assessee could not satisfy the Income-tax Officer regarding the value of the goodwill as on 1-1-54 and the Income-tax Officer, therefore, was of the opinion that the acquisition of goodwill did not cost the assessee anything. The Income-tax Officer, therefore, held that the entire amount of Rs. 1,20,000/-was to be assessed as the assessee's capital gains. On appeal the Appellate Assistant Commissioner remanded the case to the Income-tax Officer for ascertaining the value of the goodwill of the firm as on 1-1-54. In answering the remand the Income-tax Officer reported that on the basis of the two years' purchase price of the average profits for the immediately preceding five years the value of the goodwill would amount to Rs. 73,886/- on 1-1-54. On the basis of that report, the Appellate Assistant Commissi