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High Court Of Calcutta
S. C. Deb, Dipak Kumar Sen
COMMISSIONER OF INCOME-TAX, CENTRAL - Appellant
Versus
BIRD AND CO.(P.) LTD. - Respondent
Income-Tax Reference 377 Of 1969
Decided On : 07/28/1975
INCOME TAX - Section 23a - Goodwill - Fixed asset - Accumulated profits and reserves - Depreciation - Dividend distribution - Reasonableness. 1. Goodwill of a company can constitute a 'fixed asset' within the meaning of Explanation 2 (iv) (a) to Section 23a of the Indian Income-tax Act, 1922. 2. Amounts written off from goodwill account by debiting capital reserve account and profit and loss account do not constitute 'accumulated profits and reserves' within the meaning of proviso (b) to Section 23a (1) of the Indian Income-tax Act, 1922. 3. Depreciation of goodwill, if genuine and supported by evidence, can be considered as a legitimate business expenditure in determining the commercial profits of a company. 4. Capital losses incurred by a company should be taken into account in determining the reasonableness of the dividend distribution under Section 23a of the Indian Income-tax Act, 1922.
Fact of the Case:
The assessee, a private limited company, was a managing agent of several companies. In the relevant assessment years, the assessee declared dividends that were not less than sixty percent of its distributable surplus for the assessment years 1955-56, 1958-59, and 1959-60, and not less than sixty-five percent thereof for the assessment year 1960-61, as normally required under Section 23a of the Indian Income-tax Act, 1922. However, such declared dividend fell short of the enhanced statutory percentage also laid down by the said Section 23a.
Finding of the Court:
The court held that the goodwill of the assessee constituted a fixed asset within the meaning of Explanation 2 (iv) (a) to Section 23a of the Indian Income-tax Act, 1922. The court further held that the amounts written off from goodwill account by debiting capital reserve account and profit and loss account did not constitute 'accumulated profits and reserves' within the meaning of proviso (b) to Section 23a (1) of the Indian Income-tax Act, 1922. The court also held that depreciation of goodwill, if genuine and supported by evidence, can be considered as a legitimate business expenditure in determining the commercial profits of a company. Finally, the court held that capital losses incurred by a company should be taken into account in determining the reasonableness of the dividend distribution under Section 23a of the Indian Income-tax Act, 1922.
Issues: 1. Whether the goodwill of the assessee-company constituted a 'fixed asset' within the meaning of proviso (b) to Section 23a (1) of the Indian Income-tax Act, 1922? 2. Whether the amounts written off from goodwill account by debiting capital reserve account and profit and loss account constituted 'reserves representing accumulations of past profits' within the meaning of proviso (b) to Section 23a (1) 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?
Ratio Decidendi: 1. Goodwill is an intangible asset that can be considered a fixed asset if it is retained by the company and used to produce income or gain profits. 2. Amounts written off from goodwill account by debiting capital reserve account and profit and loss account do not constitute 'accumulated profits and reserves' because they are not retained by the company as profits. 3. Depreciation of goodwill, if genuine and supported by evidence, can be considered as a legitimate business expenditure in determining the commercial profits of a company. 4. Capital losses incurred by a company should be taken into account in determining the reasonableness of the dividend distribution under Section 23a of the Indian Income-tax Act, 1922.
Final Decision: The court answered the questions referred to it as follows: 1. Question No. 1 for the assessment year 1955-56 is answered in the affirmative and in favor of the assessee. 2. Question No. 2 for the same assessment year is answered in the negative and also in favor of the assessee. 3. Questions Nos. 1 and 2 for the assessment years 1958-59, 1959-60, and 1960-61 are identical to the questions referred to above and are answered accordingly. 4. The court declined to answer question No. 3 for the assessment years 1958-59, 1959-60, and 1960-61. 5. The court reframed question No. 4 for the said assessment years and answered it in the negative and in favor of the assessee.
( 1 ) IN this reference under Section 66 (1) of the Indian Income-tax Act, 1922, the following questions have been referred : assessment year 1955-56"1. Whether, on the facts and in the circumstances of the case, the goodwill of the assessee-company constituted a 'fixed asset' within the meaning of proviso (b) to Section 23a (1) of the Indian Income-tax Act, 1922, as the section stood at the relevant time ? 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 'reserves representing accumulations of past profits' within the meaning of proviso (b) to Section 23a (1) of the Indian Income-tax Act, 1922 ? "assessment years 1958-59, 1959-60 and 1960-61"1. Whether, on the facts and in the circumstances of the case, the goodwill of the assessee-company constituted a 'fixed asset' within 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 ?"
( 2 ) 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 and Co. (Private) Ltd. , the assessee, is a private limited company and had been the managing agents of several companies.
( 3 ) IN each of the assessment years in question the assessee had declared dividends. Such dividend was not less than sixty per cent. of its distributable surplus for the assessment years 1955-56, 1958-59 and 1959-60 and not less than sixty-five per cent. thereof for the assessment year 1960-61 as normally required under Section 23a of the Indian Income-tax Act, 1922. But such declared dividend fell short of the enhanced statutory percentage also laid down by the said Section 23a. Under the said section the enhanced statutory percentage being 100% for the assessment year 1955-56 and 95% for the other assessment years was applicable where the accumulated profits and reserves (including the amounts capitalised from the earlier reserves) representing accumulation of past profits which had not been the subject of an order under Section 23a (1) exceeded either the aggregate of the paid up capital and loan capital or the actual cost of the fixed assets, whichever was the greater.
( 4 ) ON the computation of the assessee in each of the assessment years in question the aggregate of its reserves and accumulated profits did not exceed the cost of its fixed assets and hence the assessee claimed exemption for higher statutory percentage.
( 5 ) FOR such computation the assessee treated its goodwill to be a fixed asset and the value of such goodwill was taken at the original cost.
( 6 ) IN proceedings under Section 23a the Income-tax Officer held that goodwill of the assessee was an intangible asset and could not be considered to be a fixed asset. Even otherwise he held the cost of the goodwill could not be taken at its original value ignoring the amounts written off from time to time. By such write-off the reserve and accumulated profit
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