The goodwill of a business is a capital asset and any profit or gain arising from its sale is taxable under the head "capital gains".

( 1 ) THE following question is involved in this reference under Section 256 (1) of the I. T. Act, 1961:" Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that there was no mistake apparent from the record in its' order dated 25th August, 1973, which could be rectified under Section 254 (2) of the Income-tax Act, 1961 ?"

( 2 ) THE statement of the case relates to the assessment year 1965-66. The assessee is an individual. He was the owner of a business and sold it to a company in the relevant previous year. He also sold the goodwill of the said business to that company for Rs. 60,000. The ITO brought Rs. 60,000 to tax under the head "capital gains".

( 3 ) THE appeals filed by the assessee were dismissed by both the appellate authorities. The assessee then made an application before the Tribunal under Section 254 (2) of the I. T. Act, 1961, without asking for setting aside of the appellate order of the Tribunal.

( 4 ) IT may be now noted here that two grounds were taken before the Tribunal in that application but only one ground has been argued before us which was argued before the Tribunal on behalf of the assessee. It was in substance argued before the Tribunal that the goodwill of a business is not a capital asset as held in CIT v. Chunilal Prabhudas and Co. by a Division Bench of this court, and the Tribunal should, therefore, rectify its mistake.

( 5 ) THE departmental representative, on the other hand, cited several decisions including a judgment of the Supreme Court in the case of Devidas Vithaldas and Co. v. CIT [1972] 84 ITR 277, in support of the contention that goodwill of a business is a capital asset.

( 6 ) THE Tribunal rejected the contention of the assessee and dismissed the said application. Thereafter, at the instance of the assessee, the Tribunal referred the above question to this court.

( 7 ) MR. N. K. Poddar, learned advocate for the assessee argues before us that by following the case of Chunilal Prabhudas and Co. we should hold that the goodwill of a business is not a capital asset and, therefore, there is a mistake apparent from the record in the appellate order of the Tribunal which should have been rectified by the Tribunal under Section 254 (2) of the Act. He also argues that the goodwill of a business which is built up in the course of carrying on the business cannot be regarded as a capital asset for the purposes of capital gains because there cannot be any cost of acquisition of such a goodwill.

( 8 ) MR. Ajit Sengupta, learned counsel for the revenue, disputes the above contentions and cites two subsequent decisions of this court in support of his contentions that the goodwill of the business is a capital asset and any profit or gain arising from its sale is taxable under the head "capital gains". Mr. Sengupta also argues that in any event two conceivable opinions being possible as to whether the goodwill of the business is a capital asset for the purposes of capital gains, it cannot be said that there is any mistake apparent from the record in the order of the Tribunal and, therefore, it was not a rectifiable mistake under Section 254 (2) of the Act.

( 9 ) BEFORE dealing with the aforesaid arguments we would like to dispose of the two cases cited by Mr. Poddar in support of his another argument that the Tribunal should have followed the case of Chunilal Prabhudas and Co.

( 10 ) IN CIT v. Ramjibhai Hirjibhai and Sons [1977] 110 ITR 411 (Guj), at the time of original assessment the ITO did not charge any interest under Section 139 of the 1961 Act for late filing of the return of income by the assessee. He thereafter charged interest by acting under Section 154 of the Act. The appeal filed by the assessee from the rectification order was allowed by the AAC who held that the ITO having already exercised his discretion in not levying any interest was no longer competent to charge it under Section 154 of the Act. The department th