1971 Supreme(Guj) 123

IN THE HIGH COURT OF GUJARAT
P.N. BHAGWATI, P.D. DESAI, JJ.
Commissioner of Income-Tax, Gujarat - Petitioner
Versus
Mohanbhai Pamabhai - Respondent
Income-tax Reference No. 22, 23, 24 and 25 of 1970 decided on 24.9.1971.
Decided on : 28-09-1971.

The retirement of a partner from a partnership does not amount to dissolution of the firm and goodwill is a capital asset within the meaning of section 2(14) of the Income Tax Act, 1961.

Headnote:

INCOME TAX - CAPITAL GAINS - TRANSFER OF CAPITAL ASSET - GOODWILL OF A FIRM - RETIREMENT OF PARTNERS - WHETHER RETIREMENT OF PARTNERS AMOUNTS TO DISSOLUTION OF FIRM - WHETHER GOODWILL IS A SELF-CREATED ASSET - WHETHER AMOUNT RECEIVED BY RETIRING PARTNERS IN RESPECT OF THEIR SHARE IN GOODWILL IS TAXABLE AS CAPITAL GAIN.

Fact of the Case:

The assessee, a partner in a firm, retired from the partnership. On retirement, he received a certain amount in respect of his share in the partnership as contemplated in clauses (3) and (4) of the retirement agreement. The Income-tax Officer assessed the amount received by the assessee as capital gains chargeable to tax under section 45 of the Income Tax Act, 1961. The assessee contended that the retirement of the partners amounted to dissolution of the firm and, therefore, no transfer of capital asset chargeable to tax under section 45 was involved in the process by which the goodwill of the firm was taken over by the remaining seven partners and the proportionate share in the value of the goodwill was paid to each of the assessees. The Tribunal negatived this contention and held that the present case was a case of retirement of four partners from the firm and not a case of dissolution which would attract the applicability of section 47, clause (ii). However, the Tribunal allowed the assessee's contention that goodwill was a self-created asset which had cost nothing to the firm and its partners in terms of money and a "transfer" of it was, therefore, not within the ambit of the charging provision contained in section 45 and the proportionate share in the value of the goodwill received by each assessee for transfer of his interest in the goodwill was not taxable as capital gain. The Commissioner was dissatisfied with this decision and moved the Tribunal for reference of the following questions of law for the opinion of the court:

Finding of the Court:

1. Whether the Tribunal was right in holding that the goodwill of the firm is a self-acquired asset of the firm? 2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the amount received by the assessee by way of his share in the goodwill of the firm is not liable to be assessed to tax?

Issues: 1. Whether the retirement of the partners amounted to dissolution of the firm? 2. Whether goodwill is a self-created asset? 3. Whether the amount received by the assessee in respect of his share in the goodwill is taxable as capital gain?

Ratio Decidendi: 1. The retirement of a partner from a partnership does not amount to dissolution of the firm. (paras 6-14) 2. Goodwill is a capital asset within the meaning of section 2(14) of the Income Tax Act, 1961. (paras 16-20) 3. The amount received by the assessee in respect of his share in the goodwill is not taxable as capital gain, as there was no transfer of interest of any of the assessees in the goodwill when the assessees retired from the firm and, in any event, even if there was transfer of such interest, there was no consideration received or accrued as a result of transfer of such interest. (paras 15, 25-26)

Final Decision: The questions referred to the court were answered as follows: 1. Question No. (1) in the affirmative. 2. Question No. (2) in the affirmative. 3. Question No. (3) does not arise.