The main legal point established in the judgment is that the amount received towards the value of goodwill during the dissolution of a partnership was not assessable to tax as capital gains under the Income-tax Act 1961, as the profits or gains arising from the transaction could not be computed in accordance with the provisions of Section 48.

1. The question referred for the opinion of the court is:

"Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is correct in holding that the amount of Rs. 32,009 cannot be subjected to tax capital gains?"

The reference arises out of an assessment for the year 1965-66. The assessee had been practising as a chartered accountant at Kottayam under the firm name "Jacob & Mathew" from the year 1951. During the accounting year relevant to the assessment year in question, the assessee took in as bis partner another chartered accountant Sri. Venkatanarayanan on 15 71965; and Annexure D is the deed of partnership dated 15 71965 entered into between the two partners. The main item in the assets of the assessee which were taken over by the newly constituted firm was the goodwill which was valued at Rs. 32,000/-. As between the assessee and his partner, the net profit or loss of the business of the partnership was agreed to be divided in the proportion 75% and 25% respectively. Towards his share in the goodwill obtained by the firm, the partner paid the assessee an amount of Rs. 8,000/-. The firm continued only till 19101965 when the assessee was appointed as Accountant Member of the Kerala Sales-tax Appellate Tribunal. There was a consequent dissolution of the firm; and the assessee received Rs. 24,000/- towards his share of the goodwill of the firm.

2. During the assessment proceedings, the assessee took up the stand that the aforesaid Rs. 32,000/- received by him in two instalments was not liable to be taxed. The Income-tax Officer, on the other hand, proceeded on the basis that with the formation of the partnership the assessee must be deemed to have transferred the goodwill of his profession and that the entire amount of Rs. 32,000/- was taxable as

'capital gains'. In the appeal preferred by the assessee, the Appellate Assistant Commissioner substantially confirmed the assessment on somewhat different grounds. The assessee thereupon took the matter in appeal before the Income-tax Appellate Tribunal, where he reiterated the earlier contention and pressed into service S.47 (ii) of the Income-tax Act as well. The Tribunal held that the assessee was entitled to succeed on both grounds. With regard to the question whether the transfer of the goodwill would give rise to the levy of capital gains, the Tribunal followed the decision of the Madras High Court reported in Commisioner of Income tax v. Rathanam Nadar 71 ITR. 433 and decided in favour of the assessee. On application by the revenue, the Appellate Tribunal has referred the question cited above for the advice of the court.

3. What is urged by the revenue is that the entire amount of Rs. 32,000/-received by the assessee in the process of he formation and dissolution of his partnership with Shri Venkatanarayanan, should be treated as 'capital gains' arising out of the transfer of his goodwill and hence assessable to tax. To appreciate the contention of the revenue, the relevant provisions of the Income-tax, Act 1961 (hereinafter referred to as the Act of 1961) may be briefly set out. The charging provision contained in S.45 of the Act may be read as follows:

"Any profits or gains arising from the transfer of a capital asset effected is the previous year shall, save as otherwise provided in S.53, 54 and 54B shall be chargeable to income-tax under the head 'Capital gains', and shall be deemed to be the income of the previous year in which the transfer took place."

4. 'Capital assets' is defined' in S.2 (14) of the Act of 1961 as property of any kind held by an assessee whether or not connected with his business or profession, but excluding certain items specified therein. How the capital gains are to be computed is provided by S.48, which is in the following terms:

"The income chargeable under the head'Capital gains' shall be computed by deducting from the full value of the consideration received or accruing as a result of the transfer of the capital as