The goodwill of a firm is a valuable asset of the firm and can be dealt with as such by the partners. The goodwill of a firm not only constitutes property of the firm but can be dealt with separately or along with other property of the firm.

A.P.Chowdhri, J.

1. This is a reference under Section 256(1) of the Income-tax Act, 1961 (hereinafter referred to as "the Act"), made by the Income-tax Appellate Tribunal, Amritsar, at the instance of the assessee.

2. Briefly stated, the relevant facts are that a partnership firm was constituted by a deed of partnership, annexure A-1, dated April 13, 1956, between Gopal Singh (individual) and his two sons representing their smaller Hindu Undivided families, namely, Jagjit Singh Hindu undivided family and Gurcharan Singh Hindu undivided family, under the name and style of Messrs. Golden Chemical Works. Gopal Singh died on September 4, 1970. By virtue of a registered will dated March 29, 1968, his share in the goodwill of the said firm came to Jagjit Singh Hindu undivided family and Gurcharan Singh Hindu undivided family who were the surviving partners in the firm. A new firm was constituted with Smt. Kulwant Kaur (individual) joining Jagjit Singh Hindu undivided family and Gurcharan Singh Hindu undivided family under a new partnership deed dated September 5, 1970, annexure A-II. This was followed by a partial partition in the two Hindu undivided families of Jagjit Singh and Gurcharan Singh, which was recognised by the Income-tax Officer, vide order dated January 7, 1976. A new partnership deed was executed on April 14, 1975, annexure A-III. The partners of the newly constituted firm were Jagjit Singh (individual), Gurcharan Singh (individual) Hindu undivided family Baldev Singh, son of Jagjit Singh, and Hindu undivided family Jatinder Singh, son of Gurcharan Singh.

3. For the assessment year 1977-78, the assessee claimed deduction of Rs. 12,000 as having been paid as rent of goodwill to Hindu undivided family Jagjit Singh and Hindu undivided family Gurcharan Singh, The claim was disallowed by the Income-tax Officer on the ground that it was only a device adopted by the assessee for bringing down the incidence of tax. It was also held by the Income-tax Officer that all along the same individuals continued as partners and that being so, there was no question of claiming any rent. On appeal filed by the assessee, the Commissioner of Income-tax (Appeals) reversed the decision of the Income-tax Officer and allowed the claim of the assessee holding that the goodwill belonged to the two Hindu undivided families, namely, Hindu undivided family of Jagjit Singh and Hindu undivided family of Gurcharan Singh, and the amount claimed on account of rent was reasonable. The Revenue filed an appeal against the decision of the Commissioner of Income-tax (Appeals) before the Income-tax Appellate Tribunal. It was urged before the Tribunal that goodwill continued to be an asset of the going concern and the same never vested in the two Hindu undivided families of Jagjit Singh and Gurcharan Singh. It was further contended before the Tribunal that the goodwill could not be separated from a going concern. Further, it was urged that the two Hindu undivided families of Jagjit Singh and Gurcharan Singh not being partners, they could not claim ownership of the goodwill. Lastly, it was argued that the firm having not been dissolved, none of the partners could predicate his share and, therefore, there was no question of payment of rent on account of use of the goodwill. These contentions prevailed with the Tribunal, with the result that the Revenues appeal was allowed, as already stated. Hence, this reference.

4. The questions referred are as under :

"(1) Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was legally justified in holding that the goodwill did not belong to the two retiring Hindu undivided families, S. Jagjit Singh and S. Gurcharan Singh ?

(2) Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was legally correct in disallowing the claim of the appellant firm for the payment of rent of goodwill to the two Hindu undivided families, S. Jagjit Singh and