Judgment

PATHAK, J.:- The question in these appeals is whether the transfer of the goodwill of a newly commenced business can give rise to a capital gain taxable under S. 45, Income-tax Act, 1961.

2. The assessee, a registered firm, manufactured and sold agarbattis. Cl. (13) of the Instrument of Partnership executed on 28th July, 1954 showed that the goodwill of the firm had not been valued, and the valuation would be made on dissolution of the partnership. The period of the partnership was extended by an instrument dated 31st March, 1964, and it contained a similar clause (13). Subsequently, the assessee firm was dissolved by a deed dated 1st December, 1965. At the time of dissolution, it seems, the goodwill of the firm was valued at Rs. 1,50,000/-. A new partnership by the same name was constituted under an instrument dated 2nd December. 1965 and it took over all the assets, including the goodwill, and liabilities of the dissolved firm.

3. The Income-tax Officer made an assessment on the dissolved firm for the assessment year 1966-67 but did not include any amount on account of the gain arising on transfer of the goodwill. The Commissioner, being of the view that the assessment order was prejudicial to the Revenue, decided to invoke his revisional jurisdiction and setting aside the assessment order directed the Income-tax Officer to make a fresh assessment after taking into account the capital gain arising on the sale of the goodwill.

4. In appeal before the Income-tax Appellate Tribunal, the assessee maintained that the sale did not attract tax on capital gains under S. 45 of the Income-tax Act, 1961. Accepting the contention, the Tribunal allowed the appeal. At the instance of the Commissioner of Income-tax, it referred a question of law to the High Court of Karnataka which as reframed by the High Court, reads as follows :

"Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that no capital gains can arise under S. 45 of the Income-tax Act, 1961 on the transfer by the assessee firm of its goodwill to the newly constituted firm?"

By its judgment dated 4th July, 1974 the High Court answered the question in the affirmative, holding that the value of the consideration received by the assessee for the transfer of its goodwill was not liable to capital gains tax under S. 45 of the Act. Civil Appeal No. 1146 of 1975 is directed against that judgment.

5. Civil Appeal No. 1378 of 1976 arises out of a judgment by the same High Court in which it has followed its earlier view.

6. Civil Appeal No. 926 of 1973 has been preferred against the judgment of the Kerala High Court where a similar opinion has been expressed, but in respect of the provisions of S. 12-B, Indian Income-tax Act. 1922.

7. At the relevant time S. 45, Income-tax Act, 1961 provided :

"45. (1) Any profits or gains arising from the transfer of a capital asset effected in the previous year shall, save as otherwise provided in Sections 53 and 54, 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."

8. The section operates if there is a transfer of a capital asset giving rise to a profit or gain. The expression "capital asset" is defined in S. 2 (14) to mean "property of any kind held by an assessee". It is of the widest amplitude, and apparently covers all kinds of property except the property expressly excluded by clauses (i) to (iv) of the sub-section which, it will be seen, does not include goodwill. But the definitions in S. 2 are subject to an overall restrictive clause. That is expressed in the opening words of the section : unless the context otherwise requires". We must therefore enquire whether contextually S. 45. in which the expression "capital asset" is used, excludes goodwill.

9. Goodwill denotes the benefit arising from connection and reputation. The original definition by Lord Edon in Cruttwell v. Lye (1810) 17 Ves 335 that goodwi