Summary
The assesses, a registered firm, manufactured and sold agarbattis. Clause (13) of the Instrument of Partnership executed on 28th of July, 1954 and subsequently extended by another instrument dated 31st March, 1964 showed that the goodwill of the firm had not been valued, and the valuation would be made on dissolution of the partnership. The assesses firm was dissolved by a deed dated 31st December, 1965. At the time of dissolution the goodwill of the firm was valued at Rs. 1,50,000/-. A new partnership by the same name was constituted under an instrument subsequently and it took over all the assets including the goodwill and liabilities of the dissolved firm. 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 gains 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. The Income Tax Appellate Tribunal in appeal accepted the contention of the assesses that the sale did not attract tax on capital gains under section 45 of the Income Tax Act, 1961. The High Court of Karnataka on a reference, at the instance of the Commissioner of Income Tax affirmed the Tribunal's view and held that the value of the consideration receive ed by the assesses for the transfer of its goodwill was not liable to capital gains tax under section 45 of the Income Tax Act.
Hence the three appeals as to the taxability of the transfer of the goodwill to capital gain tax.Dismissing the appeals, the Court^HELD: 1. The goodwill generated in a newly commenced business cannot be described as an asset within the terms of section 45 of the Income Tax Act, 1961 and therefore its transfer is not subject to Income Tax under the head"capital gains". [946 B-C]2.1. Goodwill denotes the benefit arising from connection and reputation. The benefit to the business varies with the nature of the business and also from one business to another. No business commenced for the first time possesses goodwill from the start. It is generated as the business is carried on and may be augmented with the passage of time. A variety of elements goes into its making, and its composition varies in different trades and in different businesses in the same trade, and while one element may preponderate in one business, another may dominate in another business. And yet because of its intangible 939nature, it remains insubstantial in form and nebulous in character. In a progressing business goodwill tends to show progressive increase. And in a failing business it may begin to wane. Its value may fluctuate from one moment to another depending on changes in the reputation of the business. It is affected by everything relating to the business, the personality and business rectitude of the owners, the nature and character of the business, its name and reputation, its location, its impact on the contemporary market, the prevailing socioeconomic ecology, introduction to old customers and agreed absence of competition. There can be no account in value of the factors producing it. It is also Impossible to predicate the moment of its birth. It comes silently into the world, unheralded and unproclaimed and its impact may not be visibly felt for an undefined period.Imperceptible at birth it exists enwrapped in a concept, growing or fluctuating with the numerous imponderables pouring into, and affecting the business. [942 F, H, 943 A,E-H, 944 A]Cruttwell v. Lye, 1810, 17 Ves 335; Churton v. Douglas, 1859 John 174; Trego v. Hunt, 1896 A.C. 7; Commissioner of Inland Revenue v. Muller & Co's Margarine Limited, [1901]A.C. 217. quoted with approval.3.1. Section 45 of the Income Tax Act operates if there is a transfer of a capital asset giving rise to & profit or gain. The expression "capital asset" defined in section 2(14) to mean "property of any kind held by an assessee" is of the widest amplitude and covers all kinds of property except the property expressly excluded by clauses (i) to (iv) of the sub-section which do nor include good-will. [942D-E]3.2. Section 45 is a charging section, charging the profits or gains arising from the transfer of a capital asset to income-tax, according to the detailed provisions for computing the profits or gains under that head. The charging section and the computation provisions together constitute an integrated code. When there is a case to which the computation provisions cannot apply at all, it is evident that such a case was not intended to fall within the charging section. [944 C, D-E]3.3. The mode of computation and deductions set forth in section 48 provides the principal basis for quantifying the income chargeable under the head "capital gains".Section 48 contemplates an asset in the acquisition of which it is possible to envisage a cost. The intent goes to the nature and character of the asset, that it is an asset which possesses the inherent quality of being available on the expenditure of money to a person seeking to acquire it. None of the provisions pertaining to the head "capital gains"suggests that they include an asset in the acquisition of which no cost at all can be conceived. [945 A, C-E]3.4. The date of acquisition of the asset is a material factor in applying the computation provisions pertaining to capital gains. The "cost of acquisition mentioned in section 48 implies a date of acquisition, an inference as strengthened by the provision of sections 49, 50 and sub- section (2) of section 55. If the goodwill generated in a new business is regarded as acquired at a cost and subsequently passes to an assessee in any of the modes specified in sub-section (1) of section 49, it will become necessary to determine the cost of acquisition to the previous owner. Having regard to the nature of the asset, it will be impossible to determine such cost of acquisition.Nor can sub-section (3) of section 55 be invoked, because the date of acquisition by the previous owner will remain unknown. [945 F-G, H, 946 A]940 Commissioner of Income-tax v. K. Rathnam Nadar, (1969) 71 I.T.R. 433 (Mad.); Commissioner of Income-tax v. Chunilal Prabhudas & Co., (1970) 76 I.T.R. 566 (Cal.); Jagdev Singh Mumick v. Commissioner of Income-tax, (1971) 81 I.T.R. 500 (Delhi); commissioner of Income-tax v. E. C. Jacob, (1973) 89 I.T.R. 88 (Kerala): Commissioner of Income-tax v. Home Industries & Co., (1977) 107 I.T.R. 609 (Bom.); commissioner of Income-tax v. Michel Postal, (1978) 112 I.T.R. 315 (Bom.) commissioner of Income-tax v. Jaswant Lal Dayabhai, (1978) 114 I.T.R. 798 (M.P.) approved.Commissioner of Income-tax v. Mohanbhai Pamabhai, (1978) 91 I.T.R. 393 (Guj.); K. N. Daftary v. Commissioner of Income-tax (1977) 106 I.T.R. 998, overruled.See the full content of this document
Extract
Commissioner Of Income Tax, Bangalore Etc. Etc. VS. B. C. Srinivasa Setty, Etc. Etc.
PETITIONER: COMMISSIONER OF INCOME TAX, BANGALORE ETC. ETC.Vs.RESPONDENT: B. C. SRINIVASA SETTY, ETC. ETC.DATE OF JUDGMENT19/02/1981BENCH: PATHAK, R.S.BENCH: PATHAK, R.S.BHAGWATI, P.N.TULZAPURKAR, V.D.CITATION: 1981 AIR 972 1981 SCR (2) 938 1981 SCC (2) 460 1981 SCALE (1)384CITATOR INFO : R 1985 SC 146 (10)RF 1986 SC 368 (15)RF 1988 SC1305 (6)D 1989 SC1055 (9,10)RF 1992 SC 147 (6,8)ACT: Goodwill of a newly commenced business-Whether, (i) a capital asset and (ii) if so, an asset falling within the contemplation of section 45 of Income Tax: Act, 1961 giving rise to a capital gain.JUDGMENT: CIVIL APPELLATE JURISDICTION: Civil Appeal No. 1146 of 1975.Appeal by Special Leave from the Judgment and order dated 4-7-1974 of the Karnataka High Court in I.T.R. No.38/72.CONNECTED WITH Civil Appeal No. 1378 of 1976.Appe...
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