COMMISSIONER OF INCOME TAX Vs. GOWRIKANTHAN J

JUDGEMENT

(1.) THE assessee is a chartered accountant and a partner in a firm of auditors, constituted under a deed of partnership dated August 3, 1964. At the inception, the assessee and another were partners in the firm, the assessee having contributed a capital of Rs. 7,500 and the other partner Rs. 2,500 and the profit and loss sharing ratio was fixed as 75 : 25. On June 1, 1969, another chartered accountant was also taken in as a partner and a fresh deed of partnership was entered into among them on June 30, 1969. Therein, besides a provision for the payment of monthly remuneration to the newly taken partner at the rates and for the periods specified, it was also further provided that the profit or loss was to be shared between the assessee and the other two partners in the ratio of 69 : 25 : 6. Again, on June 1, 1972, a fresh arrangement was made among the partners and yet another deed of partnership was executed on April 2, 1973, under which the assessee and the other two partners were to contribute capital of Rs. 5,000, Rs. 3,000 and Rs.

(2.) ,000, respectively, and share the profits and losses in the ratio of 50 : 30 : 20. The result of this was that the share of profits of the assessee, which was 75per cent to begin with and later reduced to 69per cent, ultimately got fixed at 50per cent, while the share of profits of the other two partners increased from 25per cent to 30per cent and from 6per cent to 20per cent, respectively. According to the assessee, it was agreed then among the partners of the firm that he should be paid Rs. 25,000 by the other two partners, in consideration of his giving up a portion of his share in the goodwill of the firm. Entries were made in the accounts of the assessee and the other two partners in the books of the firm on May 31, 1973, according to which the assessee's account was credited with Rs. 25,000 representing the amount payable to him by the other two partners in consideration of the assessee giving up a portion of his share in the goodwill of the firm and the accounts of the other two partners were debited with Rs. 5,000 and Rs. 20,000 respectively. In the course of the assessment proceedings of the assessee, as an individual, for the asst. year 1974 -75, the assessee took up the stand that, as the amount of Rs. 25,000 was received by him from the other partners in consideration of his giving up a portion of his share in the goodwill of the firm, there was no question of subjecting to tax any capital gains arising therefrom. However, the ITO took the view that the assessee had transferred a portion of his share in the firm on receipt of consideration in a sum of Rs. 25,000 and the asset so transferred by the assessee could not be regarded as a self -generating asset and since it was a long -term asset and had no cost of acquisition, the entirety of Rs. 25,000 was liable to tax under S. 45 of the IT Act, 1961 (hereinafter referred to as "the Act"). In so holding, the ITO placed reliance upon the decision in CGT vs. V. A. M. Ayya Nadar (1969) 73 ITR 761 (Mad). On appeal by the assessee reiterating the plea that Rs. 25,000 was received by the assessee from the other two partners only as consideration for giving up a portion of his share in the goodwill of the firm and there was no question of any gains arising from the transfer of goodwill, the AAC viewed the receipt of Rs. 25,000 by the assessee as consideration for his giving up a portion of his share in the goodwill of the firm and so doing, it was further held that, as goodwill was a self - generating asset, there was no question of any capital gains arising therefrom as per the decision in CIT vs. Rathnam Nadar (1969) 71 ITR 433 (Mad). On further appeal by the Revenue before the Tribunal, it took into account the entries dated May 31, 1973, in the accounts of the assessee and the other two partners in the books of the firm and held that the sum of Rs. 25,000 was agreed to be paid to the assessee by the other two partners as consideration for the giving up of a portion of his share in the goodwill of the firm by the assessee and there was no capital gain arising out of such transfer which could be subjected to tax treatment. In that view, the Tribunal dismissed the appeal. Under S. 256(2) of the Act, at the instance of the Revenue, the following question of law has been referred to this Court for its opinion:

(3.) FROM the account entries of the firm relating to the receipt of Rs. 25,000 by the assessee, it is seen that on May 31, 1973, the account of the assessee had been credited with two sums of Rs. 5,000 and Rs. 20,000, respectively, and the accounts of the other two partners correspondingly debited with the same amounts. The narration found in the entries refers to the adjustment of the firm's goodwill account as mutually agreed upon among the partners. Obviously, therefore, the amount of Rs. 25,000 credited to the assessee is referable to the adjustment of the rights of the partners inter se in the goodwill of the firm. Our attention has not been drawn to any material to doubt the correctness of the narration or genuineness of the entries and we find from the order of the Tribunal that its conclusion was based upon the aforesaid entries in the accounts coupled with the fact that the income of the firm, which had no fixed assets whose value was likely to appreciate, had increased for the accounting periods ending May 31, 1971, and May 31, 1972, and the valuation of the goodwill of the firm at one lakh of rupees, as on June 1, 1972, was not excessive.