LATHIA R V Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) BY this reference made under section 256(2) of the Income -tax Act, 1961, the following questions have been referred to this court for opinion at the instance of the assessee : '1. Whether the assessment of Rs. 2,55,000 as capital gain in the hands of the applicant on account of the goodwill in relation to the sale of the entire business by the firm to the limited company is valid in law ?

(2.) WHETHER , on the facts and in the circumstances of the case, the inference that the goodwill of the firm was not the property of the firm merely because the goodwill belonged exclusively to the applicant and, hence, the capital gain is taxable in the hands of the applicant is valid in law, even though prior to the sale, the partnership had given due credit to the applicant in respect of the goodwill ?' 2. The relevant assessment year is 1970 -71 and the corresponding previous year ended on March 31, 1970.

(3.) ON April 30, 1969, the said reconstituted partnership firm entered into an agreement with a limited company incorporated under the provisions of the Companies Act, 1956, whereunder the reconstituted partnership firm agreed to sell its entire business along with all assets and liabilities to the company on the terms and conditions mentioned therein. Pursuant to the said agreement, a sale deed was executed on March 31, 1971, and the goodwill was valued at Rs. 2,75,000. According to the Income -tax Officer, the assessee became liable to pay the capital gains tax on the sum of Rs. 2,55,000 since the goodwill was valued at Rs. 2,75,000 and the cost of acquisition was taken at Rs. 20,000. The contention of the assessee that no capital gains tax was leviable on the value of the goodwill was rejected by the Income -tax Officer. Being dissatisfied with the order of the Income -tax Officer, the assessee preferred an appeal to the Appellate Assistant Commissioner who held that the Income -tax Officer was not justified in assessing the capital gains at Rs. 2,55,000. In the Departmental appeal to the Income -tax Appellate Tribunal, the Tribunal held that the Appellate Assistant Commissioner was not justified in reversing the Income -tax Officer and further held that the assessee was liable to capital gains tax on the sum of Rs. 2,55,000. It is in these circumstances, the present reference has been made at the instance of the assessee for the opinion of this court on the questions referred above.