COMMISSIONER OF INCOME TAX Vs. DAULATRAN NAYAR

JUDGEMENT

(1.) THIS is a reference under section 66(1) of the Indian Income -tax Act, 1922, in which at the instance of the Commissioner of Income -tax, Bombay City II, Bombay, the following question has been referred to us for our opinion :

(2.) THE question relates to the assessments of the assessee, Shri Daulatran Nayar (HUF), and his seven other partners for the assessment year 1960 -61, for which the accounting year is the year which ended on March 31, 1960. The assessee was a partner of the firm carrying on business in the name and style of M/s. India Woollen Textile Mills. There were seven other partners in this firm and each of the partners and equal share in the profits and losses of the firm. It appears that the business carried on by the firm was taken over by a limited company of the same name as from July 1, 1959. As a result of this transaction the firm charged and received the sum of Rs. 5 lakhs towards goodwill of the business from the limited company. Accordingly, an equal share of Rs. 62,500 in the said sum came to be credited in the account of each of the partners of the firm in the books of the firm. In the assessment proceedings for the assessment year 1960 -61 a question arose whether any capital gains tax had to be paid by the assessee and his seven partners on the sale of the goodwill to which each one of them was entitled. The Income -tax Officer held that the entire amount of Rs. 62,500 without any deduction under section 12B(2) of the Act was a capital gain made by each of the partners and the same was liable to tax. He took that view, inasmuch as, according to him, no asset as and by way of goodwill had been shown in the books of the firm nor had the firm paid anything towards goodwill and that since there was no 'actual cost' paid for the goodwill, the substitution of the fair market value as on January 1, 1954, as envisaged under the third proviso to section 12B(2) was not available to the assessee. In the alternative, he took the view that assuming that the assessee was entitled to such substitution, still the difference between the value of the goodwill as on the date of sale (July 1, 1959) and its fair market value on January 1, 1954, was in excess of the sum of Rs. 5 lakhs. He, accordingly, taxed the sum of Rs. 62,500 as a capital gain in the assessee's case as well as in the case of seven other partners.

(3.) IN second appeal the Tribunal confirmed the Appellate Assistant Commissioner's order. Both the Accountant Member and the Judicial Member. Though they gave different reasons, concurred in the view that the assessee and his partners were entitled to substitute the fair market value of that capital asset as on January 1, 1954, for the actual cost, even in cases where that particular asset had actually cost nothing to the assessee and the7 partners as it was self -generating asset. At the instance of the Commissioner of Income -tax the question set out at the commencement of this judgment has been referred to us for our opinion.