COMMISSIONER OF INCOME TAX Vs. JASWANTLAL DAYABHAI

JUDGEMENT

(1.) THIS is a reference made by the Income-tax Appellate Tribunal under Section 256(1) of the Income-tax Act, 1961, at the instance of the department.

(2.) THE assessee, Jaswantlal Dayabhai, is an individual. THE relevant assessment year is 1962-63, for which the previous year ended on 31st March, 1962. THEre was a partnership consisting of the assessee and his three brothers, namely, Jayantilal, Suresh Chandra and Hemendra. Three other minor brothers of the assessee were admitted to the benefits of the partnership. This partnership was constituted by a partnership deed executed on 24th October, 1957. THE assessee's share in the partnership was 15 per cent. On 16th April, 1961, a deed was executed between the assessee, the three major brothers who were partners and the guardian of the minors. THE effect of this deed was that the assessee retired from the partnership with effect from 15th April, 1961. THE goodwill of the partnership was valued at Rs. 6 lakhs. THE assessee's share in the goodwill, therefore, worked out to Rs. 90,000. THE guardian of the minors consented to pay off the assessee the value of his interest in the goodwill by debit of the proportionate amounts to the accounts of the respective minors. THE interest of each of the minors was also increased to the extent of 5 per cent. As a result of this arrangement, which was agreed to by all concerned, a sum of Rs. 90,000 was credited to the assessee's account on 17th April, 1961, and corresponding debits of Rs. 30,000 each were made to the accounts of the three minors. In the assessment proceedings, the assessee claimed that the sum of Rs. 90,000 was exempt from taxation. THE Income-tax Officer held against the assessee and taxed the amount as capital gains under Section 45 of the Act. In appeal, the Appellate Assistant Commissioner also took the same view. On a further appeal, however, the Tribunal came to the conclusion that the sum of Rs. 90,000, which was obtained by the assessee, in consideration of his interest in the goodwill of the firm at the time of his retirement, was not taxable as capital gains. On an application made by the department the following question of law has been referred to the High Court :

(3.) HAVING given our anxious consideration to the submissions made before us, we have reached the conclusion that the view taken by the majority of the High Courts must be accepted. There are various reasons for this conclusion. Firstly, Section 45, which is the charging section, shows that the charge is on "any profits or gains arising from the transfer of a capital asset" and not on the capital asset itself. The concept of "profits or gains "made chargeable under Section 45, itself implies that there is something received in excess of the cost of the capital asset which is transferred. In the case of a self-created or self-generated goodwill, the assessee incurs no cost in terms of money. On transfer of such a goodwill, it cannot be said that the assessee makes any "profits or gains chargeable under Section 45. If the whole of the consideration received on such a transfer is taken to be "profits or gains" to the assessee within the meaning of Section 45, it would amount to taxing the capital asset itself and not "profits or gains" arising from its transfer. Secondly, the above construction of Section 45 is supported by the scheme of Section 48 which provides that the income chargeable under Section 45 is to be computed by deducting from the full value of the consideration "the cost of acquisition of the capital asset and the cost of any improvement thereto". The mode of computation provided in Section 48 shows that the capital asset, a transfer of which is taxable under Section 45, is one which costs in terms of money to the assessee, and is also one which can be improved by investing money. Self-created or self-generated goodwill is not that type of capital asset. Thirdly, even assuming that the construction for which the department contends is also open, the rule of construction applicable to a taxing statute is that the benefit of construction, when two constructions are equally open, should be given to the assessee. This rule requires that the construction adopted by the majority of the High Courts, which is certainly a reasonable construction of Section 45, should be accepted as it is favourable to the taxpayer, fourthly, when the Madras High Court in Commissioner of Income-tax v. Rathnam Nadar [1969] 71 ITR 433, decided against the department, an appeal was taken to the Supreme Court, but the appeal was not pressed, although at the time when the matter came up before the Supreme Court the department could have relied upon the decision of the Gujarat High Court. Fifthly, in the matter of a taxing statute of all India application it is very necessary that there should be uniformity in its construction throughout the country as far as possible. Lastly, a reading of the decision of the Gujarat High Court shows that the decision on this point was clearly obiter. For all these reasons, we are of opinion that the transfer of a self-created or self-generated goodwill is not taxable under Section 45.