COMMISSIONER OF INCOME TAX Vs. SHANTI GOSWAMI

JUDGEMENT

(1.) THIS is a reference under Section 256(1) of the Income-tax Act, 1961, in relation to the assessment year 1970-71. The assessee was assessed in the status of a Hindu undivided family in relation to his shop styled "New Chaibasa Cycle Stores, Sadar Bazar, Chaibasa". The concern was sold to one N.P. Ahuja by a sale deed dated April 30, 1969, for Rs. 1,00,000. THIS was made up, according to the statement of the case, of closing value of stock-in-trade at Rs. 23,867.84. The outstanding dues with others was to the tune of Rs. 2,257.48. Rs. 71,918.90 was taken as long-term capital gain. The sale deed did not mention sale of any goodwill. The assessee did not state before the Income-tax Officer about the sale of any goodwill nor did the Income-tax Officer make any reference about goodwill. Surprisingly somehow the Appellate Assistant Commissioner treated this amount as being on account, of goodwill of the shop "New Chaibasa Cycle Stores". Describing the said sum as representing goodwill, the whole matter received a twist. Before the Appellate Assistant Commissioner, a letter dated May 26, 1971, was filed. THIS letter showed that there was an offer of Rs. 73,000 on account of goodwill including the quota rights from certain manufacturers and suppliers of cycles and cycle parts. The vendee in its books showed purchase of goodwill in its balance-sheet. Relying upon a decision of the Calcutta High Court in CIT v. Chunilal Prabhudas and Co. [1970] 76 ITR 566, the Appellate Assistant Commissioner held that "the quantum of goodwill" was of the value of Rs. 71,920, but he deleted this item wholly on the footing that goodwill was not a capital asset for purpose of computation of capital gains. The Revenue, being aggrieved by the order of the Appellate Assistant Commissioner deleting the said sum, appealed to the Appellate Tribunal. The Tribunal, finding divergence of views propounded by the Madras, Delhi and Kerala High Courts on the one hand and the Gujarat High Court on the other, held that capital gains tax was not attracted to transfer of goodwill. The Tribunal observed that the capital value of goodwill is charged to wealth-tax under the Wealth-tax Act, 1957, which is an annual recurring tax. Being an annual recurring tax on the capital value of goodwill, it will be unfair to levy another tax calling it capital gains tax on the same value of the goodwill in the same assessment year merely because the goodwill had been transferred for a consideration. In that situation, the Department failed. Hence, the present reference under Section 256(1) of the Income-tax Act. The question referred to us for our opinion is as follows :

(2.) LEARNED counsel for the Revenue contended that, in the instant case, the sale deed itself did not contain any reference to sale of goodwill. It was rather surprising how matters got messed up and the question of goodwill cropped up. He submitted that the business of the shop was sold as a going concern, lock, stock and barrel. The consideration received on that account was, therefore, a revenue receipt. Whatever, therefore, was minus the stock-in-trade was liable to capital gains tax in terms of Section 45 of the Income-tax Act. Section 45 was introduced in 1964 by the Twelfth Finance Act with effect from April 1, 1964. Sub-sections (2) to (4) were deleted by the Thirteenth Finance Act with effect from April 1, 1966. On the basis of Section 45, learned senior standing counsel has urged that the sale was not item wise, but was lock, stock and barrel and since the sale included capital assets as well as non-capital assets, the balance after setting aside the value of stock-in-trade had to be assessed as capital gains. The submission urged on behalf of the Revenue seems to have substance. Section 45 provides for charging of income-tax on profits or gains arising from the transfer of a capital asset. Capital asset as mentioned in Section 2(14) of the Act means property of any kind held by the assessee whether or not connected with his business or profession. It is no more in doubt that goodwill is a capital asset. The large package involved in the sale of a going concern may include goodwill or it may not. That the inquiry whether goodwill is involved or not is irrelevant. In giving effect to Section 45, all that the taxing authorities have to do is to leave out the stock-in-trade, consumable stores or raw materials, personal effects, etc., and assess the balance sum as capital gains. If the sale is itemwise, things may be different, In that situation, after the value of goodwill has been mentioned, it would have to be considered how the capital gain is to be computed and assessed, but where it is the transfer of a going concern, the inquiry about the sale of goodwill or the nature thereof would, in my view, with great respect, be irrelevant. In the instant case, when the sale deed did not mention sale of goodwill, there was no question of trying to compute the value thereof. The fact that the vendee _ or the assessee or somebody else had offered Rs. 73,000 as value of goodwill was entirely irrelevant. The paper book does not show who had written this letter. I would, however, assume that it was written by the vendee himself. It is difficult to comprehend when it was written--whether after the order of assessment or before it. According to the Calcutta High Court, in the case of Chunilal Prabhudas and Co. [1970] 76 ITR 566, goodwill was held not to be a capital asset. I regret, I have some difficulty in accepting this position. It is now well established and fully recognised that goodwill is a capital asset and may be assessed as a capital gain.

(3.) THE next question which may possibly arise is whether self-generated goodwill is liable to be taxed? THEre is no material on the record before us to show whether the goodwill was self-generated or acquired. THE assessee had placed no material in this behalf. In fact, he did not co-operate in the assessment proceedings. THE assessment was thus ex parte. If the assessee did not assert that there was sale of goodwill, I fail to appreciate how does the question of value of goodwill arise ? It is therefore, difficult to apply the law laid down by the Supreme Court in regard to self-generated goodwill in CIT v. R.C. Srinivasa Setty [1981] 128 ITR 294.