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TMI Blog1981 (2) TMI 1X X X X Extracts X X X X X X X X Extracts X X X X ..... ed at Rs. 1,50,000. A new partnership by the same name was constituted under an instrument dated 2nd December, 1965, and it took over all the assets, including the goodwill and liabilities of the dissolved firm. The ITO made an assessment on the dissolved firm for the assessment year 1966-67 but did not include any amount on account of the gain arising on transfer of the goodwill. The Commissioner, being of the view that the assessment order was prejudicial to the revenue, decided to invoke his revisional jurisdiction and, setting aside the assessment order directed the ITO to make a fresh assessment after taking into account the capital gain arising on the sale of the goodwill. In appeal before the Income-tax Appellate Tribunal, the assessee maintained that the sale did not attract tax on capital gains under s. 45 of the I.T. Act, 1961. Accepting the contention, the Tribunal allowed the appeal. At the instance of the Commissioner, it referred a question of law to the High Court of Karnataka which, as reframed by the High Court, reads as follows: " Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that no capital gains can arise under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with any other matter carrying with it the benefit of the business." In Trego v. Hunt [1896] AC 7 (HL) Lord Herschell described goodwill as a connection which tended to become permanent because of habit or otherwise. The benefit to the business varies with the nature of the business and also from one business to another. No business commenced for the first time possesses goodwill from the start. It is generated as the business is carried on and may be augmented with the passage of time. Lawson in his Introduction to the Law of the Property describes it as property of a highly peculiar kind. In CIT v. Chunilal Prabhudas & Co. [1970] 76 ITR 566 the Calcutta High Court reviewed the different approaches to the concept (pp. 577, 578): " It has been horticulturally and botanically viewed as 'a seed sprouting' or an 'a corn growing into the mighty oak of goodwill'. It has been geographically described by locality. It has been historically explained as growing and crystallising traditions in the business. It has been described in terms of a magnet as the 'attracting force'. In terms of comparative dynamics, goodwill has been described as the 'differential return of profit'. Philosophical ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctions of the head " Capital gains ". Section 45 is a charging section. For the purpose of imposing the charge, Parliament has enacted detailed provisions in order to compute the profits or gains under that head. No existing principle or provision at variance with them can be applied for determining the chargeable profits and gains. All transactions encompassed by s. 45 must fall under the governance of its computation provisions. A transaction to which those provisions cannot be applied must be regarded as never intended by s. 45 to be the subject of the charge. This inference flows from the general arrangement of the provisions in the I.T. Act, where under each head of income the charging provision is accompanied by a set of provisions for computing the income subject to that charge. The character of the computation provisions in each case bears a relationship to the nature of the charge. Thus, the charging section and the computation provisions together constitute an integrated code. When there is a case to which the computation provisions cannot apply at all, it is evident that such a case was not intended to fall within the charging section. Otherwise, one would be driven to c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at all can be conceived. Yet there are assets which are acquired by way of production in which no cost element can be indentified or envisaged. From what has gone before, it is apparent that the goodwill generated in a new business has been so regarded. The elements which create it have already been detailed. In such a case, when the asset is sold and the consideration is brought to tax, what is charged is the capital value of the asset and not any profit or gain. In the case of goodwill generated in a new business there is the further circumstance that it is not possible to determine the date when it comes into existence. The date of acquisition of the asset is a material factor in applying the computation provisions pertaining to capital gains. It is possible to say that the " cost of acquisition " mentioned in s. 48 implies date of acquisition, and that inference is strengthened by the provisions of ss. 49 and 50 as well as sub-s. (2) of s. 55. It may also be noted that if the goodwill generated in a new business is regarded as acquired at a cost and subsequently passes to an assessee in any of the modes specified in sub-s. (1) of s. 49, it will become necessary to determine t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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