TMI Blog1981 (2) TMI 1X X X X Extracts X X X X X X X X Extracts X X X X ..... firm had not been valued, and the valuation would be made on dissolution of the partnership. The period of the partnership was extended by an instrument dated. 31st March, 1964, and it contained a similar cl. (13). Subsequently, the assessee-firm was dissolved by a deed dated 31st December, 1965. At the time of dissolution, it seems, the goodwill of the firm was valued 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng more than " the probability that the old customers would resort to the old places" was expanded by Wood V.C. in Churton v. Douglas [1859] John 174 to encompass every positive advantage " that has been acquired by the old firm in carrying on its, business, whether connected with the premises in which the business was previously carried on or with the name of the old firm, or 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 45 ? Section 45 charges the profits or gains arising from the transfer of capital asset to income-tax. The asset must be one which falls within the contemplation of the section. It must bear that quality which brings s. 45 into play. To determine whether the goodwill of a new business is such an asset, it is permissible, as we shall presently show, to refer to certain other sections 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he purpose of s. 48, is determined in accordance with those provisions. There are other provisions which indicate that s. 48 is concerned with an asset capable of acquisition at a cost. Section 50 is one such provision. So also is sub-s. (2) of s. 55. None of the provisions pertaining to the head " Capital gains suggests that they include an asset in the acquisition of which no cost 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 " ..... X X X X Extracts X X X X X X X X Extracts X X X X
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