TMI Blog1998 (1) TMI 15X X X X Extracts X X X X X X X X Extracts X X X X ..... tten down value of land and building, machinery and equipment, etc. The Assessing Officer accepted the computation of profit/loss made by the assessee, in which deduction of Rs. 2,00,000 as cost of the goodwill was claimed under section 45 read with section 2(47) of the Income-tax Act, 1961 (hereinafter referred to as "the Act"), and the said assessment was ordered by the Assessing Officer. In view of the audit objection, the assessment was reopened and reassessment was made, thereby withdrawing the deduction originally allowed in respect of the goodwill to an extent of Rs. 2,00,000 on the ground of non-application of section 45 read with section 2(47) of the Act. The assessee preferred an appeal before the Commissioner of Income-tax (Appeals) stating that there was a transfer within the meaning of section 2(47) of the Act with regard to the goodwill acquired by him at a cost of Rs. 2,00,000, that the cost of Rs. 2,00,000 towards goodwill was extinguished in view of the transfer referred to above and, therefore, the assessee is entitled to set-off against the capital gains with regard to the loss of Rs. 2,00,000. The abovesaid contention of the assessee was accepted by the Commis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rs. 2,00,000 towards goodwill of the abovesaid theatre. After the purchase of the abovesaid theatre, the assessee was running the abovesaid theatre changing the name to Kohinoor Theatre. Admittedly, the assessee had sold the theatre running under the name and style of Kohinoor Theatre to one Thiru S. Gurunathan Chettiar of Mayuram on July 17, 1974, under two separate documents for transfer. A registered document was executed for sale of land and cinema theatre on July 17, 1974, while a sale note was executed with regard to the movable properties, like cinema equipment, projector, machinery, furniture and fittings, generator, etc. It is equally not in dispute that the vendee of the abovesaid theatre did not want to purchase the goodwill of the abovesaid Gowri Theatre even though the land and building were purchased for a sum of Rs. 2,00,000, while, machinery, furniture, et(!., were purchased for a sum of Rs. 1,80,000. In view of the fact that the goodwill of the abovesaid theatre, which was purchased by the assessee for Rs. 2,00,000 from its previous owner, was not sold to the present owner, namely, Thiru S. Gurunathan Chettiar, the assessee had treated the abovesaid sum of Rs. 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee up to the transfer of the abovesaid theatre on July 17, 1974, to Thiru S. Gurunathan Chettiar. The decision reported in CIT v. B. C. Srinivasa Setty [1981] 128 ITR 294 (SC), would disclose that goodwill generated in a newly commenced business cannot be described as an "asset" within the terms of section 45 of the Act, and the transfer of goodwill initially generated in a business does not give rise to a capital gain for the purposes of income-tax. It is also stated that goodwill denotes the benefit arising from connection and reputation. A variety of elements goes into its making, and its composition varies in different trades and in different businesses in the same trade, and while one element may preponderate in one business, another may dominate in another business. Its value may fluctuate from one moment to another depending on changes in the reputation of the business. It is affected by everything relating to the business, the personality and business rectitude of the owners, the nature and character of the business, its name and reputation, its location, its impact on the contemporary market, the prevailing socio-economic ecology, introduction to old customers and a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... contemporary market, the prevailing socioeconomic ecology, introduction to old customers and agreed absence of competition. In this case, the cinema business carried on by the assessee under the name and style of Kohinoor Theatre, after the purchase of Gowri Theatre on October 7, 1967, with the goodwill for a sum of Rs. 2,00,000, had continued for many long years, and it is not a new business. The same principle has also been laid down by the apex court with regard to goodwill in Rustom Cavasjee Cooper v. Union of India [1970] 40 Comp Cas 325 ; AIR 1970 SC 564 as follows: "Goodwill of a business is an intangible asset : it is the whole advantage of the reputation and connections formed with the customers together with the circumstances making the connection durable. It is that component of the total value of the uncle taking which is attributable to the ability of the concern to earn profits over a course of years or in excess of normal amounts because of its reputation, location and other features. Goodwill of an undertaking therefore is the value of the attraction to customers arising from the name and reputation for skill, integrity, efficient business management or efficien ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of a partner. The abovesaid decision lends support to the contention of learned counsel for the assessee that the goodwill is inseparable from the business and on transfer of the abovesaid business, the goodwill also accompany if to the purchaser. In view of the abovesaid decision of the apex court, the contention raised on behalf of the Revenue that the goodwill was not sold, but was retained by the assessee at the time of sale of the theatre to Thiru S. Gurunathan Chettiar on July 17, 1974, and, therefore, it cannot be said that there was loss to an extent of Rs. 2,00,000 in the goodwill, for which, the assessee had paid Rs. 2,00,000 at the time of the purchase of the said theatre on October 7, 1967, from Thiru K. S. Ramalingam Pillai, cannot be accepted. It was also brought to the notice of the court about the decision reported in C. Leo Machodo v. CIT [1988] 172 ITR 744 (Mad). In that case, a ship was sunk in the high seas without any act on the part of any person and the entire ship was destroyed. A sum of Rs. 1,00,000 was paid by the insurance company to the assessee for destruction of the abovesaid property in high seas. In the abovesaid facts and circumstances of the cas ..... 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