TMI Blog1995 (11) TMI 39X X X X Extracts X X X X X X X X Extracts X X X X ..... ficer had completed the assessment under section 143(3) of the Act for the assessment year 1974-75 in the case of the assessee, a registered firm on January 25, 1977. On December 15, 1978, the Commissioner of Income-tax, Rajkot, issued notice under section 263 of the Income-tax Act, 1961, stating that on going through the case records of the income-tax assessment proceedings of the assessee for the assessment year 1974-75, it was noticed that the assessment made by the Income-tax Officer on January 25, 1977, is erroneous and is prejudicial to the interests of the Revenue on the following grounds : " (i) that the Income-tax Officer has failed to tax the so-called goodwill amounting to Rs. 10,75,000 credited to the accounts of the partners in their profit-sharing ratio ; (ii) that the Income-tax Officer has failed to pass an order under section 185(1)(a) of the Income-tax Act, 1961 ; (iii) that the Income-tax Officer has failed to add back the interest payments of Rs. 94,631 made to the partners." The assessee replied. In respect of questions about taxing the goodwill amount, the assessee replied that, the entire matter was scrutinised in detail and accepted while passing the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the merits of its assessability. We, therefore, do not propose to adjudicate upon the issue whether or not the goodwill of Rs. 10,75,000 debited in the books of account with corresponding credits in the accounts of the partners in their profit-sharing ratios is taxable or not taking into consideration the havala entries and the ultimate transfer of the assets to a limited company which the Income-tax Officer will no doubt consider while framing the assessment de novo." We have heard learned counsel for the parties. In the first instance it was contended by learned counsel for the assessee that the very premise on which order under section 263 was made against the assessee, namely, that the Income-tax Officer has not at all examined the goodwill account is not existent. According to him, it is apparent from the record that the goodwill account was thoroughly examined by the Income-tax Officer before making the assessment and after examining when he accepted the contention of the assessee its discussion did not find place in the assessment order, as no additions were going to be made or no modifications in the return filed by the assessee were required to be made in that regard ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be erroneous and prejudicial to the interests of the Revenue. The accounting year of the assessee is Samvat year closing on Diwali year. Hence, the previous year relevant to the assessment year 1974-75 in the case of the assessee ended with Diwali, 1973. It is fundamental that the assessment of each year is independent of the assessment of other years, the assessment being of a particular assessment year which is in respect of income which has been earned, accrued or received during twelve months comprising the previous year relevant to the assessment year, the assessment has to be framed on the basis of the existing material and which is then existing law applicable for that assessment. From the chain of events, it is apparent that the goodwill account was created on November 7, 1982, that is to say, at the beginning of the previous year relating to the assessment year 1974-75 and on the date when the actual account was debited and the accounts of existing partners the induction of new partners were credited. It is also apparent that the business of the firm ultimately became the business of the company only on February 23, 1974, that is to say, after about fifteen months of cr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Commissioner. That is to be founded on the objective material after assessing the contentions raised by the assessee on opportunity of hearing being afforded to him before passing the order. Apart from the fact that the basic premise on which the order under section 263 has been made does not exist, there is no whisper in the order how on reaching any finding that creation and disbursement of goodwill account amongst the partners in their profit-sharing ratio would be prejudicial to the interest of the Revenue. The period with which we are concerned is the assessment year 1974-75. So far as the charge of any tax on transfer of goodwill is concerned, if creation of a capital asset in the nature of goodwill in the accounts of the firm and its crediting to the partners' capital accounts in the profit-sharing ratios, is treated to be a transfer within the meaning of sub-section (47) of section 2 of the Income-tax Act, law is settled on the subject that no capital gain can be charged in respect of self-created goodwill. It is not the case of the Revenue that the goodwill account was credited in the books of account on purchase from the market. It is a case of debiting goodwill accou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y 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 agreed absence of competition. There can be no account in value of the factors producing it. It is also impossible to predicate the moment of its birth. 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." The same view was taken by the Gujarat High Court in the case of Jayantilal Bhogilal Desai v. CIT [1981] 130 ITR 655. Therefore, as a matter of law, no profit or gain could arise to the firm by creation of a goodwill account in the firm or by crediting the partners' accounts in their profit-sharing ratio, the amount of such goodwill, which can be subjected to tax. In that view of the settled position of law, the assessment order could not have been said to be an order prejudicial to the interests of the Revenue, qua the goodwill ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fer of business to the company on dissolution of the firm would have attracted levy of tax, it would not have made the order passed for the assessment year 1974-75 prejudicial to the interests of the Revenue. The event on which much emphasis has been laid by the Tribunal and the Commissioner of Income-tax clearly happened beyond the period which was under consideration for the assessment year 1974-75. The Revenue authorities have fallen into error by not noticing the most relevant fact as to when the business of the firm became the business of the company and it consequently failed to appreciate that even that has no bearing as far as the assessment year 1974-75 was concerned. Therefore, in our opinion, the conclusion of the Tribunal in affirming the decision of the Commissioner of Income-tax that the order of the Income-tax Officer for the assessment year 1974-75 was erroneous for want of making enquiry, and is otherwise prejudicial to the interests of the Revenue is not well-founded in law. Accordingly, we answer both the questions referred to us in the negative, that is to say, in favour of the assessee and against the Revenue. There shall be no order as to costs. - ..... X X X X Extracts X X X X X X X X Extracts X X X X
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