TMI Blog1986 (4) TMI 3X X X X Extracts X X X X X X X X Extracts X X X X ..... le 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 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 ch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , 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. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Court held as follows (p. 569) : "Thus, it is clear that if at all there is any surplus in the sense of excess of the consideration for the transfer of the business of the undertaking over the cost of acquisition of the business or undertaking within the meaning of section 45 of the Income-tax Act, 1961, there would be capital gain and such capital gain would be taxable in the hands of the assessee, that is, in the hands of the firm which transferred its business to the limited company." An authoritative voice on the subject may be discerned in the decision of the Supreme Court in CIT v. Mugneeram Bangur and Co. [1965] 57 ITR 299, where Sikri J., following the decision of the Privy Council in Doughty v. Commissioner of Taxes [1927] AC 327 laid down as follows (at p. 305) : "It follows from the above that once it is accepted that there was slump transaction in this case, i.e., that the business was sold as a going concern, the only question that remains is whether any portion of the slump price is attributable to the stock-in-trade." On the basis of the case of Mugneeram Bangur and Co. [1965] 57 ITR 299 (SC), there seems to be no escape from the position that where there is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not of much consequence. 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. B. C. Srinivasa Setty [1981] 128 ITR 294. For the reasons stated above, I am of the view that the Tribunal was not justified in holding that the consideration for goodwill amounting to Rs. 71,918 received from the vendee by the assessee was not a capital gain assessable to capital gains tax. It was a package deal encompassing goodwill besides other capital assets. It was, therefore, liable to be taxed in terms of section 45 of the Income-tax Act. The question referred to us thus must be answered in favour of the Revenue and against the assessee. There ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or Rs. 71,920. Mr. Rajgarhia has not produced the balance-sheet before us which would have clearly showed that the value of the goodwill is fixed at Rs. 71,920. In view of this specific statement, the Appellate Assistant Commissioner held that there was no dispute before him about the quantum of goodwill and the only dispute was that this goodwill of Rs. 71,920 was not taxable as a capital asset on which capital gain may be said to arise. The Appellate Assistant Commissioner has mentioned that the amount of Rs. 71,918.90 was shown in the balancesheet as goodwill value separately. The Department, aggrieved by the order of the Appellate Assistant Commissioner, raised the following grounds, as mentioned at page 6 of the paper book, before the Tribunal : " 1. On the facts and the circumstances of the case, the Appellate Assistant Commissioner was not justified in holding that goodwill was not a capital asset for the purpose of computation of capital gains and tax on it. 2. On the facts and the circumstances of the case, the Appellate Assistant Commissioner was not justified in excluding the amount of Rs. 71,920 from the total income being an item of capital gain from the total in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... efore the Appellate Assistant Commissioner and the Tribunal, it was the admitted case of both the parties that it was goodwill which was transferred for a consideration of Rs. 71,920. Now the question is whether, under such circumstances, Mr. B. P. Rajgarhia is entitled to argue that it was not goodwill and that Rs. 71,920 was not the value of goodwill which was sold but it was the difference between the sale price and the value of the assets and so it was taxable as capital gains. It has been held in the case of CIT v. Imperial Chemical Industries (India) (P.) Ltd. [1969] 74 ITR 17, by their Lordships of the Supreme Court that the High Court was in error in embarking upon a reappraisal of the evidence before the Tribunal and setting aside the finding that there was no agreement between the respondent and the Imperial Chemical Industries (Export) Ltd., and, if there was one, it was not acted upon. It has also been held in this decision that the High Court is not a court of appeal in a reference under section 66(1) of the Indian Income-tax Act, 1922 (hereinafter referred to as the "old Act"), and it is not open to the High Court in such a reference to embark upon a reappraisal o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erence, inter alia, of the question whether there was material before the Tribunal for that finding, the High Court proceeded to deal with the matter as if it had itself to arrive at an independent finding and held that there was no material for the finding that the shares were purchased with a view to acquiring the managing agency and that the shares constituted the stock-in-trade of the appellant. In those circumstances, their Lordships of the Supreme Court held that the approach of the High Court was wholly erroneous and not warranted by law and that it was for the Tribunal to decide the questions of fact and the High Court, in a reference under section 66 of the old Act, could not go behind the Tribunal's findings of fact, and that the High Court could only lay down the law applicable to the facts found by the Tribunal and that the High Court and the Supreme Court, in an appeal against the judgment of the High Court given in a reference under section 66 of the old Act, were not constituted courts of appeal against the order of the Tribunal and that these courts only exercised advisory jurisdiction in such references. It has been held in the case of Anil Kumar Roy Chowdhury v. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent of the assessee that the value of the goodwill was shown in the books of the business as per the balance-sheet for the year ending March 31, 1969. Thus, it has to be held that the amount of Rs. 71,920 was the value of the goodwill which was transferred by the assessee-Hindu undivided family. In view of the decisions of the Supreme Court mentioned above, this court cannot give a finding that the amount of Rs. 71,920 was not the value of the goodwill which was transferred by the assessee-Hindu undivided family. Another point which has to be considered is that the Tribunal has referred the question as mentioned above and it is only to the effect that, whether the Tribunal was justified in holding that the consideration for goodwill amounting to Rs. 71,918 received from the vendee by the assessee was not a capital gain assessable to capital gains tax ? Thus, the Tribunal clearly referred the question whether the value of Rs. 71,920 which was consideration for the goodwill was assessable to capital gains tax. No other question was referred by the Tribunal. Mr. B. P. Rajgarhia has submitted that this question covers the question whether the value of the goodwill can be considered w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... igh Court that the High Court can answer only the question that has been referred to it and not the question which, according to the Tribunal's view, forms a part of the question that is before the High Court and that, where the question referred to the High Court was whether the amount payable under a decree of court was a business liability, it cannot include the litigation expenses incurred in the legal proceedings. Thus, it is evident that the question referred by the Tribunal has to be answered and not a new question which can be raised by Mr. B. P. Rajgarhia at this stage. The only question referred is whether consideration for the goodwill amounting to Rs. 71,918 received from the vendee by the assessee was a capital asset assessable to capital gains tax. The question cannot be raised now whether the value of the goodwill can be taken if the sale is of going concern. This will be absolutely a new question which had never been raised by the Tribunal. It cannot even be said to be another aspect of the same question. Mr. B. P. Rajgarhia has also relied on the case of Jamunadas Mannalal v. CIT [1985] 152 ITR 261, which is a Full Bench decision of the Patna High Court. In thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e to income-tax under the head "Capital gains", in respect of the money so received or the market value of the other assets on the date of distribution, as reduced by the amount assessed as dividend within the meaning of sub-clause (c) of clause (22) of section 2 and the sum so arrived at shall be deemed to be the full value of the consideration for the purpose of section 48. Section 48 of the Act lays down that the income chargeable under the head "Capital gains" shall be computed by deducting from the full value of the consideration received or accruing as a result of the transfer of the capital asset the following amounts, namely : "(i) Expenditure incurred wholly and exclusively in connection with such transfer ; (ii) The cost of acquisition of the capital asset and the cost of any improvement thereto." Section 55(2)(i) of the Act lays down that, for the purpose of section 48, "cost of acquisition", in relation to a capital asset, where the capital asset became the property of the assessee before the lst day of January, 1954, means the cost of acquisition of the asset to the assessee or the fair market value of the asset as on the lst day of January, 1954, at the option ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wever, it has been held in the case of CIT v. B. C. Srinivasa Setty [1981] 128 ITR 294 (SC) that goodwill generated in a newly commenced business cannot be described as an "asset" within the meaning of section 45 of the Act or of section 12B of the old Act and that the transfer of the goodwill initially generated in a business does not give rise to a capital gain for the purpose of income-tax. It has also been held by their Lordships of the Supreme Court that the charging section and the computation provisions together constitute an integrated code and 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. Their Lordships of the Supreme Court have also further held that all transactions encompassed by section 45 must fall under the governance of its computation provisions and a transaction to which those provisions cannot be applied must be regarded as never intended by section 45 to be a subject of the charge. Their Lordships have also laid down that what is contemplated by section 48(ii) of the Act is an asset in the acquisition of which it is possible to envisage a cost: i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is not a capital asset if it is self-generated and is not liable to capital gains tax and so if goodwill is self-generated, it is not an asset under section 45 of the Act and no capital gains tax is leviable. In the present case, there is no evidence to show that the assessee Hindu undivided family had purchased the goodwill. It appears that the goodwill was self-generated in the business of the Hindu undivided family and in so far as it was transferred, it was not liable to capital gains tax. This is why the Appellate Assistant Commissioner has relied on the decision reported in CIT v. Chunilal Prabhudas and Co. [1970] 76 ITR 566 (Cal) which has also been referred to at page 301 as mentioned in the decision of the Supreme Court. The decision in CIT v. B. C. Srinivasa Setty [1981] 128 ITR 294 (SC) related to the decision reported in CIT v. B. C. Srinivasa Setty [1974] 96 ITR 667 (Kar) which was affirmed by their Lordships of the Supreme Court. The Tribunal probably has quoted some portions of this decision but their Lordships of the Supreme Court have clearly pointed out that it was goodwill generated in a newly commenced business. Thus, the Appellate Assistant Commissioner and t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt previous year being the year ending June 30, 1948), the Income-tax Officer assessed the capital gains made by the assessee, on the transfer of its capital assets to the two companies, at Rs. 32,01,747. In appeal, the Appellate Assistant Commissioner modified the order. He was of the view that the assessee had made capital gains amounting to Rs. 25,40,737 by sale of shares to the two companies and other assets transferred to Killick Nixon and Co. Ltd. and had suffered a capital loss of Rs. 4,00,530 being the difference between the market value of the managing agencies, 240 shares of Cement Agencies Ltd. and the goodwill on January 1, 1939, estimated at Rs. 51,40,802 and the market value of those assets on February 1, 1948, estimated at Rs. 47,40,272. Debiting the loss against the capital gains made by the sale of shares, the Appellate Assistant Commissioner brought to tax an amount of Rs. 21,06,455. The Appellate Assistant Commissioner rejected the claim of the assessee to the benefit of section 25(3) and (4) of the old Act. The Tribunal confirmed the order passed by the Appellate Assistant Commissioner. The High Court, in dealing with the questions referred, observed that, under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in deciding an appeal is bound to consider all the evidence and the arguments raised by the parties and that the Tribunal apparently did not consider the evidence ; it merely recorded a bare conclusion without setting out any reasons in support thereof. The case was remanded to the Tribunal with the observation that it will be the duty of the Tribunal in disposing of the appeal under section 66(5) of the old Act to hear the parties and to determine on a consideration of the evidence the value of the three assets on January 1, 1939, in the light of the third proviso to section 12B of the old Act. Thus, it is evident that, in this case also, the whole running business was sold but, even then it was held that the value of the goodwill had to be determined. Mr. B. P. Rajgarhia has also relied on the case of M. R. Goyal v. CIT [1969] 73 ITR 698 (SC). In this case, the assessee was a businessman dealing in articles including parachute silk. He entered into a contract for purchase of parachutes. Finding himself unable to deposit the earnest money, he entered into an agreement with a firm. Under that agreement, the firm agreed to deposit the earnest money and receive a share of net profi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es, the assessee was unable to repay the amounts and hence he transferred his business together with the factory premises and all plant, machinery, etc., to the firm. The consideration effectively discharged the amounts due by the assessee to M, the firm and another. The difference between the written down value of the assets sold and the sale consideration included capital gains and, after making certain adjustments, the officer fixed the amount of capital gains at Rs. 53,317 and taxed the same as income. The Appellate Assistant Commissioner dismissed the appeal but the Tribunal held that no capital gains arose to the assessee. In those circumstances, it was held by the Full Bench of the Kerala High Court that the transfer of the business by the assessee to the firm fell within the ambit of section 12B of the old Act and though it was open to the assessee to establish that the real consideration was less than what was shown in the document, in the instant case, no such materials were placed and hence the order of the officer was justified. Thus, it is evident that, in this case also, although the factory was sold as a going concern, the written down value of the assets sold was tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd. In this decision, it has been held at page 305 that once it is accepted that there was a slump transaction in this case, i.e., that the business was sold as a going concern, the only question that remained was whether any portion of the slump price was attributable to the stock-in-trade. Their Lordships of the Supreme Court held that the sale was the sale of the whole concern and no part of the slump price is attributable to the cost of land and so no part of the slump price is taxable. The aforesaid decision has been considered in the case of Artex Manufacturing Co. v. CIT [1981] 131 ITR 559 (Guj) and it has been clearly observed at page 567 of this decision that, at the time relevant for the decision of the Supreme Court in Mugneeram Bangur's case [1965] 57 ITR 299, the provisions as to capital gains were not part of the incometax law in India and the agreement of sale was dated July 7, 1948, and, thereafter, the transaction of transfer by the partnership firm to the limited company had taken place and the provisions as to capital gains were introduced in the old Act only in 1956 and hence the only question before the Supreme Court in Mugneeram Bangur's case [1965] 57 ITR 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... her appeal, the Tribunal held that the surplus was assessable under section 41(2) and the status of the assessee was that of a registered firm, and that the principle of mutuality was not attracted. In those circumstances, the Gujarat High Court held that what was transferred and sold was the whole business of the undertaking together with its assets and liabilities for a slump price and it was not sold by any itemised value or item-by-item price fixed for the different assets of the firm and that the entire business of the undertaking together with its assets and liabilities was sold for a slump price and so it was held that the surplus was not assessable under section 41(2). A quotation has been given at page 568 of this decision from a Division Bench decision which is as follows : "It is well settled that business is property and the undertaking of business is a capital asset of the owner of the undertaking. When an undertaking as a whole is transferred as a going concern together with its goodwill and all other assets, what is sold is not the individual itemised property but what is sold is the capital asset consisting of the business of the undertaking and any tax that can b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as self-generated goodwill but the decision relied upon by it clearly goes to show that the self-generated goodwill cannot be taxable under the head "capital gains". In view of my discussions above, I hold that the Tribunal was justified in law in holding that the consideration for goodwill amounting to Rs. 71,918 received from the vendee by the assessee was not a capital asset and as such is not assessable to capital gains tax. The question is answered accordingly in favour of the assessee and against the Revenue. In the circumstances of the case, however, there will be no order as to costs. G. G. SOHANI C. J.[January 19, 1990] -This case has come up before me for consideration as there has been a difference of opinion between Uday Sinha J. and Nazir Ahmad J., who heard the reference made by the Income-tax Appellate Tribunal, Patna Bench "B", under section 256(1) of the Income-tax Act, 1961 (hereinafter referred to as the "Act") referring the following question of law to this court for its opinion : "Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the consideration for goodwill amounting to Rs. 71,918 received fro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alue of the stock-in-trade. This contention was upheld by Uday Sinha J., but Nazir Ahmad J., held that, in view of the finding of the Tribunal that the amount of Rs. 71,918 was the value of the goodwill and in view of the fact that the question as to the correctness of the facts found by the Tribunal was not before this court, it was not permissible for this court to go into the question as to whether there was or was not any consideration for goodwill and whether that consideration amounted to Rs. 71,918. Having given my anxious consideration to the matter, I agree with the view taken by Nazir Ahmad J. in this behalf. In this connection, reference to the decision of the Supreme Court in Karnani Properties Ltd. v. CIT [1971] 82 ITR 547 is instructive. The Supreme Court held that when the question referred to the High Court speaks of "on the facts and in the circumstances of the case", it means on the facts and in the circumstances found by the Tribunal and not on facts and circumstances that may be found by the High Court on a reappraisal of evidence, and that, in the absence of a question having been referred to the High Court as to whether the findings of the Tribunal were vitiat ..... X X X X Extracts X X X X X X X X Extracts X X X X
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