COMMISSIONER OF INCOME-TAX Versus DHARAMCHAND & CO.

T.D. SUGLA, J.‑‑ The question of law referred to us by the Tribunal at the instance of the Department in this reference is:

It is common ground that the assessee, a registered firm, converted itself into a private limited company under a sale‑deed dated July 11, 1960. The proceedings relate to the assessment year 1961‑62. Under the sale agreement, all the assessee's assets and liabilities including goodwill were transferred to the private limited company at book value. The goodwill did not appear as an asset in the assessee's books and no value was charged therefore from the limited company.

However, the Income‑tax Officer took the view that the assessee had goodwill which was transferred to the limited company without consideration. Since the partners of the assessee‑firm were the shareholders in the company he was entitled to estimate the fair market value of the goodwill and compute the capital gains assessable under section 12‑B(2) of the Indian Income‑tax Act, 1922. He estimated the fair market value of the assessee's goodwill on the date of the transfer at Rs. 5,08,098. He also estimated the value of the assessee's goodwill as on January 1, 1954 at Rs. 2,02,050. He treated the difference between the two estimated values, i.e. Rs. 3,66,048, as the assessee's income under the head "Capital gains". The Appellate Assistant Commissioner upheld the addition. In second appeal, the Tribunal deleted the addition observing that goodwill was a self‑generated assets in the case of the assessee and no income on the transfer thereof was, therefore, assessable in view of a number of decisions relied upon.

Ordinarily, we would have immediately answered the question against the Department following the Supreme Court decision in the case of CIT v. B.C. Srinivasa Setty (1981) 128 ITR 294. Dr. Balasubramanian, however, argued that though the contention of the Department before the Tribunal was that the sum of Rs. 3,00,048 was assessable to tax as capital gains on transfer of the assessee's goodwill to the private limited company without any consideration, the Tribunal had refrained the question in general terms so that all aspects of the matters which were urged before it could be canvassed before the High Court. He pointed out that though the Tribunal had decided the issue only on one ground and had rejected the assessee's miscellaneous application by order dated July 31, 1975, the assessee's contention that it had raised several contentions and the appeal was decided considering only one of the contentions, was noted by the Tribunal in its order. The Tribunal, of course, stated that it was not necessary for it to consider the other contentions in the view it took on one contention.

We are not able to appreciate the point Dr. Balasubramanian really wants to make. The assessee transferred its business, including goodwill as a whole at its book value. In the process, all assets including goodwill of the business were acquired by the limited company as per the value shown in the books. Goodwill did not even appear as an asset in the assessee's books. No consideration as such was thus received by the assessee on account of goodwill. There is no dispute about these facts. We do not understand as to how can, in these circumstances, the provisions of section 12‑B (2) of the 1922 Act be made applicable. In any case, the goodwill in this case is, admittedly, a self‑generated asset. It was not purchased by the assessee, It did not cost anything to the assessee. This being so, in view of the Supreme Court decision in CIT v. B.C. Srinivasa Setty (1981) 128 ITR 294, we have no difficulty in holding that the Tribunal was right that the goodwill being a self‑generated asset, the surplus so determined by the Income‑tax Officer was not assessable to tax as capital gains.

The question of law is, accordingly, answered in the negative and in favour of the assessee.

No order as to costs.

Z.S./864/T ?????????????????????????????????????????????????????????????????? Question answered in negative.