COMMISSIONER OF INCOME TAX, BANGALORE ETC. ETC. vs. B. C. SRINIVASA SETTY, ETC. ETC.

CIVIL APPEAL No. 1146/1975Supreme Court[1981] 2 S.C.R. 93819 February 1981Bench: 3 JudgesAuthor: P.N. BHAGWATI, V.D. TULZAPURKAR, R.S. PATHAK10 pages
AI SummaryDismissed

What did the Supreme Court hold?

The Supreme Court held that goodwill generated in a newly commenced business cannot be described as an 'asset' within the terms of Section 45 of the Income Tax Act, 1961, and therefore its transfer is not subject to income tax under the head 'capital gains'. The Court reasoned that Section 45, as a charging section, operates in conjunction with computation provisions. The computation provisions, particularly Section 48, contemplate an asset in the acquisition of which a cost can be envisaged and a date of acquisition can be determined. Goodwill generated in a new business lacks these characteristics; it is not acquired at a cost, and its date of birth is impossible to predicate. Consequently, the computation mechanisms for capital gains cannot be applied. The Court noted a preponderance of judicial opinion from various High Courts supporting this view, while overruling contrary decisions. The appeals were dismissed.

What were the facts?

The assessee, a registered firm engaged in manufacturing and selling agarbattis, had its goodwill valued at Rs. 1,50,000 upon dissolution on December 31, 1965. A new partnership, under the same name, took over the assets, including goodwill. The Income Tax Officer assessed the dissolved firm for assessment year 1966-67 without including gains from goodwill. The Commissioner, viewing this as prejudicial to revenue, invoked revisional jurisdiction and directed the ITO to reassess, considering capital gains on goodwill. The Income Tax Appellate Tribunal ruled against taxability. The High Court of Karnataka, on reference, affirmed the Tribunal's decision, holding that the consideration for goodwill transfer was not liable to capital gains tax. The appeals concern the taxability of goodwill transfer under capital gains.

What were the issues?

1. Whether the goodwill generated in a newly commenced business is a capital asset within the meaning of Section 45 of the Income Tax Act, 1961, giving rise to capital gains upon its transfer? Assessee's Contention: The assessee contended that the sale of goodwill did not attract tax on capital gains under Section 45 of the Income Tax Act, 1961. The High Court affirmed this view. Revenue's Contention: The Revenue argued that the assessment order was prejudicial to it because it did not account for capital gains arising on the sale of goodwill. The Commissioner invoked revisional jurisdiction to rectify this. The High Court's decision was against the Revenue's position.

Which sections of the Income-tax Act were involved?

Section 45,Section 2(14),Section 48,Section 49,Section 50,Section 55,Section 12B

AI-generated summary — verify with the full judgment below

A :B 938 COMMISSIONER OF INCOME TAX, BANGALORE ETC. ETC. v. B. C. SRINIVASA SETTY, ETC. ETC.

February 19, 1981 [P. N. BHAGWATI, V. D. TuLZAPURKAR AND R. S. PATHAK, JJ.] Goodwill of a nett:ly conunenced business-Whether, (i) a capital asset and (ii) if so, an asset falling within the contemplation of section 45 of Income Tax Acr, 1961 giving rise to a capital gain. ·C The assessee, a registered firm, manufactured and sold agarbattis.

Clause (13) of the Ins1ru1ncnt of Partnership executed on 28th of July, 1954 and subsequently extenda~ by another instrument dated 31st March, 1964 showed that the goodv;1ill of the firm had not been valued, and the valuation would be made on dissolntion of the partnership. The assessee firm was dissolved by a deed dated 31st December, 1965. At the time of dissolution the goodwill of the firm was valued at Rs. 1,50,000/-. A new partnership by the same name io was constituted under an instrument subsequently and it took over all the assets including the goodwill and liabilities of the dissolved firm.

The Income Tax Offieer made an assessment on the dissolved firm for the assessment year 1966- 67 but did not include any an1ount o

The order continues below.

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