Source: https://thetaxtalk.com/2019/01/17/commissioner-of-income-tax-vs-b-c-srinivasa-setty-supreme-court/
Timestamp: 2019-04-22 12:28:22+00:00

Document:
COMMISSIONER OF INCOME TAX, BANGALORE ETC. ETC.
B. C. SRINIVASA SETTY, ETC. ETC.
rise to a capital gain.
capital gains  tax under  section 45  of the Income Tax Act.
of the goodwill to capital gain tax.
impact may  not be  visibly felt  for an  undefined  period.
A.C. 217. quoted with approval.
the  income  chargeable	 under	the  head  "capital  gains".
of the	provisions pertaining  to the  head "capital  gains"
will be	 impossible to	determine such	cost of acquisition.
114 I.T.R. 798 (M.P.) approved.
of Income-tax (1977) 106 I.T.R. 998, overruled.
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 1146 of 1975.
Appeal by Special Leave from the Judgment and order dated 4-7-1974 of the Karnataka High Court in I.T.R. No. 38/72.
CONNECTED WITH Civil Appeal No. 1378 of 1976.
Appeal by Special Leave from the Judgment and Order dated 1-12-1975 of the Karnataka High Court in I.T.R.C. No. 32/74.
AND Civil Appeal No. 926 of 1973.
From the Judgment and Order dated 2-11-1972 of the Kerala High Court in Income Tax Reference No. 120/70. C.A . No. 1146/75.
Soli J. Sorabjee, Addl. Sol. General, B. B. Ahuja and Miss A. Subhashini for the Appellant.
T. A. Ramachandran, B. Partha Sarathi and Miss R. Vaigai for the Respondent.
K. K. Goswami, S. P. Mehta, Dinesh Vyas, P. H. Parekh, C. B. Singh, Miss Vineeta Caprihan and B. L. Verma for the intervener.
Vineet Kumar and A. K. Srivastava for the Respondent. C.A. No. 926/73.
V. S. Desai, K. C. Dua and Miss A. Subhashini for the Appellant A. S. Nambiar and P. P. Namboodiri for the Respondent.
The Judgment of the Court was delivered by PATHAK, J.-The question in these appeals is whether the transfer of the goodwill of a newly commenced business can give rise to a capital gain taxable under s. 45, Income Tax Act, 1961.
The assessee, a registered firm, manufactured and sold agarbattis. Clause (13) of the Instrument of Partnership executed on 28th July, 1954 showed that the goodwill of the firm had not been valued, and the valuation would be made on dissolution of the partnership. The period of the partnership was extended by an instrument dated 31st March, 1964, and it contained a similar clause (13). Subsequently, the assessee firm was dissolved by a deed dated 1st December, 1965. At the time of dissolution, it seems, the goodwill of the firm was valued at Rs. 1,50,000/-. A new partnership by the same name was constituted under an instrument dated 2nd December, 1965 and it took overall the assets, including the goodwill, and liabilities of the dissolved firm.
The Income-Tax Officer made an assessment on the dissolved firm for the assessment year 1966-67 but did not include any amount on account of the gain arising on transfer of the goodwill. The Commissioner, being of the view that the assessment order was prejudicial to the Revenue, decided to invoke his revisional jurisdiction and setting aside the assessment order directed the Income-Tax Officer to make a fresh assessment after taking into account the capital gain arising on the sale of the goodwill.
By its judgment dated 4th July, 1974 the High Court answered the question in the affirmative, holding that the value of the consideration received by the assessee for the transfer of its goodwill was not liable to capital gains tax under s. 45 of the Act. Civil Appeal No. 1146 of 1975 is directed against that judgment.
Civil Appeal No. 1378 of 1976 arises out of a judgment by the same High Court in which it has followed its earlier view.
Civil Appeal No. 926 of 1973 has been preferred against the judgment of the Kerala High Court where a similar opinion has been expressed, but in respect of the provisions of s. 12-B, Indian Income Tax Act. 1922.
(i) to (iv) of the sub-section which, it will be seen, do not include goodwill. But the definitions in s. 2are subject to an overall restrictive clause. That is expressed in the opening words of the section: “unless the context otherwise requires”. We must therefore enquire whether contextually s. 45, in which the expression “capital asset” is used, excludes goodwill.
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. And yet because of its intangible nature, it remains insubstantial in form and nebulous in character. Those features prompted Lord Macnaghten to remark in Commissioner of Inland Revenue v. Muller & Co.’s Margarine Limited that although goodwill was easy to describe, it was nonetheless difficult to define. In a progressing business goodwill tends to show progressive increase. And in a failing business it may begin to wane. 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 agreed absence of competition. There can be no account in value of the factors producing it. It u also impossible to predicate the moment of its birth. It comes silently into the world, unheralded and unproclaimed and its impact may not be visibly felt for an undefined period. Imperceptible at birth it exists enwrapped in a concept, growing or fluctuating with the numerous imponderables pouring into, and affecting, the business. Undoubtedly, it is an asset of the business, but is it an asset contemplated by s. 45 ?
Section 45 charges the profits or gains arising from the transfer of a capital asset to income-tax. The asset must be one which falls within the contemplation of the section. It must bear that quality which brings s. 45 into play. To determine whether the goodwill of a new business is such an asset, it is permissible, as we shall presently show, to refer to certain other sections of the head, “Capital gains”.Section 45 is a charging section. For the purpose of imposing the charge, Parliament has enacted detailed provisions in order to compute the profits or gains under that head. No existing principle or provision at variance with them can be applied for determining the chargeable profits and gains. All transactions encompassed by s. 45 must fall under the governance of its computation provisions. A transaction to which those provisions cannot be applied must be regarded as never intended by s. 45 to be the subject of the charge. This inference flows from the general arrangement of the provisions in the Income-tax Act, where under each head of income the charging provision is accompanied by a set of provisions for computing the income subject to that charge. The character of the computation provisions in each case bears a relationship to the nature of the charge. Thus the charging section and the computation provisions together constitute an integrated code. 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. Otherwise one would be driven to conclude that while a certain income seems to fall within the charging section there is no scheme of computation for quantifying it. The legislative pattern discernible in the Act is against such a conclusion. It must be borne in mind that the legislative intent is presumed to run uniformly through the entire conspectus of provisions pertaining to each head of income. No doubt there is a qualitative difference between the charging provision and a computation provision. And ordinarily the operation of the charging provision cannot be affected by the construction of a particular computation provision. But the question here is whether it is possible to apply the computation provision at all if a certain interpretation is pressed on the charging provision. That pertains to the fundamental integrality of the statutory scheme provided for each head.
The point to consider then is whether if the expression “asset” in s. 45 is construed as including the goodwill of a new business, it is possible to apply the computation sections for quantifying the profits and gains on its transfer.
What is contemplated is an asset in the acquisition of which it is possible to envisage a cost. The intent goes to the nature and character of the asset, that it is an asset which possesses the inherent quality of being available on the expenditure of money to a person seeking to acquire it. It is immaterial that although the asset belongs to such a class it may, on the facts of a certain case, be acquired without the payment of money. That kind of case is covered by s. 49 and its cost, for the purpose of s. 48 is determined in accordance with those provisions. There are other provisions which indicate that s. 48 is concerned with an asset capable of acquisition at the cost. s. 50 is one such provision. So also is sub-section (2) of s. 55. None of the provisions pertaining to the head “Capital gains” suggests that they include an asset in the acquisition of which no cost at an can be conceived. Yet there are assets which are acquired by way of production in which no cost element can be identified or envisaged. From what has gone before, it is apparent that the goodwill generated in a new business has been so regarded. The elements which create it have already been detailed. In such a case, when the asset is sold and the consideration is brought to tax, what is charged is the capital value of the asset and not any profit or gain.
In the case of goodwill generated in a new business there is the further circumstance that it is not possible to determine the date when it comes into existence. The date of acquisition of the asset is a material factor in applying the computation provisions pertaining to capital gains. It is possible to say that the “cost of acquisition” mentioned in s. 48 implies a date of acquisition, and that inference is strengthened by the provisions of ss. 49 and 50 as well as sub-section (2) of s. 55.
It may also be noted that if the goodwill generated in a new business is regarded as acquired at a cost and subsequently posses to an assessee in any of the modes specified in sub-section (1) of s. 49, it will become necessary to determine the cost of acquisition to the previous owner. Having regard to the nature of the asset, it will be impossible to determine such cost of acquisition Nor call sub-section (3) of s. 55 be invoked, because the date of acquisition by the previous owner will remain unknown.
We are of opinion that the goodwill generated in a newly commenced business cannot be described as an “asset” within the terms of s. 45 and therefore its transfer is not subject to income-tax under the head “Capital gain”.
The question which has been raised before us, has been considered by some High Courts, and it appears that there is a conflict of opinion. The Madras High Court in Commissioner of Income-tax v. K. Rathnam Nadar, the Calcutta High Court in Commissioner of Income-Tax v. Chunilal Prabhudas & Co., (supra) the Delhi High Court in Jagdev Singh Mumick v. Commissioner of Income-tax, the Kerala High Court in Commissioner of Income-tax v. E.C. Jacob, the Bombay High Court in the Commissioner of Income-tax v, Home Industries & Co. and Commissioner of Income-tax v. Michel Postal and the Madhya Pradesh High Court in Commissioner of Income-tax v. Jaswant Lal Dayabhai have taken the view that the receipt on the transfer of goodwill generated in a business is not subject to income-tax as a capital gain. On the other side lies the view taken by the Gujarat High Court inCommissioner of Income-tax v. Mohanbhai Pamabhai, and the Calcutta High Court in R.N. Daftary v. Commissioner of Income-tax that even if no cost is incurred in building up the goodwill of the business, it is nevertheless a capital asset for the purpose of capital gains, and the cost of acquisition being nil the entire amount of sale proceeds relating to the goodwill must be brought to tax under the head “Capital gains”. It is apparent that the preponderance of judicial opinion favours the view that the transfer of goodwill initially generated in a business does not give rise to a capital gain for the purposes of income-tax.
Upon the aforesaid considerations, Civil Appeal No. 1146(T) of 1975 and Civil Appeal No. 1378 of 1976 must be dismissed.
Civil Appeal No. 926 of 1973 raises the same question with reference to s. 12B, Indian Income Tax Act, 1922. As the relevant statutory provisions of the Indian Income Tax Act, 1922 are substantially similar to the corresponding provisions of the Income Tax Act, 1961, that appeal is also liable to be dismissed.
Accordingly, the appeals are dismissed with costs.
Next articleAnd you Will get your income tax refund instantly !!

References: V. 
 v. 
 v. 
 v. 
 v. 
 v. 
 v. 
 v. 
 v. 
 v.