S.C : No capital gains arose on the transfer of the goodwill of the transferred business under the provisions of the IT Act, 1961

BY THE COURT :

The Hon’ble Supreme Court of India has directed the Tribunal to refer the following question of law, in Civil Appeal No. 639 of 1978, directly to the Supreme Court, by its order dated March 16,1978 :

“Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that no capital gains arose on the transfer of the goodwill of the transferred business under the provisions of the IT Act, 1961 ? “

The assessee-firm was newly constituted in terms of a partnership deed dated August, 7, 1970. The accounting period relevant to the asst. yr. 1972-73 was the year ending September 30, 1971.

The assessee-firm carried on during this year a business as sole selling agents of Bennett Coleman and Co. for selling their dailies and periodicals. Though the firm came into existence w.e.f. September 1, 1970, the business of the firm commenced on January 1, 1971, and the business of the partnership was carried on up to September 30, 1971. Thereafter, the business of the assessee-firm was transferred to a limited company called Kaikobad Byramji and Sons (Agency) P. Ltd. No goodwill amount was paid by the transferee to the transferor of the business in the present case, as noted by the AAC. The ITO, however, invoked the provisions of s. 52 of the IT Act, 1961, and estimated the fair market value of the goodwill transferred by the assessee-firm to the limited company at Rs. 2,96,420 on the basis of one year’s purchase of five years’ average profits. The ITO treated the said amount of Rs. 2,96,420 as the capital gains arising to the assessee-firm on the transfer of the goodwill of the business and deducting therefrom a sum of Rs. 1,50,710 in terms of s. 80T of the Act, computed the taxable capital gains at Rs. 1,45,710.

The AAC held, relying on the decisions in CIT vs. K. Rathnam Nadar (1969) 71 ITR 433 (Mad), CIT vs. Chunilal Prabhudas and Co. ( 19701 76 ITR 566 (Cal), Jagdev Singh Mumick vs. CIT (1971) 81 ITR 500 (Delhi), CIT vs. E. C. Jacob (1973) 89 ITR 88 (Ker) (FB) and CIT vs. B. C. Srinivasa Setty (1974) 96 ITR 667 (Kar), that no capital gains tax could be levied on the transfer of the goodwill.The Revenue thereafter carried the matter in second appeal to the Tribunal and the Tribunal observed that the entire position in this regard has now been reviewed by the Karnataka High Court in the case of B. C. Srinivasa Setty (1974) 96 ITR 667, wherein it has been held that the view taken that capital gains tax is not attracted to the transfer of goodwill is a fair and just interpretation. Their Lordships of the Karnataka High Court also observed that the appeal of the Revenue before the Supreme Court against the judgment in Rathnam Nadar’s case (supra), was not pressed by the Revenue and was accordingly dismissed by the Supreme Court and the Revenue had also not preferred any appeal against the judgments of the High Courts of Calcutta and Kerala. Their Lordships further observed that in the circumstances set out above, one could safely draw an inference from the conduct of the Department in not preferring appeals against the judgments of the High Courts of Calcutta and Kerala and further in not pressing the appeals before the Supreme Court against the judgment in Rathnam Nadar’s case (supra), that the Department had accepted the ratio of the decision in Rathnam Nadar’s case (supra) as laying down the correct law. Following this view, the Tribunal rejected the Department’s appeal. Thereafter, the Revenue filed R. A. No. 177/Bom/1976-77 under s. 256(1) of the Act, but the Tribunal rejected the same by its order dated September 17, 1976, on the ground that on the same issue, their Lordships of the Bombay High Court have since declined to grant any reference under s. 256(2) of the Act in ITA No. 11 of 1976 in the case of Smt. Krishna Kumari Goswami. It, however, appears that the Bombay

High Court also rejected the application filed by the CIT, Bombay, under s. 256(2) and, thereafter, the Revenue filed Civil Appeal No. 639 of 1978 in the Supreme Court of India and their Lordships of the Supreme Court of India have been pleased to direct the Tribunal to draw up the statement of the case and refer the same directly to them.

Accordingly, we refer the following question of law for the opinion of Lordships : ” Whether, on the facts and the circumstances of the case, the Tribunal was right in holding that no capital gains arose on the transfer of the of the transferred business under the provisions of the IT Act, 1961 ? ” Dr. V. Gauri Shankar, Senior Advocate (B. B. Ahuja and Miss A. Subhashini, Advocates, with him), for the applicant (Commissioner). R. F. Nariman and J. B. Dadachanji and Co., Advocates, for the respondent (assessee).In view of the decision in CIT vs. B. C. Srinivasa Setty (1981) 128 ITR 294 (SC), the answer given by the Tribunal to the question referred to us is correct and it is upheld. The matter is disposed of accordingly.

No costs.

[Citation : 179 ITR 569]