Tulzapurkar, J.:— This is a reference under section 66(1) of the Indian Income-tax Act, 1922, in which at the instance of the Commissioner of Income-tax, Bombay City II, Bombay, the following question has been referred to us for our opinion:

“Whether, on the facts and in the circumstances of the case, the assessee was entitled to substitute the fair market value of the goodwill on January 1, 1954, under the third proviso to section 12B(2) of the Indian Income-tax Act, 1922?”

2. The question relates to the assessments of the assessee, Shri Daulatran Nayar (HUF), and his seven other partners for the assessment year 1960–61, for which the accounting year is the year which ended on 31st March, 1960.

3. The assessee was a partner of the firm carrying on business in the name and style of M/s. India Woollen Textile Mills. There were seven other partners in this firm and each of the partners had equal share in the profits and losses of the firm. It appears that the business carried on by the firm was taken over by a limited company of the same name as from July 1, 1959. As a result of this transaction the firm charged and received the sum of Rs. 5 lakhs towards goodwill of the business from the limited company. Accordingly, an equal share of Rs. 62,500 in the said sum came to be credited in the account of each of the partners of the firm in the books of the firm. In the assessment proceedings for the assessment year 1960–61 a question arose whether any capital gains tax had to be paid by the assessee and his seven partners on the sale of the goodwill to which each one of them was entitled. The Income-tax Officer held that the entire amount of Rs. 62,500 without any deduction under section 12B(2) of the Act was a capital gain made by each of the partners and the same was liable to tax. He took that view, inasmuch as, according to him, no asset as and by way of goodwill had been shown in the books of the firm nor had the firm paid anything towards goodwill and that since there was no “actual cost” paid for the goodwill, the substitution of the fair market value as on January 1, 1954, as envisaged under the third proviso to section 12B(2) was not available to the assessee. In the alternative, he took the view that assuming that the assessee was entitled to such substitution, still the difference between the value of the goodwill as on the date of sale (July 1, 1959) and its fair market value on January 1, 1954, was in excess of the sum of Rs. 5 lakhs. He, accordingly, taxed the sum of Rs. 62,500 as a capital gain in the assessee's case as well as in the case of seven other partners.

4. The matter was carried in appeal by the assessee as well as by his other partners and the Appellate Assistant Commissioner accepted the assessee's contention that the assessee and his partners were entitled to the substitution of the fair market value of the asset as on January 1, 1954, for the “actual cost” as envisaged in the third proviso to section 12B(2). The Appellate Assistant Commissioner determined such fair market value at a figure higher than Rs. 5 lakhs and, therefore, according to him, there was no capital gain at all made on the sale of the goodwill at Rs. 5 lakhs. He, accordingly, held that no capital gains tax was chargeable and allowed the appeals.

5. In second appeal the Tribunal confirmed the Appellate Assistant Commissioner's order. Both the Accountant Member and the Judicial Member, though they gave different reasons, concurred in the view that the assessee and his partners were entitled to substitute the fair market value of that capital asset as on January 1, 1954, for the actual cost, even in cases where that particular asset had actually cost nothing to the assessee and the 7 partners as it was self-generating asset. At the instance of the Commissioner of Income-tax the question set out at the commencement of this judgment has been referred to us for our opinion.

6. At the outset we would like to observe that we shall proceed to deal with and answer the question referred to us for opinion on the assumption that the goodwill though a self-genera ting asset is a capital asset and on further assumption that there was a transfer of this capital asset when the business of the firm was taken over by the limited company. Mr. Joshi for the department contended before us that section 12B(2) of the Act would apply only where there is an “actual cost” to the assessee of a capital asset and there was none here. He further urged that if section 12B(2) did not apply, then the third proviso to that section which provides substitution of fair market value as on January 1, 1954, in place of the “actual cost” also would not apply. He also urged that the third proviso to section 12B(2) opens with the words “where the capital asset became the property of the assessee” and it is implicit in these words that the capital asset must become the property of the assessee by acquisition from a third party or that it must come from an external source and since the goodwill in the instant case was not acquired from an external source, the proviso cannot be invoked. It is not possible to accept any of these submissions of Mr. Joshi for the reasons which we shall presently indicate.

7. It will be necessary to set out the relevant provisions of section 12b(2) and the relevant proviso. Section 12B(2) runs thus:

“The amount of a capital gain shall be computed after making the following deductions from the full value of the consideration for which the sale, exchange, relinquishment or transfer of the capital asset is made, namely:

(i) expenditure incurred solely in connection with such sale, exchange, relinquishment or transfer;

(ii) the actual cost to the assessee of the capital asset, including any expenditure of a capital nature incurred and borne by him in making any additions or alterations thereto, but excluding any expenditure in respect of which any allowance is admissible under any provision of sections 8, 9, 10 and 12:……

Provided further that where the capital asset became the property of the assessee, or of the previous owner where the cost of the capital asset to the previous owner is to be taken in accordance with sub-section (3), before the 1st day of January, 1954, he may, on proof of the fair market value thereof on the said date to the satisfaction of the Income-tax Officer, substitute for the actual cost such fair market value which shall be deemed to be the actual cost to him of the asset, and which shall be reduced by the amount of depriciation, if any, allowed to the assessee after the said date and increased or diminished, as the case may be, by any adjustment made under clause (vii) of sub-section (2) of section 10:”

8. For our purpose sub-section (3) of section 12b would also be material and it runs thus:

“Where any capital asset became the property of the assessee by succession, inheritance or devolution or on any distribution of capital-assets on the total or partial partition of a Hindu undivided family or on the dissolution of a firm or other association of persons or on the liquidation of a company or under a deed of gift, or transfer on irrevocable trust, its actual cost allowable to him for the purposes of this section shall be its actual cost to the previous owner thereof, and the provisions of subsection (2) shall apply accordingly; and where the actual cost to the previous owner cannot be ascertained, the fair market value at the date on which the capital asset became the property of the previous owner shall be deemed to be the actual cost thereof:

Provided that where the capital asset became the property of the assessee—

(i) before the 1st day of April, 1956, under a deed of gift or on the partition of a Hindu undivided family, the actual cost allowable to him shall be the fair market value of the capital asset on the date of the gift or the date of the partition, as the case may be, if such value is greater than the actual cost to the previous owner or the fair market value thereof on the 1st day of January, 1954, where the third proviso to sub-section (2) applies;

(ii) on or after the 1st day of April, 1956, on the partition of a Hindu undivided family, the cost allowable to him shall be the fair market value on the date of the partition.”

9. The argument of Mr. Joshi has been that since in the instant case the capital asset with which we are concerned is a self-generating asset, namely, the goodwill of the business, in point of fact there is no “actual cost” in terms of money to the assessee, inasmuch as it grew as the business of the assessee-firm grew for over a number of years and, according to him, since there was no “actual cost” to the assessee of this capital asset, the deduction contemplated by section 12B(2) would not apply and the entire consideration received by each of the partners will have to be brought in as capital gain for tax purposes. His further argument has been that if section 12B(2) did not apply to the facts of the case, then the third proviso to that section which provides substitution of fair market value as on January 1, 1954, in place of the “actual cost” cannot also apply. In our view, this argument proceeds on a misconception or misreading of the relevant provision. The expression “became the property of the assessee” occurring in the third proviso need not be confined to acquisition of that property by the assessee from a third party or acquisition for some price paid. There is nothing in the third proviso to limit the operation of that expression in the manner suggested by Mr. Joshi. The capital asset can become the property of the assessee within the meaning of the third proviso, even if it is acquired by self-generation as in the instant case here, where the goodwill which is unquestionably a self-generating asset has come to be acquired by the firm. If that be the correct interpretation of the expression “became the property of the assessee” occurring in the third proviso, then there will be no difficulty in coming to the conclusion that the capital asset, which is in the instant case the goodwill of the firm, had become the property of the assessee and his 7 partners before January 1, 1954, and there is no reason why the substitution of fair market value as on January 1, 1954, in place of the “actual cost” as envisaged by the third proviso to section 12B(2), should not be available to the assessee and his 7 partners if this particular asset had been acquired by the assessee and his 7 partners otherwise than by payment of price therefor, that is to say, in a case where the actual cost of this asset has been nil to the assessee in terms of money. That this would be the correct interpretation of the expression “became the property of the assessee” occurring in the third proviso is clearly indicated by the provision which is to be found in subsection (3) of section 12B. Under sub-section (3) of section 12B a provision has been made for charging capital gains tax on any capital asset which may become the property of the assessee by succession, inheritance or devolution and provision has also been made for substitution of fair market value as on January 1, 1954, in place of the “actual cost” and such substitution being available to the assessee while computing the capital gains made by such assessee. This provision clearly shows that where capital asset has become the property by succession or inheritance, which must ordinarily mean that the asset has become the property of the assessee for which no price in terms of money is paid by the assessee, the provision for substitution of fair market value as on January 1, 1954, in place of the “actual cost” has been made and is available to the assessee. There is no reason why the same expression occurring in the third proviso to subsection (2) should not be construed similarly. Having regard to the language that has been employed in the third proviso to section 12B(2) and having regard to the provisions which are to be found in sub-section (3) of section 12b it seems to us clear that on its proper interpretation the expression “became the property of the assessee” occurring in the third proviso to section 12B(2) would include a case of acquisition of capital asset for which no actual cost in terms of money has been paid by the assessee. In this view of the matter, it is quite clear to us that the assessee and his 7 partners were entitled to substitute the fair market value of the goodwill as on January 1, 1954, under the third proviso to section 12B(2) of the Act.

10. In the result, the question referred to us is answered in the affirmative and in favour of the assessee.

11. Revenue will pay the costs of the reference to the assessee.

Question answered in the affirmative.