1. The Income-tax Appellate Tribunal, Bangalore Bench has stated a case and referred the following question for the opinion of this Court.
“Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the provisions of S. 45 of the Income-tax Act, 1961 would not apply to, the capital gains arising from the transfer of goodwill by the assessee firm?”
2. The Assessee was a partnership firm consisting of three partners constituted under an instrument of partnership executed on 28-7-1954. The said partnership was dissolved on 1-12-65 and its business was taken over by another partnership constituted under an instrument dt. 2-12-65. At the time of the dissolution of the Assessee-firm its goodwill was valued at Rs. 1,50,000 and the amount of each partner was credited with an amount of Rs. 50,000. The said amount of Rs. 1,50,000 was realised by the Assessee from the new partnership firm as consideration for the transfer of its business. In computing the assessment of the Asseessee-firm for the assessment year 1966-1967, the ITO had not taken into account the sum of Rs. 1,50,000 realised as consideration for the transfer of its goodwill. The Commr. of I.T, on the view that the order of assessment made by the ITO in ignoring the transaction of transfer of goodwill was errorneous and prejudicial to the interests of the revenue, initiated action under S. 263 of the Income-tax Act, 1961, hereinafter called the ‘Act’. After hearing the objections of the Assessee, he set aside the order of assessment and directed the ITO to re-do the assessment in accordance with law.
3. Against the said order the Assessee preferred an appeal to the ITAT before which two contentions were urged on behalf of the Assessee. The first ground urged was that there was no transfer of any goodwill by the Assessee. The argument was that the Assessee-firm was dissolved on 1-12-1965 and the accounts of its partners were credited with their share of the assets of the firm as on that date, that the successor firm came into existence only on 2-12-1965 and therefore, it should be held that each of the partners of the Assessee-firm had sold his interest to the newly constituted firm and as such, the case fell under S. 47(ii) of the Act. The Tribunal rejected the said ground stating that it is not supported by any evidence.
4. The second ground which is the main ground, was that under the scheme of the Act, S. 45 which brings to charge profits or gains arising from the transfer of a capital asset does not apply to transfer of goodwill. In support of that contention, the Assesses relied on the decision of the Madras High Court in Commr. of I.T v. Rathnam Nadar . 71 ITR. 433.. The Tribunal was of the opinion that although the decision was rendered in the context of S. 12B of the I.T Act of 1922, the ratio of the decision would clearly apply to a case arising under the Act also, as the, relevant provisions of the Act are in pari materia with the relevant provisions of the 1922 Act. The Tribunal also noticed that the High Court of Calcutta in Commr. of I.T v. Chunilal Prabhudas & Co. . 76 ITR. 566. had taken the view that no capital gains arise under the Act on transfer of goodwill. Following the said decisions, the Tribunal held that the provisions of S. 45 of the Act do not apply to transfer of goodwill and accordingly, allowed the Assessee's appeal.
5. In our opinion, the question of law has not been correctly framed by the Tribunal. It assumes that ‘capital gains’ arise from a transfer of goodwill. The argument of the Assessee before the Tribunal based on the principles laid down in Rathnam Nadar's case was that no capital gains can be said to arise from transfer of goodwill under the scheme of the Act and therefore capital gains tax is not attracted, learned Counsel on both sides agreed that the question as framed by the Tribunal is defective and that we may re-frame the question as follows:
“Whether on the facts and circumstances of the case the Tribunal was right in holding that no capital gains could arise under S. 45 of the I.T Act, 1961, on the transfer by the Assessee-firm of its goodwill to the newly constituted firm?”
6. The ratio of the decision in Rathnam Nadar's case, was followed by the High Courts of Delhi and Kerala. In Jagdev Singh Mumick… v. Commissioner Of Income-Tax… . 81 ITR. 500. which arose under the I.T Act, 1822 it was held that the sum received on account of transfer of goodwill is not capital gains and therefore not liable to tax under S. 12B. The case before, the Kerala High Court in Commissioner Of Income-Tax v. E.C Jacob . 89 ITR. 88. arose under the Act and it was held that the amount received by the assessee towards the value of goodwill was not assessable to capital gains tax. The decision of the Calcutta High Court in Chunilal Prabhudas's case arose under the 1922 Act and it proceeded on the view that goodwill is not a capital asset within the meaning of S. 12B.
7. The decision of the High Court of Madras in Rathnam Nadar's case raised a substantial question of law of general importance. Against the said judgment the Department preferred an appeal to the Supreme Court in C.A 1504/70. It was submitted by Sri Ramamani, learned Counsel for the Assessee, that the said appeal was heard before a Tax Bench of the Supreme Court on 5-3-1973 and 6-3-1973 and was dismissed as not pressed. The correctness of that statement was not disputed by Sri Rajasekhara Murthy, learned Counsel for the Department.
8. Long before the date of hearing of C.A 1504/70 before the Supreme Court, the High Court of Gujarat in CIT v. Mohanbhai Pamabhai . 91 ITR. 39., dissenting from the view of the High Courts of Madras and Calcutta, had taken a contrary view. In the said decision it was held that “the charging provision in S. 45 is not confined to those cases where the capital asset has cost something to the assessee in terms of money in acquiring it and that there is nothing in any of the sections relating to capital gains that the charging provision should be construed in a narrow manner by excluding self-created capital assets or capital assets which have cost nothing to the assessee in terms of money in acquiring it”.
9. Briefly stated, the reasoning of the decision in Rathham Nadar's case is: Goodwill, no doubt, is a capital asset. But it is a self-created intangible asset; the cost of acquisition of such an asset is incapable of determination. Capital gains has to be computed by deducting the cost of acquisition of the capital asset from the full value of the consideration for its transfer. Since the cost of acquisition of a goodwill is incapable of determination, it could not have been in the contemplation of the Legislature to include property of that kind for the purpose of taxation of capital gains.
10. There is more than one reason for us to follow the ratio of the decision in Rathnam Nadar's case. No doubt, two views are possible on the question. When two views are possible on a question concerning the interpretation of a tax law, the one which is fair both to the assessee and the Department should be followed. The view that capital gains tax is not attracted to transfer of goodwill is a fair and just interpretation. If the view of the Gujarat High Court in Mohanbhai Pamabhai's case is correct, the cost of acquisition of a goodwill being nil, the full value of the consideration for its transfer has to be brought to charge to capital gains tax. Such a levy will no be a tax on profits or gains but, in substance, a tax on the capital value of the asset. The capital value of goodwill is charged to tax under the Wealth Tax Act, 1957. Wealth Tax is an annual recurring tax. When there is an annual recurring tax on the capital value of goodwill, it will be unfair to levy another tax calling it as capital gains on the same value of the goodwill in the same assessment year, merely because, the goodwill has been transferred for consideration.
11. When the appeal by the Department against the decision of the Madras High Court in Rathnam Nadar's case came up for hearing before the Supreme Court, the Department could not have been unaware of the decision of the Gujarat High Court in Mohanohai Pamabhai's case which was decided on 24/28-9-1971. The Department could have pressed that decision for acceptance by the Supreme Court as correctly interpreting the law. When the Department did not press its appeal when the question raised concerned the interpretation of a law in a taxing statute governing the whole of India, it should be deemed that the Department had made up its mind to accept the decision in Rathnam Nadar's case as laying down the correct law. The I.T Act is an all India statute. Uniformity of construction of all India Tax laws by the various High Courts is eminently desirable. If any High Court gives a decision against the Department on a substantial question of law of general importance which the Department does not accept, it is highly desirable that the Department at the earliest opportunity available should take up the matter in appeal before the Supreme Court and obtain its decision so that the law is settled by the highest Court of the land and no unceratinity is left in the administration of the tax law. The decision in Rathnam Nadar's case was rendered in the year 1969. We asked Sri Rajasekhara Murthy as to whether the Department had preferred appeals against the judgments of the High Courts of Calcutta, Delhi and Kerala. He took time for making his submissions after contacting the Departmental authorities. He stated that no appeals were preferred by the Department against the judgment of the High Courts of Calcutta and Kerala and that he has no information whether an appeal has been filed against the judgment of the High Court of Delhi. Sri Rajasekhara Murthy submitted that though the appeal against the judgment in Rathnam Nadar's case was dismissed as not pressed, the Department has not accepted the correctness of the decision in the said case and that he has been instructed to urge before us that the ratio of the Gujarat case should be followed as laying down the correct law. In the circumstances set out above, we can safely draw the 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 appeal before the Supreme Court against the judgment in Rathnam Nadar's case, that the Department has accepted the ratio of the decision in Rathnam Nadar's case as laying down the correct law. For the above reasons, we are of the opinion that the Tribunal was right in holding that the value of consideration received by the Assessee-firm for transfer of its goodwill is not liable to capital gains tax under S. 45 of the Act. Accordingly, we answer the question as re-framed by us in the affirmative and against the Department.
12. The Assessee is entitled to its costs. (Advocate's fee Rs. 250).