Law:

Section:

Income-----   ---- Sale of entire stock at cost price when business was making good profits Price fixed for good will also Income tax Authorities charging difference between market price and cost price as profits Legality Price fixed by vendor is binding if bona fide Good will Method of valuation.   The assessee sold the entire stock of his goods to an incorporated company at cost price amounting to Rs. 1,19,138. The assessee also sold to the company the good will of the business for a sum of Rs. 50,000. The Income tax Officer held that as the assessee was earning a gross profit on an average of 35 per cent. per year the sale value of the stock in trade should be over Rs. 1,50,000 and a profit of Rs. 50,000 should have accrued to the assessee in respect of the stock in trade sold to the company and that the Rs. 50,000 paid for good will did not represent the price of good will but represented profits of the assessee on the sale of stock in trade. Accordingly, he added a sum of Rs. 50,000 to the gross profits of the assessee. The Appellate Assistant Commissioner and the Tribunal took the view that the value of the good will was not so high as Rs. 50,000 but should be placed at Rs. 25,000 and accordingly the profits of the assessee should be increased by Rs. 25,000. On a reference of the question whether the sum of Rs. 50,000 mentioned as the price of good will or any portion thereof was liable to be taxed by the Income tax Department : Held, in the absence of a finding that the transaction of the sale of good will was a sham transaction it was not open to the Income tax Authorities to hold that the price paid for the stock-in-trade by the company to the assessee was not the amount mentioned in the contract, but something more than that amount, and that the difference between the market price and the cost price should be taxed as the profits of the assessee. Accordingly, no portion of the sum of Rs. 50,000 mentioned as the price of good will was liable to be taxed by the Income tax Department :   Held also, that in the matter of valuation of the good will of a business the proper approach is to ascertain the net annual earning of the business after…