Law:

Section:

ACT: Goodwill of a newly commenced business-Whether, (i) a capital asset and (ii) if so, an asset falling within the contemplation of section 45 of Income Tax: Act, 1961 giving rise to a capital gain. HEADNOTE: The assesses, a registered firm, manufactured and sold agarbattis. Clause (13) of the Instrument of Partnership executed on 28th of July, 1954 and subsequently extended by another instrument dated 31st March, 1964 showed that the goodwill of the firm had not been valued, and the valuation would be made on dissolution of the partnership. The assesses firm was dissolved by a deed dated 31st December, 1965. At the time of dissolution the goodwill of the firm was valued at Rs. 1,50,000/-. A new partnership by the same name was constituted under an instrument subsequently and it took over all 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 gains 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. The Income Tax Appellate Tribunal in appeal accepted the contention of the assesses that the sale did not attract tax on capital gains under section 45 of the Income Tax Act, 1961. The High Court of Karnataka on a reference, at the instance of the Commissioner of Income Tax affirmed the Tribunal's view and held that the value of the consideration received by the assesses for the transfer of its goodwill was not liable to capital gains tax under section 45 of the Income Tax Act. Hence the three appeals as to the taxability of the transfer of the goodwill to capital gain tax. Dismissing the appeals, the Court HELD: 1. The goodwill generated in a newly commenced business cannot be described as an asset within the terms of section 45 of the Income Tax Act, 1961 and therefore its transfer is not subject to…

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