Law:

Section:

Rule 1 of the second schedule to the company (Profits) surtax Act, 1964-Capital-Computation of-Goodwill of assessee-company written off from balance sheet and transferred to profit and loss account-No evidence that written off goodwill amount was available for future use of assessee-Whether goodwill amount was not a 'reserve' includible in computation of capital-Held, on facts, yes Facts The assessee-company had purchased goodwill. In 1956, it had written off the goodwill from the balance sheet and transferred it to the profit and loss account. For the subsequent years, the goodwill amount remained in the profit and loss account. The assessee contended that in working out the super profits tax liability for the assessment year 1963-64 and the surtax liability for the assessment years 1964-65 and 1965-66, the goodwill amount should be included in the capital computation. The ITO rejected the assessee's contention. On appeal, the AAC upheld the ITO's order. On further appeal, the Tribunal confirmed the AAC's decision. On reference: Held 1. In order to merit consideration as 'reserves', it is not required by the Second Schedule that such reserve should appear in the balance sheet as such. The fact that the goodwill amount did not appear in the balance sheet as reserve would not disentitle the assessee from claiming that the amount should be available for the computation of its capital. The balance sheet is an important factor but may not be conclusive or decisive. 2. The question whether the concerned amount constituted a 'reserve' or not would have to be decided having regard to the true nature and character of the sums so retained or appropriated, depending on the surrounding circumstances, particularly the intention with which and the purpose for which such appropriation had been made. The true nature and character of the appropriation must be determined with reference to the substance of the matter. 3. In the instant case, the goodwill amount was written off from the balance sheet and transferred to profit and loss account. However, the expression 'written off' was not clear as the true intention of the person capable of deciding for the company as to what…

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