Law: Income Tax Act, 1922

Section:

(a) Income-tax------Firm---Goodwill---Goodwill constitutes property of firm. Goodwill of a business is as much a property of the firm as the property originally brought into the stock of the firm or acquired by purchase or otherwise by the firm. Subsection (1) of section 55 of the Partnership Act, 1932, makes it clear that goodwill of a firm not only constitutes property of the firm but can also be dealt with separately or alongwith other property of the firm. (b) Income-tax--- ----Firm---Assessment---Deduction---Rent paid for user of goodwill is deductible. Originally, the concern styled as GCW was a Hindu undivided family concern with six members including G and his two sons, J and GU. The said Hindu undivided family partitioned its business and thereafter a partnership deed was executed. It was agreed at that time that G and his two sons, J and GU, would carry on the business of the firm, GCW. The concern carried on by the Hindu undivided family had a goodwill, which with the consent of all concerned was acquired by G and his two sons, J and GU. G bequeathed his share in the goodwill of the firm in favour of the Hindu undivided families of his two sons, J and GU, under his will. After the death of G, a second partnership deed was executed. In April, 1975, a third partnership deed was executed which provided for payment of rent to J (Hindu undivided family) and GU (Hindu undivided family) for allowing the firm to utilise the goodwill. For the assessment year 1977-78, the assessee claimed deduction of Rs.12,000 as having been paid as rent for the goodwill to J (Hindu undivided family) and GU Hindu undivided family). The claim was disallowed by the Income Tax Officer and this was confirmed by the Tribunal. On a reference: Held, (i) that the Tribunal was not justified in holding that the goodwill did not belong to the two retiring Hindu undivided families, J and GU. (ii) that the Tribunal was not legally correct in disallowing the claim of the appellant-firm for payment of rent for the goodwill to the two Hindu undivided families, J and GU, especially because the Commissioner of Income-¬tax (Appeals) had held that the amount claimed on account of rent in this…

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