Law: Income Tax Act, 1922

Section:

Income-tax----Goodwill---Capital or revenue receipt---Transfer of business for a consideration which includes value of goodwill ---Goodwill being a self generating asset not taxable as revenue receipt. The assessee was carrying on business of manufacturing electrical goods, transformers, etc., as a proprietary concern at Bangalore, Ahmedabad and Calcutta and some places in Maharasthra. He transferred his business at Bangalore and Ahmedabad with its assets and goodwill to a limited company for a consideration of Rs.1,30,000 which included the value of goodwill, determined at Rs.15,000 by an agreement, dated August 30, 1974. The business at Gujarat and Maharashtra were sold together with goodwill to, another limited company and the goodwill was valued at Rs.5,000. The sale was on October 7, 1974. The Assessing Officer, for the assessment year 1975-76, refused to accept Rs.15,000 and Rs.5,000 as capital receipts but treated them as income in the hands of the assessee and accordingly assessed the income. On appeal, the Appellate Assistant Commissioner agreed with the Income-tax Officer. On further appeal, the Appellate Tribunal held in favour of the assessee. On a reference: Held, that the transfer could not be held to be a transfer of anything other than goodwill. The goodwill being a self-generating asset was not liable to be taxed at that time, as goodwill was not taxable under the law in that year. The amount of Rs.20,000 could not be brought to tax. JUDGMENT It is submitted by learned counsel for the Revenue that a transferor who retains the right to use the name under which he was trading and licenses the right to use that name by others, when he effects sale of the business carried on by him in some parts of the country to two private limited companies-transfer by him and, therefore, the consideration obtained for such sale is only in the nature of the licence fee. The assessee who was carrying on business in the name and style of "Kappa Electricals" manufacturing electrical goods, transformers, etc., as a proprietary concern at Bangalore, Ahmedabad, Calcutta and some places in Maharashtra, transferred his business at Bangalore and Ahmedabad with its assets…

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