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Pramod Kumar K. Bussa Vs. Addl. Second Income-tax Officer - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Mumbai
Decided On
Judge
Reported in(1984)10ITD77(Mum.)
AppellantPramod Kumar K. Bussa
RespondentAddl. Second Income-tax Officer
Excerpt:
.....same. similarly, the ito did not tax the sum of rs. 1,81,031 apparently because it represented a capital receipt. that left the balance of rs. 10,000 paid to the retiring assessee as its share in the goodwill of the firm. the ito taxed the same as short-term capital asset.2. the assessee appealed to the aac and contended that the amount received towards the goodwill was not taxable as capital gains because it was a self-generated asset and so the decision of the supreme court in the case of cit v. b.c. srinivasa setty [1981] 128 itr 294 applied to the facts of the case. the aac did not agree. according to him, the case of b.c. srinivasa setty (supra) did not apply to the facts of this case. relying on the decision in the case of cit v. gangadhar baijnath [1972] 86 itr 19 (sc), the aac.....
Judgment:
1. This appeal has been filed by the assessee against the order dated 3-5-1982 of the AAC relating to the assessment year 1978-79, the previous year of which was the Samvat year 2033. The assessee is a HUF.It was a partner in the firm styled Rajesh Dye-chem. As per the deed dated 28-4-1977, the assessee retired from the aforesaid partnership and received a total sum of Rs. 1,95,873.62. This deed of retirement clearly states that a sum of Rs. 10,000 was paid to the assessee towards its share in the goodwill of the firm. In fact, the goodwill of the aforesaid firm was not appearing as an asset in its balance sheet, but, for the purpose of settling the account of the retiring assessee, its share of the goodwill was valued at Rs. 10,000 and the same was brought into accounts and credited to the retiring partner's account.

The amount paid to the assessee consisted of the aforesaid sum of Rs. 10,000 as goodwill, another sum of Rs. 4,842 as the assessee's share in the current profits and the balance amount representing the assessee's share in the other assets of the aforesaid firm. The ITO assessed the sum of Rs. 4,842 and there is no dispute about the same. Similarly, the ITO did not tax the sum of Rs. 1,81,031 apparently because it represented a capital receipt. That left the balance of Rs. 10,000 paid to the retiring assessee as its share in the goodwill of the firm. The ITO taxed the same as short-term capital asset.

2. The assessee appealed to the AAC and contended that the amount received towards the goodwill was not taxable as capital gains because it was a self-generated asset and so the decision of the Supreme Court in the case of CIT v. B.C. Srinivasa Setty [1981] 128 ITR 294 applied to the facts of the case. The AAC did not agree. According to him, the case of B.C. Srinivasa Setty (supra) did not apply to the facts of this case. Relying on the decision in the case of CIT v. Gangadhar Baijnath [1972] 86 ITR 19 (SC), the AAC held the sum of Rs. 10,000 to be a revenue receipt assessable under the head 'Business' in the hands of the assessee. In this view of the matter, he confirmed the assessment of Rs. 10,000 made by the ITO though under the head 'Profits and gains of business or profession'.

3. Aggrieved by the above order of the AAC, the assessee is in appeal before us. Shri N.A. Shah, the learned representative for the assessee, urged before us that the case of the assessee came within the ratio of the decision of the Supreme Court in the case of B.C. Srinivasa Setty (supra) and so, the learned AAC was not correct in not following the said decision. Further, he urged that the facts in the case of Gangadhar Baijnath (supra) were entirely different and the AAC erroneously relied on the same.

4. Shri Roy Alphonso, the learned representative for the department, on the other hand, urged before us that the AAC was quite correct in his decision. He said that there was a difference between the dissolution of a firm and the retirement of a partner. He referred to the decisions in the cases of CGT v. P. Gheevarghese [1972] 83 ITR 403 (SC), CIT v.Tribhuvandas G. Patel [1978] 115 ITR 95 (Bom.) and CIT v. H.R. Aslot [1978] 115 ITR 255 (Bom.) in support of his contention. His point was that the sum of Rs. 10,000 received by the assessee as its share in the goodwill of the firm was rightly treated as a revenue receipt assessable under the head 'Profits and gains of business or profession'.

5. We have considered the contentions of both the parties as well as the facts on record. We find that the AAC has wholly relied on the decision in the case of Gangadhar Baijnath (supra). However, we find that the facts and circumstances of that case were entirely different.

In that case, there was an assessee-firm of three partners who were carrying on several business activities. One of those activities was the selling agency and managing agency of a textile mill. Those three partners entered into an oral partnership agreement with three partners of another firm, to carry on the said selling agency and managing agency business. No partnership deed was executed. The partnership was, therefore, terminable at will. The three partners of the assessee-firm retired from the said oral partnership and received a certain sum as compensation. The Supreme Court found that the payment was made for surrendering the managing agency rights, selling agency rights as well as the goodwill. There was no material on which the compensation could be allocated amongst the different heads. The assessee-firm continued to carry on business even after surrendering the aforesaid rights to the surviving partners of the aforesaid oral partnership. That was really a case of cancellation of a contract which had been entered into in the ordinary course of business. Any compensation received for the termination of such a contract was a revenue receipt as was held by the Supreme Court in the earlier case of CIT v. Rai Bahadur Jairam Valji [1959] 35 ITR 148. Again, the assessee firm in that case was engaged in several business activities and the managing agency and selling agency of the aforesaid mill was only one such activity. Hence, the Court held that any amount received in the normal course of business for the determination of the agency agreement was a trading receipt. In the case before us the facts are entirely different. In the instant case, a partner retires from the firm and takes the entire amount appearing to its credit in its capital account in the books of the firm. The ITO himself has treated the retiring partners' share in all the assets as capital receipts and has not taxed the same. In our opinion, he has rightly done so. When it came to goodwill, the ITO took it to be a capital receipt and subjected the same to capital gains tax. Thus, the question which is raised in this appeal is whether the sum of Rs. 10,000 admittedly received towards the assessee's share in the goodwill of the firm is a capital receipt or a revenue receipt. It may be pointed out that unlike the case of Gangadhar Baijnath (supra), the sum of Rs. 10,000 has been specifically stated as payment towards the goodwill in the deed of retirement dated 28-4-1977. In our considered opinion, this sum of Rs. 10,000 received towards goodwill by the assessee is nothing but a capital receipt because it relates to the assessee's share in the goodwill of the firm, which is a capital asset vide Section 14 of the Indian Partnership Act, 1932. Hence, we find that the facts in the case of Gangadhar Baijnath (supra) were entirely different and so the ratio of the said decision cannot be applied to the facts of the instant case.

6. This brings us to the decision of the Supreme Court in the case of B.C. Srinivasa Setty (supra). Admittedly, the firm in which the assessee was a partner acquired its goodwill on its own. It was a new firm and it did not buy the goodwill from anybody else. Hence, it was a self-generated asset which had cost nothing. Consequently, respectfully following the aforesaid decision in the case of B.C. Srinivasa Setty (supra), we hold that there could be no capital gains on the transfer of such an asset.

7. We have considered the decisions relied on by Shri Roy Alphonso but we find that they are of no help to the revenue. The case of P.Gheevarghese (supra) was concerned with gift-tax. In that case, the Supreme Court held that the department could not single out one asset and treat it to be a gift while not treating all the other transferred assets as gifts. Further, the Court was concerned in that case with the interpretation of Section 5(1)(xiv) of the Gift-tax Act, 1958. The facts of the instant case are quite different. Similarly, in the case of Tribhuvandas G. Patel (supra), the assessee was a partner in a firm.

He retired from the firm and received a sura of Rs. 50,000 as his share of the value of the goodwill in the firm. The Court held that the sum of Rs. 50,000 received by the assessee as his share of the value of the goodwill was not liable to tax as capital gain. The Court relied on their earlier decision in the case of CIT v. Home Industries & Co.

[1977] 107 ITR 609 (Bom.), which was, later approved by the Supreme Court in the case of B.C. Srinivasa Setty (supra). This case was followed in the subsequent decision in the case of H.R. Aslot (supra).

Thus, these two cases actually help the assessee's case and do not help the case of the revenue.

8. For the above reasons, we reverse the order of the AAC as well as the ITO and direct that the sum of Rs. 10,000 should be deleted from the total, income of the assessee.


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