1. In this case the Tribunal had disposed of the original appeal under its order dated 16-8-1973. The question involved was regarding the capital gains assessable in respect of transaction of the assessee-firm with a limited company called Chandan Bharat (P.) Ltd. to whom the assessee's business was transferred. All the assets and liabilities of the firm were taken over. The difference between assets and liabilities as per books on the eve of take over was Rs. 27,238. For this shares of the face value of Rs. 1 lakh were allotted. The Tribunal held that the difference of Rs. 72,762 is only fictional and, therefore, nothing is assessable in the hands of the assessee-firm either as profits or as short-term capital gains arising out of the above transaction.
2. The matter was taken up by the department in reference and their Lordships of the Bombay High Court by their Reference Appeal No. 90 dated 5-10-1983 were pleased to hold that the transaction has to be examined on the lines indicated in the judgment. Their Lordships held in CIT v. Chandan & Bharat Enterprises  151 ITR 441 (Bom.) that the transaction did result in transfer but the extent of capital gains liable to tax has to be determined by the Tribunal after hearing the parties. Accordingly, the matter was remanded to the Tribunal. In compliance with this remand order, we have heard the parties afresh.
3. Shri Jairaman, on behalf of the assessee, took us through the basic facts once again. There was a firm called Chandan & Bharat Enterprises which started its activity in August 1964. The business of the firm was purchase and sale of real estate. It entered into various agreements and contracts regarding land and construction of ownership flats. Some of the transactions were mere agreements for purchase and some others were agreements for sale of flats. During the period 1964-65 the price spiral was not as steep as in the later years. Between August 1964 and March 1965, when the assessee entered into the agreement to give the entire business to the private limited company, there could not have been material appreciation in the value of the business. Thus, the value of the business transferred could not have been materially different from the value determined as excess of the assets over liabilities of the firm on the eve of take over. This figure stood at Rs. 27,278. The mere fact that shares of the face value of Rs. 1 lakh were allotted against this take over does not mean that the assessee has in fact realised Rs. 1 lakh in respect of the assets and liabilities whose net value as mentioned above is only Rs. 27,278. It should, therefore, be held that what the assessee really realised in real terms was not anything more than Rs. 27,278 so that the capital gains attributable to transaction would be nil.
4. Shri Jairaman, however, admitted that in the books of the limited company, the shares of the face value of Rs. 1 lakh have actually been shown as paid-up capital. The book value of the assets taken over is Rs. 6,14,237 and the book value of the liabilities taken over as per detail on page 1 of the paper book is Rs. 5,87,000. The company made adjustment entries in respect of some depreciation and advances and ultimately arrived at the figure of Rs. 75,000 as goodwill in place of Rs. 72,762. If the contention regarding the real value of shares is not acceptable, the matter could be looked upon in a different manner, namely, that the excess consideration of Rs. 1 lakh over Rs. 27,278 is real consideration received for transfer of goodwill, as noted in the books of the company. Since goodwill is not a capital asset as held by the Supreme Court in CIT v. B.C. Srinivasa Setty  128 ITR 294, nothing would be taxable even from this point of view. Shri Jairaman, however, could not give the manner of arriving at the alleged goodwill figure of Rs. 75,000 (originally worked out at Rs. 72,762). We enquired, how, if, as contended above, there could not have been much of appreciation in the values of assets and liabilities on account of the short time gap, there could have been so much goodwill of a business which has started six months earlier and for which there was no profit. To this, Shri Jairaman submitted that the goodwill of Rs. 75,000 is a book entry arrived at after mature consideration of all the facts. Thus, the sum and substance of Shri Jairaman's argument was that, taken either on real consideration basis or goodwill transfer basis, there are no capital gains liable to tax.
5. In reply Shri Sathe invited our attention to the agreement dated 26-3-1965 and highlighted the following aspects. The limited company had taken over not just the assets individually but all machinery, office furniture, livestock, utensils, etc., as also all book debts actionable claims and in particular full benefit of all pending contracts and agreements to which the assessee-firm was entitled, in connection with its running business. Thus, when a running business is transferred, it cannot be accepted without strong proof that the transfer has actually been made at book value. In this connection there is no proof. The argument based on alleged stagnant market in 1964-65 is not acceptable. Further, the agreement clearly provided for payment of sum of Rs. 1 lakh and not shares of the face value of Rs. 1 lakh. It is true that the clause also mentions that the liability for the said Rs. 1 lakh shall be discharged by the allotment of shares of the face value of Rs. 1 lakh but from this also it cannot be said that the value of the shares allotted is any different from the face value. Further, as there was provision for payment of interest at six per cent on Rs. 1 lakh (and not on share value), under certain contingencies mentioned in clause 7 of the agreement it would be clear that what the assessee has received is Rs. 1 lakh and not necessarily shares of the face value of Rs. 1 lakh. Again, the face value has not been shown to be different from market value.
6. Shri Sathe then invited our attention to the observation of the AAC in para 4 that no evidence regarding the value of the assets taken over was produced. Since all the agreements and pending contracts constituted valuable assets, it is fallacious to argue that all these valuable assets were taken over at the book value. The entire consideration of Rs. 1 lakh is, thus, wholly for the business which was paid for above, leaving nothing for the alleged goodwill (which did not exist). It has not been shown that there was any goodwill in respect of business which had just started and which right up to the date of take over did not even yield any income. The fact that a book entry is made by the buyer regarding goodwill is no ground for holding that there was in fact goodwill to the tune of Rs. 75,000. As the entire consideration has come for transferring primarily stock-in-trade and other benefits of contracts and agreements, the entire consideration is to be taken as giving rise to capital gain to the extent of Rs. 1,00,000-Rs. 27,238, i.e., Rs. 72,762. This capital gain will be short-term capital gain.
Reliance was placed in support of the above proposition on CIT v. Tata Services Ltd.  122 ITR 594 (Bom.). In this case it has been held that even agreement for sale of immovable properties constitute capital asset and that assignment of such agreement is a transfer. Reliance was also placed on CIT v. Sterling Investment Corpn. Ltd.  123 ITR 441 (Bom.) in which their Lordships have followed the ratio of Tata Services Ltd.'s case (supra). Shri Sathe further relied on J.K. Trust v. CIT  32 ITR 535 (SC) in support of his contention that the subject matter of transfer in this case is entire running concern and such a concern itself was a property or capital asset. According to him, the assessee sold entire concern and made a capital gain of Rs. 72,762 which is clearly taxable. This is the difference between sale price of Rs. 1 lakh and net cost of the assets of Rs. 27,238. Shri Sathe relied on Sarabhai M. Chemicals (P.) Ltd. v. P.N. Mittal, Competent Authority, IAC  126 ITR 1 (Guj.) at p. 22. According to Shri Sathe, this was the view of the AAC when he upheld the capital gain computation and this was fully supported by the decision of the Gujarat High Court. Shri Sathe conceded that when there is slump sale, no reclassification into transfer of stock-in-trade and other items is possible in view of the Supreme Court's judgment in CIT v. Mugneeram Bangur & Co.  57 ITR 299. In Mugneeram Bangur & Co.'s case (supra) there was no capital gains tax whereas in the case before us we are concerned with a case where there were actual short-term capital gains liable to tax. Therefore, even assuming that there was any goodwill, no part of the sale price is attributable to goodwill. Thus, the entire difference is to be made liable to short-term capital gains tax.
7. Without prejudice to the above, Shri Sathe invited our attention to the grounds of appeal raised before the Tribunal where the question of transfer on account of alleged goodwill was never taken up. The relevant ground of appeal reads as under : The learned ITO had erred in treating the amount of Rs. 72,760 (being the amount received in excess of the net assets on conversion of the firm to private limited company) as income from business. The learned AAC had erred in treating the same as capital gains. Both the taxing authorities have erred in not treating the amount of Rs. 72,760 as non-taxable and orders of either have emanated out of improper appreciation of the evidence on record, explanations tendered and various case laws pointed out during the course of proceedings, The appellant prays that he be allowed to place additional grounds on record if necessitated.
The only question, thus, was that the authorities below erred in treating the sum of Rs, 72,760 as income from business.
8. In his rejoinder, Shri Jairaman submitted that the agreement dated 26-3-1965 should be read as a whole. Clause 2 of the agreement refers to one single indivisible transaction. Although it refers to a sum of Rs. 1 lakh as payable, in the same clause it also refers to the fact that this sum shall be paid by allotment of Rs. 1 lakh fully paid-up shares of Rs. 100 each of the total face value of Rs. 1 lakh. Thus, what the assessee has received or has agreed to receive is not cash of Rs. 1 lakh but shares of face value of Rs. 1 lakh. Shri Jairaman then next pointed out that the limited company could as well have claimed a higher value for the tangible assets taken over as it would have stood to gain by claiming the higher value in the stock-in-trade as a deduction in its own assessment. In its own assessment it did not do so because the company did feel that the value of the assets shown in the books was no more than what was shown therein. When all assets were taken over, one has to assume that the goodwill has also been taken over. There is some sanctity to the book entries made by the vendee particularly at a time when the first judgment on the question of taxing capital gains was not available. The judgment in CIT v. K.Rathnam Nadar  71 ITR 433 (Mad.) was delivered on 27-9-1968 whereas the entries in the books were made as mentioned above on 26-3-1965. The creation of goodwill at Rs. 75,000 as noted in the company's book, thus, does not warrant any disturbance. Regarding the AAC's observations relied upon by the departmental representative, it was submitted that the same are not correct and that the value of business assets has never been disputed. On the question of case law relied upon by the departmental representative, Shri Jairaman's contention was that undisputedly the take over of the business involves transfer of assets which are capital assets. The real question is whether the assets which have a cost and for which definite time of acquisition existed could have fetched as high a sum as Rs. 1 lakh when all that the assessee-firm had was a few agreements for purchase of lands and a few more agreements for sale of flats. Regarding the limitation allegedly imposed by the grounds of appeal of the assessee, Shri Jairaman submitted that since the ground specifically refers to the contention that the sum of Rs. 72,768 is not assessable to tax, the grounds are comprehensive enough to cover all the legal issues arising out of take over of the business by the limited company. Accordingly, it was submitted that the original order of the Tribunal in favour of the assessee warrants no change.
9. We have examined the facts and arguments. The following issues are to be decided, viz,- 1. What is the value of the consideration received, Rs. 27,268 or Rs. 1 lakh or some other figure 2. If the value is not Rs. 27,268, does the consideration for the transfer involve any element attributable to transfer of capital assets which are self-generated and which have no specific point of time of acquisition, so that capital gains, if any, could be considered exempt 10. In our opinion, the value of the consideration for the transfer is Rs. 1 lakh. The agreement stated so clearly. The fact that the agreement also stipulates the manner of discharging the liability by the vendee (issue of shares) cannot change the value of the consideration mentioned, viz., cash or equivalent shares. The agreement itself does not indicate that the parties had any intention of taking less than Rs. 1 lakh by referring to allotment of shares. The face value is prima facie the value of the consideration. We cannot for this purpose impart the principles of rule ID of the Wealth-tax Rules, 1957 which is confined in its scope to resolving the dispute in the wealth-tax matters. More important, there is no balance sheet of the vendee as on the date of transfer. We, therefore, hold that the consideration for the take over is Rs. 1 lakh.
11. Can it be said that the goodwill of the business of the assessee-firm was Rs. 75,000 There is no standard and infallible method of quantying the goodwill. As there were no profits and as the assessee has not shown how he arrived at the figure, the departmental representative's contention that goodwill is nil, is acceptable. The vendee limited company's book entries doubtless have a sanctity about it. The entries in books of a limited company whose accounts are duly audited cannot be lightly brushed aside as explained in CGT v. At dial P. Mewar  70 ITR 225 (Cal.) particularly because the entries were made at a time when the impression was that capital gains on goodwill are also liable to tax. This does not, however, mean that the assessee has no obligation to prove the existence or valuation of goodwill.
Besides, at the time of making the entries, the Bombay High Court judgment in Rogers & Co. v. CIT  34 ITR 336 held that field. CIT v. B.M. Kharwar  72 ITR 603 (SC) disapproved this view much later in 1968.
12. Goodwill can be described comprehensively for our purpose in terms of Rustom Cavasjee Cooper v. Union of India AIR 1970 SC 564. Goodwill of a business is an intangible asset. It is the whole advantage of a reputation and connection formed with the customers together with the circumstances making the connections durable. It is that component of the total value of the undertaking which is attributable to the ability of the concern to earn profits over a course of years or in excess of normal amounts because of its reputation, location and other features.
Goodwill is, therefore, the value of the attraction to customers arising from the same and the reputation for skill, integrity, efficient business management and efficient service. [Emphasis supplied].
13. Goodwill, thus, exists when its business is better than that of other business (with less or nil goodwill). The existence of super profits is not the same thing as existence of goodwill. In revenue terms, goodwill means that additional value over and above the tangible assets which a reasonably prudent buyer would give for the business as a going concern.
14. Now in this case the business was in existence for hardly eight months and had no fame about its name. It had not fetched any income.
There was no specific reputation or connection with any customer or class. The assessee did not acquire any clout for attracting customers by proving its efficiency, etc. It had no specific location benefits.
There is nothing in record to show that the assessee had reached the take off stage to earn bumper profits. Although subsequent events are not quite relevant, the impression that would be gathered by a potential buyer about the non-existence of goodwill is proved by subsequent events, as the vendee-company also did not make any worthwhile profits. Under the circumstances, we hold that the business did not have any intangible assets in the form of goodwill. The narration in the books of the vendee is, thus, a misnomer.
15. Why has the vendee paid Rs. 1 lakh We agree with the departmental representative that the payment was made with the intention of deriving the benefits of agreements for purchase of land as also for construction and sale of flats. All these collectively were valuable assets with a marked potential for yielding profits. The price spiral may not have reached the proposition it did in the later years, but if a taxpayer visualises a rise in prices and pays a higher price, we have to give effect to the same. The payment of Rs. 75,000 could thus not have been for goodwill but for deriving benefit out of the totality of the assets even after discharging liabilities which had a value equal to the book value. From this point of view, what the vendee has paid in excess of book value comes to about 12.2 per cent of the book value of the assets (Rs. 6,14,237). This appears to be a fair estimate of the realisation likely from the benefits of outstanding contracts, etc. The true nature of the realisation is, thus, on account of appreciation in the value of the outstanding contracts and not on account of goodwill which, as seen above, did not exist. This capital gains have, thus, arisen on account of transfer of business as a whole which has a cost and which has a date of acquisition. They are, thus, taxable as short-term capital gains. This is fully supported by the view in Sarabhai M. Chemicals (P.) Ltd.'s case (supra) extracted as below : ... It is well settled that business in property and the undertaking of a business is a capital asset of the owner of the undertaking.
When an undertaking as a whole is transferred as a going concern together with its goodwill and all other assets, what is sold is not the individual itemised property but what is sold is the capital asset consisting of the business of the undertaking and any tax that can be attracted to such a transaction for a slump price at book value would be merely capital gains tax and nothing else but capital gains tax. Plant or machinery or any fixture or furniture is not being sold as such. What is sold is the business of the undertaking for a slump price. If the capital asset, namely, the business of the undertaking, has a greater value than its original cost of acquisition, then, capital gains may be attracted in the ordinary case of a sale of an undertaking and that is precisely what has been indicated in Doughty's case  AC 327 (PC) and in Mugneeram Bangur's case  57 ITR 299 (SC). ... (p. 22) If the vendee-company choses to brand the nature of payment as something different and in the process loses the benefit of deduction that it could otherwise have perhaps obtained, there is little that can be done in the matter in the course of these proceedings We, accordingly, uphold the order of the A AC. We have rejected the contention of the departmental representative regarding limitations placed on the assessee by his ground of appeal.