Three questions have been referred for decision under section 66 (1) of the Indian Income-tax Act, 1922, two of them at the instance of the revenue, and one at the instance of the assessee. The question referred at the instance of the revenue are :
'1. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that the sum of Rs. 65,898 should not be assessed in 1960-61 as capital gains.
2. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the assessee was entitled to the benefit of the substitution of the fair market price of the goodwill as on January 1, 1954 ?'
And the question referred at the instance of the assessee is :
'Whether there was any capital gains at all in respect of goodwill liable for assessment in relation to the facts of the case pertaining to section 12B of the Indian Income-tax Act, 1922 ?'
The reference at the instance of the revenue was made by the Tribunal; but the Tribunal having refused to refer the question wanted to be referred by the assessee, he applied to this court in T.C.P. No. 56 of 1965 under section 66(2). This court directed the Tribunal to refer to it the question already mentioned, reserving however the preliminary objection raised by the revenue to the maintainability of the application and the mainainability of the reference. At that stage, the counsel for the assessee had also indicated that the would not raise any objection to the revenue raising a preliminary objection and this court deciding the matter. Before deciding the other questions that arise in this case we shall deal with the preliminary objection to the question referred at the instance of the assessee. The facts which give rise to these question are as follows :
The assessee was a partner in a firm by name, Ar. A. Shenbaga Nadar and P. V. P. Valasubramania Nadar & Co., since its inception in 1943. The business of the firm was dealing in automobiles, automobile spare parts and petroleum products. On December 31, 1958, a deed of dissolution of the partnership as between the assessee, called therein the retiring partner, and the other partners of the firm was executed. Under it, the assessee was paid of Rs. 53,400, being his one-fifth share in the capital; Rs. 34,663, his one-fifth share of the balance in the current account; Rs. 10,692, his one-fifth share in the reserve fund and the assessees share of the profits from August 17, 1958, to December 31, 1958, Rs. 8,000. With these sums we are not concerned. A sum of Rs. 65,898 was payable to the assessee in three equal instalments on August 20, 1959, August 20, 1960, and August 20, 1961, without interest towards the assessees share of the goodwill of the firm. The assessee credited the whole of this sum of January 1, 1959, in his books in an account called 'advance capital' and debited an equal amount to the account of the firm from which he had retired. He started his own business from January 1, 1959. He closed his accounts on 16th August, 1959. He maintained accounts for his business on the mercantile basis. He filed a declaration before the Income-tax Officer that cash basis was the method of accounting adopted in respect of the goodwill amount. He filed a return in which he showed the sum of Rs. 65,898 with the note : 'Receivable from Ar. A. Shenbaga Nadar and P. V. P. Valasubramania Nadar & Co. without interest in three yearly instalments starting from August 20, 1959. As the instalment does not fall in the year of account it is not included.' He contended that that sum could not be included in the assessment for 1960-61, as the amount was payable to the assessee in three instalments commencing from August 20, 1959. The Income-tax Officer took the view that under section 12B of the Act profits and gains arising under the head 'Capital gains' should be deemed to be the income of the previous year in which the sale, exchange or transfer was effected, and that the payment in instalments was not a relevant consideration. The Appellate Assistant Commissioner to whom the assessee appealed held that, when the assessee relinquished his capital asset on December 31, 1958, capital gains arose for being taxed in the relevant accounting year. He also held that the goodwill of the firm in which the assessee was a partner was never ascertained on any prior occasion and, therefore, it had no value either before or after January 1, 1954. In the result, he dismissed the appeal.
Before the Tribunal, the assessee contended that there was an extinguishment of the right of the assessee in the firm of which he was a partner, and, therefore, no capital gains tax was exigible. He contended that the amount representing the goodwill was to be paid in three equal instalments without interest, and, therefore, the right to receive each instalments arose on the 20th of August of the subsequent year. He urged that the accounting year in the present assessment ended on August 16, 1959, but that the first instalment of the goodwill was payable only on August 20, 1959, and so on for subsequent years and even if the whole sum was liable to tax, the value of the asset as on January 1, 1954, should be taken into consideration before fixing the quantum. The contention of the revenue, on the other hand, was that the goodwill of the firm had been ascertained on December 31, 1958, and the assessees share thereof quantified and that the capital gains, therefore, arose on that date. It was also contended that the fact the the payment had been postponed would not make any difference and that the profit arose on December 31, 1958, and was therefore, liable to be taxed in the assessment year 1960-61. To the contention of the assessee that January 1, 1954, should be taken to be the date on which the value of the goodwill should be taken, the reply was that there was no voluation on that the date and so the assessee was not entitled to it. The Tribunal held that the right to receive the amounts arose only on the three dates referred to the earlier and only a sum of Rs. 21,966 can be taxed in the current assessment year, and that the assessee was entitled to adopted the fair market value of the goodwill as on January 1, 1954. As regards the contention that the income in question was not taxable as capital gains at all, the Tribunal mentioned as follows :
'We are not aware how capital gains can arise when the assessee himself built the goodwill or, rather to put it in other words, the goodwill grew with the assessees carrying on of the business. Further, no asset had been acquired, sold or relinquished, so as to invite the application of section 12B. But, as the learned counsel for the assessee did not press this point very much, we are not travelling further on that road.'
During the course of the hearing in T.C.P. No. 56 of 1965, on behalf of the assessee, it was argued that the point was pressed but how far it was pressed was only a question of degree and, therefore, it cannot be said that the point was never raised before the Tribunal and, therefore, no reference in regard to it is competent. This would become relevant later when we discuss the question as to whether the income in question can be taxed at all as capital gains.
We shall now deal with the question whether the preliminary objection on behalf of the revenue to the reference directed by this court at the instance of the assessee can be upheld. We are of opinion that it ought to be. Under section 66 of the Act, either the assessee or the Commissioner may, by application in the prescribed form, require the Tribunal to refer any question of law arising out of an order under section 33(4) and the Appellate Tribunal shall draw up a statement of the case and refer it to the High Court. But, if on any application being made under sub-section (1) of section 66, the Appellate Tribunal refuses to state the case on the ground that no question of law arises, the assessee or the Commissioner, as the case may be, may apply to the High Court, and the High Court may, if it is not satisfied with the correctness of the decision of the Tribunal, require it to state a case refer it and, on such requisition, the Appellate Tribunal shall state the case and refer it and, on such requisition, the Appellate Tribunal shall state the case and refer it accordingly. It is under this provision that the assessee had applied to this court in T.C.P. No. 56 of 1965. The right of the assessee - we are not concerned in this case with the right of the Commissioner - under this sub-section arises only when he is served with a notice of refusal under sub-section, and such a notice of refusal can arise only on an application being made under sub-section (1) of that section. Under sub-section (1), as already noticed, the assessee in this case should have applied in the prescribed form, accompanied by a fee of Rs. 100 and required the Appellate Tribunal to refer to the High Court any question of law. The assessee in this case did not apply under section 66(1) to the Tribunal. The application was not in the prescribed form, nor was it accompanied by the fee of Rs. 100. The assessee required a question of law to be referred only in his counter statement to the application made by the Commissioner. The requirement of an application under section 66(1) by him before the assessee can apply under section 66(2) is not a mere technical formality. The importance of an application in the prescribed form within the prescribed period accompanied by the prescribed fee is to ensure that no party should be given an opportunity to raise any question as and when it pleases and on any occasion as it pleases but that a question can be raised only when certain condition are satisfied. Apparently, when the order under section 33(4) was served on the assessee, the assessee did not consider that any question of law, which had to be referred to the High Court, arose.
We may in this connection refer to the decision on Commissioner of Income-tax v. Arunachalam Chettiar. In that case the Supreme Court considered the question regarding the jurisdiction given to the High Court under section 66. Their Lordships held that that jurisdiction is conditional on an application under sub-section (1) being refused by the Appellate Tribunal. The further question that arose in that case was that, if an application under sub-section (1) was not well founded in that there was no order which could be properly said to be an order under sub-section (4) of section 33, then the refusal of the Appellate Tribunal to state a case on such a misconceived application on the ground that no question of law arises will not authorise the High Court on an application under sub-section (2) of section 66 to direct the Tribunal to state a case. Though it may be said that the observation in that case that the jurisdiction given to the High Court under sub-section (2) of section 66 is conditional on an application under sub-section (1) being refused by the Appellate Tribunal, it is not really so. Though the question arose only incidentally and the main question there was whether there could be an application under section 66(1) without there being an order under section 33(4), the proposition of law laid down by the Supreme Court that the jurisdiction given to the High Court under section 66(2) is conditional on an application under section 66(1) being refused by the Appellate Tribunal, still holds good. If even an application under section 66(1) cannot clothe this court with jurisdiction under section 66(2) if such an application is not well-founded, it follows that the total absence of an application under section 66(1) is a complete bar to an application under section 66(2). Therefore, in this case, as there was no application by the assessee under section 66(1) and it was not refused by the Appellate Tribunal, this court had no jurisdiction to direct the Tribunal to state a case.
Nor are we able to accept the contention on behalf of the assessee that the words 'as the case may be' found in sub-section (2) can lead to the inference that, where an application has been made by either the assessee or the Commissioner, it is open to a party other than the one which has made the application under section 66(1) to apply to the High Court under sub-section (2) of section 66. Sub-section (2) only means that, where the assessee had made the application and his application has been refused, he can apply to the High Court and the Commissioner can apply to the High Court if he had made an application under section 66(1) and it has been refused. The assessee cannot make an application to the High Court under section 66(2) by making in the course of an application made by the Commissioner under section 66(1) a request to refer a question he wants to be referred; nor can the Commissioner file an application under section 66(2) as arising out of an application by the assessee under section 66(1).
Reliance was, however, placed on behalf of the assessee on rules 40 and 41 of the Appellate Tribunal Rules, 1946. Rules 40 and 41 are as follows :
'40. On receipt of the notice of the date of hearing of the application, a respondent shall, at least 7 days before the date of hearing, submit a reply in writing to the application.
41. The reply to the application shall specifically admit or deny whether the question of law formulated by the applicant arises out of the order under sub-section (4) of section 33. If the question formulated by the applicant is defective, the reply shall state in what particular the question is defective and what is the exact question of law which arise out of the said order. The reply shall be accompanied by two copies thereof, a list of documents (the particulars of which shall be stated) which in the opinion of the respondent should form part of the case and a translation in English of any such document, where necessary.'
The right of the assessee in an application filed by the Commissioner was either to admit or deny whether the question of law formulated by the Commissioner arose out of the order under sub-section (4) of section 33. If the question formulated was defective, it was open to the assessee to state in what particular the question was defective and what is the exact question of law which arises out of the said order. The suggesion of the assessee in this case was not that the question formulated by the Commissioner was defective; nor did he state in what particular the question was defective and what was the exact question of law that arose out of the order. He suggested a completely different question altogether. He questioned the basic assumption in the question formulated by the Commissioner.
Apart from this consideration, we cannot agree that the scope of section 66 should be decided by a reference to the rules which have been made under the Act. These rules were made by the Appellate Tribunal under sub-section (8) of section 5A, which reads as follows :
'Subject to the provisions of this Act, the Appellate Tribunal shall have power to regulates its own procedure, and the procedure of Benches of the Tribunal in all matters arising out of the discharge of its functions, including the places at which the Benches shall hold their sittings.'
The right of the Appellate Tribunal to regulate its own procedure cannot confer on it the power to frame a rule conferring a substantive right not contemplated by or conferred by section 66. Naturally, the same considerations would apply if in an application made by the assessee under section 66(1) the Commissioner sought to raise a new question for being referred to the High Court, without himself having made an application under section 66(1) and such application having been refused.
Reliance was, however, placed on behalf of the assessee on the decision of the Bombay High Court in Girdhardas & Co. Ltd. v. Commissioner of Income-tax, where it was held that, where a party which has lost the case before the Tribunal applies for a reference and a references is determined upon, the party which has won may apply for reference of other questions of law which arise from the order of the Tribunal. The question is discussed as follows :
'Another question had been submitted to us by the Tribunal which was raised by the Commissioner, and Mr. Palkhivala has a preliminary objection to take to the raising of this question. His contention is that the application for a reference was made by the assessee and it was on that application that a question of law was submitted to us. As the Commissioner had made no application for reference, it was not open to the Commissioner on his application to ask for a reference of a question if law which, according to him, arose from the order of the Tribunal. Now, this point was considered by us in Commissioner of Income-tax v. Banthia Bank Ltd. and we said there :
Whoever may be the party who asks for a reference, once a reference is determined upon, all question of law which arise out of the order of the Tribunal can be referred to the High Court for its determination. Questions may be suggested either by the party which wants a reference or by the party which is content with the decision of the Tribunal. Once the decision of the Tribunal is assailed and is to come before the High Court, there is no reason why the party that loses should be given the sole right of suggesting questions of law that arise from the order of the Tribunal. It is euqally open to the winning party to point out to the Tribunal that the other questions of law arise from the order made by the Tribunal which may well be considered by the High Court.
It is obvious that there may be cases where a winning party would be seriously prejudiced if it was precluded from raising a question of law merely because it had not made an application for a reference and the reference was asked for at the instance of the losing party. The winning party can never apply for a reference. But it may happen that if the court takes a particular view on the reference asked for by the losing party, certain other questions of law may arise which may have to be decided in the interest of the winning party. Therefore, it would not be proper to shut out a party before the Tribunal from raising a question of law which clearly arises from the order of the Tribunal, merely because it so happens that it has not made an application for a reference. In this particular case, undoubtedly, the Commissioner could have made an application for a reference, but there may be cases, as we have just pointed out, where the Commissioner could not have made an application for a reference because he had won before the Tribunal. We therefore overrule the preliminary objection taken by Mr. Palkhivala.'
The court relied upon its own earlier decision which is referred to therein. The Bench does not consider the actual wording of section 66, nor do they refer to it as supporting the view which they have taken.
The Gujarat High Court has taken a similar view in Smt. D. R. Amin v. Commissioner of Income-tax. The only reason which that court gave for following the decision of the Bombay High Court was that they were bound by the decision of the Bombay High Court which was delivered prior to the bifurcation of the State of Bombay in 1960 and, therefore, they followed the Bombay High Court. The Madhya Pradesh High Court in Mis. Civil Case No. 195 of 1964 referred to the decision of the Bombay High Court and it was unable to agree with that High Court, and it held that a question cannot be referred to the High Court without an application under section 66(1) duly made by the party which wanted the reference to be made. This decision is also referred to by the Gujarat High Court. Naturally, being bound by the decision of the Bombay High Court, it had no occasion to consider which of the two views was preferable. With respect, we find ourselves unable to agree with the view taken by the Bombay High Court and followed by the Gujarat High Court. The view taken by the Madhya Pradesh High Court commends itself to us and we hold that, where either the Commissioner or the assessee has made an application under section 66(1) for a reference to the High Court, it is not open to the other party in reply to the application filed by the opposite party to ask for reference of a question which it wants to be referred. The only way by which a party can ask for a reference of any question to the High Court is by filing an application under section 66(1) and, if that is refused, to apply to the High Court under section 66(2). We may also mention that the Rajasthan High Court in Educational and Civil List Reserve Fund No. I v. Commissioner of Income-tax has followed the Bombay High Court on this point without any discussion based on the wording of the section beyond quoting the words of the learned judges of the Bombay High Court. It follows, therefore, that the preliminary objection raised by the revenue to the question referred by the Tribunal as directed by this court has to be sustained.
We now come to the question as to whether capital gains can be assessed on the transfer of a goodwill. Before doing so we may refer to the argument advanced on behalf of the assessee that there was no transfer of good will at all but only an extinguishment and that, in any case, the document dated December 31, 1958, did not have the effect of transferring the assessees share in the goodwill but that it was expected to be done in the future. This argument was based in particular on paragraph 6 of that document which is as follows :
'The retiring partner shall sign and execute such instrument, deeds and documents and do such things as the continuing partners reasonably require for giving effect to the provisions thereof. The retiring partner shall execute a separate document releasing in favour of the continuing partners releasing, extinguishing, abandoning and otherwise cancelling his respective rights, claims, demands and interest in any manner and to any extent in respect of the business, properties, capital, stock-in-trade, assets, goodwill and all effects of the partnership.'
The argument was that till the retiring partner signed and executed such instruments and documents as the continuing partners require for giving effect to the provisions of the deed of dissolution of partnership and till the retiring partner has also executed a separate document, releasing in favour of the continuing partners releasing, extinguishing, abandoning and otherwise cancelling his respective rights, claims and demands, there was no actual transfer. We are unable to accept this contention. Paragraph 1 of that document clearly says that the partnership was dissolved from December 31, 1958, and that the continuing partners shall be jointly and severally liable to the retiring partner for the payments mentioned in paragraph 2 and that the retiring partner shall accept the payments in full discharge of his rights on retirement in the partnership. Therefore, the assessee had released all his rights and the effect of the document taken as a whole is to transfer all his rights in the partnership firm to the continuing partners. What remained was only an obligation arising out of the document on the part of the continuing to pay the assessee what they had undertaken to pay under that document. The document seems to have been copied from some standard form; paragraph 6 is merely a surplusage.
We are not persuaded that the decision in Pal Chowdhury v. Commissioner of Income-tax really helps the assessee in this case. There it was only held that delivery of possession, pursuant to the agreement for sale before the actual conveyance, did not transfer title to the purchaser, and that, on a true construction of the agreement in that case, the property was not intended to pass until the full consideration was paid. In the present case we are satisfied that, on a true construction of the document, the assessees title to his share in the partnership as well as goodwill passed on the date of the document, that is, December 31, 1958, itself.
We, therefore, start with the fact that by the document dated December 31, 1958, the assessee transferred all his rights in the firm of which he was a partner and received a sum of Rs. 65,898 towards his share of the goodwill. The next question would be whether, if the gains were taxable, the whole of it was taxable in the particular year or only one-third in each year, when it was payable by the continuing partners. On this question also we have no doubt that the whole amount would be taxable as on December 31, 1958. The assessee was maintaining his accounts on a mercantile basis and he has debited this sum to the account of the firm of which he was an erstwhile partner. The fact that this sum was to be paid later would not make any difference to the assessees liability to be taxed in the particular year in which he has shown that amount as received by him and debited to the erstwhile partnership. Section 12B provides that the tax shall be payable by an assessee under the head 'Capital gains' in respect of any profits or gains arising from the sale, exchange, relinquishment or transfer of a capital asset effected after the 31st day of March, 1956, and such profits and gains shall be deemed to be income of the previous year in which the sale, exchange, relinquishment or transfer took place. In this case the transfer took place on the date of the deed of dissolution, that is, on December 31, 1958, and there is no room for the contention that the capital gains arose only on the date on which they were payable by the continuing partners.
The most important question that arises is whether the capital gains tax is payable in respect of the transfer of the assessees share of the goodwill to his erstwhile partners. Capital gains tax is payable in respect of the transfer of a capital asset. 'Capital asset' means property of any kind held by an assessee whether or nor connected with his business, profession or vocation but does not include (i) any stock-in-trade, consumable stores or raw materials held for the purposes of his business, profession or vocation, (ii) personal effects, that is to say, movable property (including wearing apparel, jewellery and furniture) held for personal use by the assessee or any member of his family dependent on him and (iii) any land from which the income derived is agricultural income.
Lawson in his introduction to the Law of Property has this to say on 'goodwill' :
'Goodwill is property of a highly peculiar kind. It is the right to enjoy all the advantages of an established trade connexion. Customers who have been in the habit of dealing with a business will probability is regarded as so valuable that large sums so money are commonly paid for it. So well established a head of property is it that its value must be taken into account for purposes of taxation. Yet it is an odd kind of property since only the person who has transferred the goodwill can be placed under a duty to respect it. He indeed can be restrained from soliciting his former customers and he may also agree not to carry on a competing business. But no third party can be restrained from trading in such a way as to reduce the value of the goodwill. Yet as a marketable object, goodwill must be considered property.'
Goodwill can, therefore, be considered to be a capital asset.
Sub-section (2) of section 12B provides that the amount of a capital gain shall be computed after making the following deductions from the full value of the consideration for which the sale, exchange, relinquishment or transfer of the capital asset is made, namely, (i) expenditure incurred solely in connection with such sale, exchange, relinquishment or transfer; (ii) the actual cost to the assessee of the capital asset, including any expenditure of a capital nature incurred and borne by him in making any additions or alterations thereto, but excluding any expenditure in respect of which any allowance is admissible under any provision of sections 8, 9, 10 and 12. Sub-clause (ii) of sub-section (2) may suggest that the capital gain arises only on the transfer of a capital asset which has actually cost to the assessee something in money. The actual cost in the context of the Income-tax Act can only be cost in terms of money. It cannot, it would appear, apply to transfer of capital assets (assuming that the goodwill is a capital asset, about which there was not much dispute), which did not cost anything to the assessee in terms of money in its creation or acquisition. What is the cost in terms of money in the creation or acquisition of goodwill It would appear that there is really no such cost. Goodwill is created by the trading activities of the assessee, and probably by the name he has earned and the goodwill he had created among his customers. Goodwill of a firm is an intangible asset. It is difficult to say that it costs anything in terms of money for its coming into existence. Goodwill of a firm can probably be compared to a seed which is planted on the day that the firm begins its business and sprouts and grows as the firm grows in its dealings, in its stature and in its reputation.
In Seethalakshmi Ammal v. Controller of Estate Duty a Bench of this court, to which one of us was a party, discussed the question of goodwill in the following terms :
'What is a goodwill It is one of those terms which is better understood than comprehensively and clearly described. Broadly speaking, it is the magnetic quality of a particular trade or business which attracts custom to it as a matter of course. This quality springs from and is developed by various contributing factors that earn a reputation for honest dealing, quality and standard. Goodwill is founded on the belief and faith of the customer. It is commonly built up in relation to a particular type of manufacture or production of articles identified by a trade-mark which becomes widely known to the public and by which the custom takes it for granted that it represents what they wish for. No trade-mark gains reputation overnight. Naturally the standing of the business is necessarily one of the contributing factors. The personalities who are engaged in the business, the location in which it is carried on and the like are other features which go into the goodwill. Where a business involves no distinguishable features and deals in standard articles manufactured by someone else which one can get from anywhere, not merely from a particular dealer, there is hardly any possibility of there being a goodwill attached to such business.'
Hamilton J. in Attorney-General v. Boden thought that the question whether there was a goodwill or not was pure matter of fact. We are of the view that it is really a mixed question of law and fact, for the propriety or reasonableness of an inference from proved facts is also a matter for the law; so too the question whether the factual finding is based on no material. The learned judge was there concerned with the question whether the business of lace manufacturers carried with it a goodwill. The approach of the learned judge to the question is instructive (page 559) :
'Plain net is a fabric principally used by lace manufacturers as the foundation for other work. It is graded by the width of the machiners and by the size of the spaces in the network. The finished product of one manufacturer is so like that of another that it is impossible to distinguish between them.......that Boden & Co. never advertise. They canvass a small market, now principally at Nottingham since German manufacturers have learnt to supply their own markets. They have no trade-mark, sign, badge, or patent; any patents for machinery that there may be have been treated as of no account. One machine is practically as good as another, and the product is so uniform that anyone who can the machinery can produce the fabric. Its sale depends almost entirely on the price.'
The learned judges concluded, therefore, that the business had no goodwill worth the name. S. C. Cambatta & Co. Private Ltd. v. Commissioner of Excess Profits Tax was concerned with a business of running theatre and a restaurant and the question there was whether a question of law did arise and whether the goodwill of the theatre and the restaurant was calculated in accordance with the law. In that connection, the Supreme Court considered what a goodwill was and referred to the following observations of Lord Macnaghten in Inland Revenue Commissioners v. Muller & Cos. Margarine Ltd. :
'What is goodwill ..........It is the benefit and advantage of the good name, reputation, and connection of a business. It is the attractive force which brings in custom.'
Reference was also made to certain other English cases and it was observed by the Supreme Court at page 505 :
'It will thus be seen that the goodwill of a business depends upon a variety of circumstances or a combination of them. The location, the service, the standing of the business, the honesty of those who run it, and the lack of competition and many other factors go individually or together to make up the goodwill, though locality always plays a considerable part. Shift the locality, and the goodwill may be lost. At the same time, locality is not everything. The power to attract customs depends on one or more of the other factors as well. In the case of a theatre or restaurant, what is catered, how the service is run and what the competition is, contribute also to the goodwill.'
In the sense used by this court in that case it cannot be said that there was any goodwill which this firm had. It was dealing in ordinary automobiles, spare parts and petroleum products. As mentioned in Attorney-General v. Boden, referred to above, one machine is practically as good as another; and the product is so uniform that anyone can buy the goods in any shop. But by the definition which the Supreme Court gave in S. C. Cambatta & Co. Private Ltd. v. Commissioner of Excess Profits Tax it may be said that this firm had a goodwill. In any case the question referred to us for decision proceeds on the assumption that there was a goodwill which was transferred and the parties also have proceeded on that basis. We have, therefore, to proceed on the basis that what was transferred was goodwill and the question really is whether any capital gains accrued on the transfer of goodwill and is taxable as capital gains.
It is argued for the revenue that the idea of capital gain need not necessarily be connected with the idea of the cost in terms of money in the creation or acquisition of a capital asset. Mr. Balasubrahmanyan gave the instance of a diamond which a person may find or a gift which may be made to him in which case it cannot be said that when such assets are acquired it cost him anything. It cannot be contended, he argued, that on the transfer of such assets no capital gains accrue. The section itself provides for a case where the capital asset becomes the property of the assessee as a result of a gift. The case of a picked up diamond is really begging the question. In the case of a goodwill of a business it cannot be said that it became the capital asset of the firm at any particular point of time. It is something which goes on slowly growing and perhaps waxing and waning also. What exactly is the value of the goodwill of a business at any point of time may have to be worked on a proper basis by costs accountants. Therefore, the instances given by Mr. Balasubrahmanyan cannot be said to establish that the legislature contemplated, in enacting section 12B, to deal with cases of self-created assets like goodwill which do not anything in terms of money.
Section 22 of the British Finance Act of 1965 deals with any form of property created by the person disposing of it or otherwise coming to be owned without being acquired. Sophian in his book on Taxation of Capital Gains gives 'goodwill' as an example of property created by the person disposing of it as also paintings, sculptures, copyrights and patents. He gives the example of a diamond picked up in a street or a land over which squatters title had been obtained as example of a property coming to be owned without being acquired. Schedule VI to that Act is with regard to computation of capital gains. Paragraph 4 contains the sums allowable as deduction from the consideration in the computation of the gain accuring to a person on the disposal of an asset. This seems to correspond to sub-section (2) of section 12B of our Act. Thus, the British Act contemplates and provides for assets of the kind now under consideration, whereas our Act does not.
In the United States Taxation Laws, 'Capital asset' is defined as 'property held by the taxpayer'. This definition is recognised to be of a sweeping kind; but that definition also specifies certain exceptions like inventory, stock-in-trade, property used in taxpayers trade or business, and particularly copyrights, literary, musical or artistic compositions and similar properties, if the taxpayer created that property by his personal efforts or acquired that property from the creator by gift or in a tax-free exchange.
In the World Tax Series, in the volume relating to Taxation in the United States, published by the Harvard Law School, at page 691 the position with regard to goodwill is stated as follows :
'Goodwill, that is, the excess of the value of the business considered as a whole and as a going concern over the aggregate value of all identifiable individual assets, tangible or intangible, which are held by the business..........is regarded as a capital asset. In some circumstances, there is uncertainty as to the amount, if any, which may be properly allocated to a sale of goodwill. While some courts have held that an amount on the sale of a professional practice, such as an accounting practice, such as an accounting practice, may be allocated to a sale of goodwill, the Internal Revenue Service appears to disagree. When goodwill and a convenant not to compete are transferred together, a determination must be made as to whether the convenant will be regarded as merely ancillary to the transfer of goodwill and the convenant will be treated as capital, or whether some portion of the sale price will be allocated to the convenant and treated as ordinary income.'
Thus, the United States tax laws specifically exempt self-created assets like copyrights; goodwill transferred along with a business is treated as a capital asset on the transfer of which capital gains would be assessable.
We have been referred to a number of decision discussing this question of goodwill like, S. C. Chambatta & Co. Private Ltd. v. Commissioner of Excess Profit Tax, S. C. Cambatta & Co. v. Commissioner of Excess Profit Tax, Commissioner of Income-tax v. A. J. Elder, and the observation in Inland Revenue Commissioner v. Muller & Co.s Margarine Ltd., at pages 223 and 224, and we do not think that it is necessary to refer to them. In the case before the Supreme Court the question that capital gains were not assessable on transfer of goodwill was not raised at all; nor was it is raised before the Bombay High Court and there also the decision proceeded on the basis the capital gains were assessable on transfer of goodwill. Thus, we do not get any guidance form the decision in those cases. We have, therefore, to proceed on the basis that, while the British and the American taxation laws proceed on the footing that capital gains are assessable in the case of transfer of goodwill, the Indian Act did not have in contenplation, when enacting section 12B, that self-created a assets like copyright, patents and goowill should be subjected to capital gains arising on their transfer. It is enought to say that, complex and difficult as this question is, we are not satisfied a that either the legislature intended to include property of the kind now in question of the purpose of taxation of capital gains, or that the wording of section 12B supports such a contention. We therefore hold, though not without hesitation, that capital gains on the transfer of a goodwill are not liable to be taxed under section 12B.
We may also mention that, if it was so taxable, we would be disposed to take the view the that the value of the goodwill as on January 1, 1954, should be taken into account for this purpose.
It is finally urged on behalf of the revenue that on the questions that have been referred to us for decision it is not open to us to consider the questions whether capital gains can be taxed as such, and that we are bond to deal only with the question whether the sum of Rs. 65,898 should not be assessee in 1960-61 as capital gains. In other words the only question to be answered i whether that sum is assessable in 1960-61 or one-third of that sum is assessable in each year as and where it is paid to the assessee. But, as the question referred to us for decision is whether this sum should not be assessees in 1960-61 as capital gains the question whether it is taxable as capital gains is implicit in that question. If it is or whether the whole of it is assessable in that year, or only one-third of it in each year as and when it is paid to the assessee is taxable would not arise at all. The assessability of a capital gains arising out of this transaction is implicit in this question and we are of opinion that on the question referred to us this matter has also to be considered.
The Supreme Court in Commissioner of Income-tax v. Sc india Steam Navigation Co. Ltd. dealt with situations of this kind in the following words (at page 611-613) :
'In this view we have next to consider whether the question which was raised before the High Court was one which arose out of the order of the Tribunal, as interpreted above. Now the only question on which the parties were at issue before the income-tax authorities was whether the sum of Rs. 9,26,532 was assessable to tax as income received during the year of account 1945-46. That having been decided against the respondents, the Tribunal referred on their application under section 66(1) the question, whether the sum of RS. 9,26,532 was properly included in the assessee-companys total income for the assessment year 1946-47, and that was the very question which was argued and decided by the High Court. Thus it cannot be said that the respondents had raised any new question before the court. But the appellant contends that while before the income-tax authoritiies the respondents disputed their liability on the ground that the amount in question had been received in the year previous to the year to of account, the contention urged by them before the court was that, even on the footing that a the income had been received in the year of account, the proviso to section 10(2)(vii) had no application and that it was a new question which they were not entitled to raise. We do not agree with this contention. Section 66(1) speaks of a question of law that arises out of the order of the Tribunal. Now a question of law might be a simple one, having its impact at one point, or it may a complex one, treaching over an areas with approaches leading to different points therein. Such a question might involve more than one aspect, requiring to be tackled form different standpoints. All that section 66(1) requires is that the question of law which is referred to the court of r decision and which the court of is decide must be the question which a was in issue before the Tribunal. Where the question itself was under issue, there is no further limitation imposed by the section that the reference should be limited to those aspects of the question which and been argued before the Tribunal. It will be an over-refinement of the position to hold that each aspect of a question is itself a distinct question for the purpose of section 66(1) of the Act. That was the view taken by this court in commissioner of Income-tax v. Ogale Glass works Ltd. and in Zoraster & Co. v. Commissioner of Income-tax and we agree with it. As the question on which the parties were at issue which was referred to the court under section 66(1) and decided by it under section 66(5), is whether the sum of Rs. 9,26,532 is liable to be included in the taxable income of the respondents, the ground on which the respondents contested their liability before the High Court was one which was within the scope of the question and the High Court rightly entertained it.
It is argued for the appellant that view would have the effect of doing away with limitations which the legislature has advisedly imposed on the right of a litigant to require references under section 66(1), as the question might be framed in such general manner as to admit of new question not argued being raised. It is no doubt true that sometimes they might take in question are framed such general terms that, constured literally, the might take in question which were never in issue. In such cases, the true scope of the reference will have to be ascertained and limited by what appears on the statement of the case. In this connection, it is necessary to emphasise that, in framing question, the Tribunal should be precise and indicate the grounds on which the question of law are raised. Where however, the question is sufficently specific, we are unable to see any ground for holding that only those contentions can be argued in support of it which had been raised before the Tribunal. In our opinion, it is competent to the court in such a case to allow a new contention to be advanced, provided it is with in the frame work of the question as referred.
In the present case, the question actually referred was whether the assessment in respect of Rs. 9,26,532 was proper. Though the point argued before the income-tax authorities was that the income was received not in the year of account but in the previous year, the question as framed is sufficient to cover the question which was actually argued before the court namely that in fact the assessment is not proper by reason of the proviso being inapplicable. The new contention does not involve reframing of the issues. On the very terms of the question as referred which are specific, the question is permissible and was open to the respondents. Indeed, the very order of reference shows that the Tribunal was conscious that this point also might bear on the controversy so that it cannot be said to be foreign to the scope of that question as framed. In the result, we are of opinion that the question of the applicability of the proviso is really implicit as was held by Chagla C.J., in the question which a was referred, and, therefore, it was one which the court had to answer.'
As pointed out by the Supreme Court, while the question itself was under issue before the Tribunal there is on further limitation imposed by the section that the reference should be limited to those aspects of the question which had been argued before the Tribunal, and it will be an over-refinement of the position to hold that each aspect of the question is itself a distinct question and where the question is sufficiently specific there is no ground for holding that only those contentions can be argued in support of it which had been raised before the Tribunal. It has been already pointed out that this question has been raised before the Tribunal though the Tribunal has stated that it was not pressed before it. Once the question had been raised there can be no question of is not having been pressed. The question having been raised, it should be assumed that question (1) referred to us is so framed as to include the question whether the sum under consideration is assessable as capital a gains.
The other decisions in commissioner of income-tax v. Arunachalam Chettiar. and Bhanji Bagawandas v. Commissioner of Income-tax only deal with different aspects of the question and we do not consider that it is necessary to discuss these decisions or refer to them at length.
Both the question referred to us are answered in favour of the assessee. In view of the fact that the assessee has failed in T.C. No. 34 of 1967, we consider that no order as to costs need be made in this case.