1961 (7) TMI 75 - HC - Income Tax

High Court rules goodwill price not taxable. Bona fide transaction upheld. Assessee entitled to costs.

Das and Co. Versus Commissioner of Income-Tax

Das and Co. Versus Commissioner of Income-Tax - 1962 (45) ITR 369 Issues Involved:1. Whether the entire sum of Rs. 50,000 mentioned as the price of goodwill of Das and Company in the deed dated 22nd August 1951, or any portion thereof, is liable to be taxed by the income-tax department.2. Whether the sale of stock-in-trade to the company at cost price instead of market price was bona fide.3. Whether the valuation of goodwill at Rs. 50,000 was justified.Issue-wise Detailed Analysis:1. Taxability of the Rs. 50,000 as Goodwill:The primary question was whether the sum of Rs. 50,000 mentioned as the price of goodwill in the deed dated 22nd August 1951, or any portion thereof, is liable to be taxed by the income-tax department. The Income-tax Officer initially added Rs. 50,000 to the gross profit of the assessee, claiming it represented profits from the sale of stock-in-trade rather than the price of goodwill. The Appellate Assistant Commissioner reduced this amount to Rs. 25,000, but the Income-tax Appellate Tribunal upheld the entire addition. The High Court, however, found that there was no material to suggest that the transaction was not bona fide and held that no portion of the Rs. 50,000 was liable to be taxed as it was genuinely the price of goodwill.2. Bona Fide Nature of the Sale of Stock-in-Trade:The assessee argued that the stock-in-trade was sold to the company at cost price and not at market price, and there was no evidence to suggest the transaction was not bona fide. The Tribunal had given five reasons for its view, including the non-transfer of the business name and book debts, and the lack of special products or contacts transferred. However, the High Court found these reasons either factually incorrect or irrelevant. The Court relied on precedents like the Madras High Court decision in Sri Ramalinga Choodambikai Mills Ltd. v. Commissioner of Income-tax and the English case Craddock v. Zevo Finance Company Ltd., which emphasized that unless there was evidence of sham transactions, the contractual price should be accepted. The Court concluded that the transaction was bona fide and the price of Rs. 1,19,138 was the actual amount paid for the stock-in-trade.3. Justification of the Goodwill Valuation at Rs. 50,000:The Appellate Assistant Commissioner arbitrarily reduced the goodwill valuation to Rs. 25,000 without providing a rationale, which was upheld by the Tribunal. The High Court criticized this approach and emphasized the proper method of valuing goodwill, which involves calculating the average net annual earnings over the past three to five years and deducting a reasonable return on capital and proprietor's services. The Court noted that the assessee's total incomes for the previous years were substantial, and applying standard methods of goodwill valuation, the contractual price of Rs. 50,000 was reasonable. The Tribunal's failure to consider relevant factors and reliance on irrelevant considerations was deemed an error of law.Conclusion:The High Court held that no portion of the Rs. 50,000 mentioned as the price of goodwill was liable to be taxed by the income-tax department. The transaction between the assessee and the company was bona fide, and the valuation of goodwill at Rs. 50,000 was justified. The question of law was answered in favor of the assessee, and the assessee was entitled to costs of Rs. 250.