Court rules on tax treatment of goodwill sale surplus as capital gains under section 45, denies depreciation on immovable property.

The court held that the surplus realized on the sale of goodwill, which was purchased and had a determinable cost, is assessable as capital gains under section 45. Additionally, the court ruled that the assessee is not entitled to depreciation on immovable property not transferred by a registered deed of conveyance. The judgment was directed to be forwarded to the Income-tax Appellate Tribunal, Cochin Bench, with each party bearing their respective costs.

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Issues Involved:
1. Whether the surplus realized on the sale of goodwill is to be assessed as capital gains under section 45.
2. Whether the assessee is entitled to depreciation on immovable property not transferred by a registered deed of conveyance.

Detailed Analysis:

Issue 1: Surplus Realized on the Sale of Goodwill
The primary question addressed was whether the surplus realized from the sale of goodwill of the Changanacherry business, acquired at a cost, should be assessed as capital gains under section 45 of the Income-tax Act, 1961. The Tribunal had determined that the goodwill, purchased by the assessee in 1971 for a known cost, was sold for Rs. 1,00,000. The Income-tax Officer initially found that the goodwill was sold for Rs. 2,00,000, but this was contested by the assessee, stating that Rs. 2,00,000 included goodwill for both Changanacherry and Ernakulam businesses.

The Tribunal's decision was based on the distinction made by the Supreme Court in CIT v. B. C. Srinivasa Setty [1981] 128 ITR 294, which dealt with self-generated goodwill. The Tribunal held that the goodwill in question was not self-generated but purchased, and its cost was recorded in the books of account. Therefore, the computation of capital gains was feasible, and the difference between the sale price and the cost price represented capital gains chargeable under section 45. The court affirmed this view, stating that the essential components for computing capital gains, such as cost and date of acquisition, were available, making the gains determinable and taxable.

Issue 2: Depreciation on Immovable Property
The second issue was whether the assessee was entitled to depreciation on immovable property not transferred by a registered deed of conveyance. The court referred to the Full Bench decision in Parthas Trust v. CIT [1988] 169 ITR 334, which held that the assessee is not entitled to depreciation on such property. The court answered this question in the affirmative, against the assessee and in favor of the Revenue.

Conclusion
The court concluded that:
1. The surplus realized on the sale of goodwill, which was purchased and had a determinable cost, is assessable as capital gains under section 45.
2. The assessee is not entitled to depreciation on immovable property not transferred by a registered deed of conveyance.

The judgment was directed to be forwarded to the Income-tax Appellate Tribunal, Cochin Bench, and each party was directed to bear their respective costs.

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