1980 (8) TMI 46 - HC - Income Tax

Court rules on tax liability for capital gains, stock sale, and goodwill transfer.

The court ruled in favor of the revenue regarding the liability of the assessee to pay tax on capital gains and profits from the sale of machineries and ... Capital Gains, Income Issues Involved:1. Liability of the assessee to pay tax on capital gains and profits under Section 41(2) of the Income Tax Act on the sale of machineries and tools.2. Liability of the assessee to pay tax on Rs. 13,000 as profit on the sale of stock.3. Liability of the assessee to pay tax on Rs. 25,000 as capital gains on the transfer of goodwill.Issue-wise Detailed Analysis:1. Liability on Sale of Machineries and Tools:The Tribunal held that the machineries and tools, goodwill, and stock sold by the assessee to M/s. Acme Pencil Factory were separately valued for the purpose of sale. The Tribunal found that the sale deeds dated July 1, 1966, and December 14, 1966, recorded the terms under which these items were sold. The Tribunal concluded that the assessee was liable to pay tax on capital gains and profit under Section 41(2) of the Act on the sale of machineries and tools, as the sale was not of the business as a going concern at a slump price but of individual items at specified prices. The court agreed with the Tribunal, stating that the second document was explanatory of the first and both documents together represented one transaction. Therefore, the first question was answered in the affirmative, against the assessee and in favor of the revenue.2. Liability on Sale of Stock:The Tribunal held that Rs. 13,000 was liable to be taxed by way of profit on the sale of stock. The ITO had assessed this amount as profit on the sale of stock worth Rs. 1,26,111 sold by the assessee to M/s. Acme Pencil Factory. The court noted that the assessee had sold the stock on a separate valuation and prepared relevant bills covering these items of sale. Since the assessee did not produce relevant books of accounts, the ITO resorted to assessment under Section 144 of the Act. The court found that the assessment of profit made by the ITO was fair and reasonable. Therefore, the second question was answered in the affirmative, against the assessee and in favor of the revenue.3. Liability on Transfer of Goodwill:The Tribunal held that the assessee was liable to pay tax on Rs. 25,000 as capital gains on the transfer of goodwill, relying on the decision of this court in CIT v. Mohanbhai Pamabhai [1973] 91 ITR 393. However, the court disagreed with the Tribunal's reliance on this decision, stating that the observations in Mohanbhai Pamabhai were obiter dicta and not justified. The court noted that various High Courts had taken a contrary view, holding that the sale of goodwill, a self-created and self-generating asset with no cost of acquisition, does not attract capital gains tax under Section 45 of the Act. The court agreed with the reasoning of these High Courts and held that transfer of goodwill does not attract the provisions of Section 45 of the Act. Therefore, the third question was answered in the negative, in favor of the assessee and against the revenue.Conclusion:The court answered the first two questions in the affirmative, against the assessee and in favor of the revenue, and the third question in the negative, in favor of the assessee and against the revenue. Each party was ordered to bear its own costs.