1975 (7) TMI 20 - HC - Income Tax

Goodwill as Fixed Asset: High Court Rules on Dividend Distribution under Income-tax Act

Commissioner Of Income-Tax, Central, Calcutta Versus Bird And Co. Pvt. Limited

Commissioner Of Income-Tax, Central, Calcutta Versus Bird And Co. Pvt. Limited - [1977] 108 ITR 253 Issues Involved:1. Whether the goodwill of the assessee-company constituted a 'fixed asset' under section 23A(1) of the Indian Income-tax Act, 1922.2. Whether the amounts written off from the goodwill account constituted 'reserves representing accumulations of past profits' under section 23A(1) of the Indian Income-tax Act, 1922.3. Whether the write-off of goodwill was a legitimate business expenditure.4. Whether a larger dividend could reasonably have been distributed.Issue-wise Detailed Analysis:1. Goodwill as a Fixed Asset:The primary issue was whether the goodwill of the assessee-company constituted a 'fixed asset' within the meaning of section 23A(1) and Explanation 2(iv)(a) of the Indian Income-tax Act, 1922. The Tribunal upheld that goodwill was a fixed asset, referencing the statutory form of the balance-sheet under the Companies Act, 1956, which recognizes goodwill as a fixed asset. The Tribunal's decision was supported by principles from Buckley on the Companies Acts and Halsbury's Laws of England. The Tribunal also considered the Supreme Court's observations in R. C. Cooper v. Union of India and Devidas Vithaldas & Co. v. Commissioner of Income-tax, which acknowledged goodwill as a capital asset. The High Court agreed with the Tribunal, affirming that goodwill constituted a fixed asset.2. Amounts Written Off from Goodwill Account:The second issue was whether the amounts written off from the goodwill account by debiting the capital reserve account and profit and loss account constituted 'reserves representing accumulations of past profits.' The Tribunal, following the Bombay High Court's decision in Bombay Cycle & Motor Agency Ltd. v. Commissioner of Income-tax, held that the amounts written off did not form part of the accumulated profits and reserves. The High Court concurred, noting that the write-off was justified and not open to challenge. The Tribunal's decision was also supported by the Calcutta High Court's ruling in Commissioner of Income-tax v. Lothian Jute Mills Co. Ltd., which clarified that depreciation should not be included in reserves.3. Write-off of Goodwill as Legitimate Business Expenditure:The third issue was whether the write-off of goodwill was a legitimate business expenditure. The Tribunal found that the write-off was not a legitimate business expenditure, enhancing the commercial profit by Rs. 5 lakhs for each assessment year. However, the Tribunal accepted the accounts of the assessee, recognizing the depreciation of goodwill as a capital loss. The High Court agreed with the Tribunal's finding that the goodwill had depreciated at the rates claimed by the assessee and that this depreciation should be considered either as a business expenditure or as a capital loss.4. Reasonableness of Dividend Distribution:The fourth issue was whether a larger dividend could reasonably have been distributed. The Tribunal initially held that a larger dividend could have been distributed based on commercial profits alone. However, the High Court, referencing the Supreme Court's decision in Commissioner of Income-tax v. Gangadhar Banerjee and Co. (P.) Ltd., held that capital losses should also be considered in determining the reasonableness of dividend distribution. The High Court concluded that the Tribunal erred by ignoring the capital loss incurred and held that a larger dividend could not reasonably have been distributed.Judgment:The High Court answered the questions as follows:- Question 1 for the assessment year 1955-56: Affirmative and in favor of the assessee.- Question 2 for the assessment year 1955-56: Negative and in favor of the assessee.- Questions 1 and 2 for the assessment years 1958-59, 1959-60, and 1960-61: Answered identically to the above.- Question 3 for the assessment years 1958-59, 1959-60, and 1960-61: Declined to answer.- Reframed Question 4 for the assessment years 1958-59, 1959-60, and 1960-61: Negative and in favor of the assessee, considering both commercial profits and capital loss.The High Court concluded with no order as to costs.