Goodwill entered as a mere book adjustment cannot be included in a partner's net wealth valuation

Goodwill entered only as a book adjustment, without any real asset or actual payment for goodwill, was treated as a fictitious asset for valuing a partner's interest in a firm. Under the valuation rule, amounts shown in the balance-sheet that do not represent the value of any asset are excluded from net wealth computation. The departmental circular also supported exclusion unless goodwill had actually been paid for. On that basis, the addition was not justified and the deletion by the first appellate authority was sustained in favour of the assessee.

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Issues: Whether the amount credited as goodwill in the firm's books could be included in the assessee-partner's net wealth, or whether it was to be excluded as a fictitious asset under the valuation rule governing a partner's interest in a firm.

Analysis: The entry was only a book adjustment and did not bring into existence any real asset of true value. The amount was shown to improve the apparent picture of the firm's business and did not represent goodwill actually paid for. Under rule 2D(d), amounts shown in the balance-sheet which do not represent the value of any asset are not to be taken into account while valuing a partner's interest in the firm. The departmental circular also indicated that goodwill should not be included unless it is actually paid for by the assessee.

Conclusion: The addition of Rs. 10 lakhs was not justified and the deletion made by the first appellate authority was ; the issue was decided in favour of the assessee.

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