COMMISSIONER OF INCOME TAX vs RAJANI MOTORS.

By the Court - A reference u/s. 256(1) of the IT Act, 1961 (hereinafter referred to as the Act) has been made and a statement of the case has been submitted by the ITAT, Patna Bench, B Patna by referring the following question to be answered by this court :

"Whether, on the facts and in the circumstances of this case, the Tribunal were correct in law in holding that the consideration of goodwill amounting to Rs. 80,000 received from the vendee was not assessable to capital gain u/s. 45 of the IT Act, 1961 ?"

The relevant short facts can be narrated from the statement of the case itself. The order under reference relate to the asst. yr. 1964-65. The assessee firm transferred its business to a private limited company Rajani Motors Private Ltd. A sum of Rs. 80,000 was paid as the price of the goodwill to the assessee by the said company. The ITO took the entire price of goodwill to the company as capital gain arising out of the transfer of goodwill to the company and include it in the total income of the assessee u/s. 45 of the Act. A copy of the order of the ITO has been marked Annexure A to the Statement of the Case.

In appeal the AAC deleted the entire addition on the ground that goodwill did not appear as an asset in the balance sheet of the assessee. A copy of the order of the AAC has been marked Annexure B to the Statement of the case.

On a further appeal to the Tribunal the Tribunal upheld the finding of the AAC that the value of the goodwill in the instant case was not tenable.

The question of law referred for the opinion of this court is now fully covered by a decision of the Supreme Court in the case of Commissioner of Income Tax, Bangalore Vs. B.C. Srinivasa Setty, wherein it has been laid down that the goodwill generated in a newly commenced business cannot be described as an "asset" within the terms of s. 45 of the Act and the transfer of goodwill initially generated in a business does not give rise to a capital gain for the purpose of Income Tax.

We, accordingly, hold that on the facts and in the circumstances of the case, the Tribunal was quite justified in law in holding that the consideration of goodwill amounting to Rs. 80,000 was not capital gain under the Act. The question is thus answered against the revenue and in favour of the assessee. In the circumstances of the case, there will be no order as to costs.