COMMISSIONER OF INCOME TAX, BANGALORE ETC. ETC. versus B. C. SRINIVASA SETTY, ETC. ETC.

Citation: [1981] 2 S.C.R. 938 · Decided: 19-02-1981 · Supreme Court of India · Bench: P.N. BHAGWATI · Disposal: Dismissed

Cited by 3 judgment(s) · see the full citation network in Lexace

Judgment (excerpt)

A 
:B 
938 
COMMISSIONER OF INCOME TAX, 
BANGALORE ETC. ETC. 
v. 
B. C. SRINIVASA SETTY, ETC. ETC. 
February 19, 1981 
[P. N. BHAGWATI, V. D. TuLZAPURKAR AND R. S. PATHAK, JJ.] 
Goodwill of a nett:ly conunenced business-Whether, (i) a capital asset and 
(ii) if so, an asset falling within the contemplation of section 45 of Income Tax 
Acr, 1961 giving rise to a capital gain. 
·C 
The assessee, a registered firm, manufactured and sold agarbattis. 
Clause 
(13) of the Ins1ru1ncnt of Partnership executed on 28th of July, 
1954 and 
subsequently extenda~ by another instrument dated 31st March, 1964 showed 
that the goodv;1ill of the firm had not been valued, and the valuation would be 
made on dissolntion of the partnership. The assessee firm was dissolved by a 
deed dated 31st December, 1965. At the time of dissolution the goodwill of 
the firm was valued at Rs. 1,50,000/-. A new partnership by the same name 
io 
was constituted under an instrument subsequently and it took over all the assets 
including the goodwill and liabilities of the dissolved firm. 
The Income Tax 
Offieer made an assessment on the dissolved firm for the assessment year 1966-
67 but did not include any an1ount on account of the gains arising on transfer 
of the goodwill. 'fhc Commissioner, being cf the view that 
the 
assessment 
order was prejudicial to the Revenue, decided to invoke his revisional jurisdic-
tion and setting aside the assessment order directed the Incon1e Tax Officer to 
E 
make a fresh assessment r1fter taking into account the capital gain arising 
on 
the sale of the goodwill. The Income Tax Appellate Tribunal in appeal 
accepted the contention of the assessee that the sale did not attract tax on capi ... 
ta! gains under section 45 of the Income Tax Act, 1961. The High Court o~ 
Karnataka on a reference, at the instance of the Commissioner of Income Tnix 
affirmed the Tribunal's view and held that the value of the consideration receive-
ed by the assessee for the transfer of its goodwill was not liable to capit&l gains 
f1 
tax under section 45 of the Income Tax Act. Hence the three a'Jlpeals 
as 
to 
the taxability of the transfer of the goodwill to capital gain tax. 
Dismissing the appeals, the Court 
HEID: 1. The gocxlwill generated in a newly commenced business cannot 
be described as an asset within the terms of section 45 of the Income Tax Act, 
·G 
1961 and therefore its transfer i'l not subject to Income Tax under the head 
"capit_al gains". [946 B-C] 
ll 
2.1. Goodwill denotes the benefit arising from connection and 
reputation. 
The benefit to the business varies with the nature of the business and also from 
one business to another. No business commenced for the first time possesses 
goodwill fronL the start. It is generated as the business. is carried on and may 
be augmented with the passage of time. 
A variety of elements goes 
into 
its 
making, and its composition varies in different trades and in different businesses 
in the same trade, and while one element may preponderate in one business, 
another may dominate in another business. 
And yet because of its intangible 
• 
• 
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C.I.T, V. B. C. SRINIV ASA 
939 
-natW'e, it remains insubstantial in form and nebulous in character. In a progres• 
A 
·sing business goodwill tends to show progr~ive increase. 
And in a failing 
business it may begin to wane. 
Its value may fluctuate from one moment to 
another depending on changes in the reputation of the business. 
It is affected 
by everything relating to the business, the personality and business rectitude of 
the owners, the nature and character of the business, its name and reputation, ill 
location, its impact on the contemporary inarket, the prevailing socio-economic 
ecology, intrOOuction to old customers and agreed absence of competition. Thero 
B 
can be no account in value of the factors producing it. 
It is also lillpossible to 
predicate the moment of its birth. It comes silently into the world, unhearalded 
• 
and unproclaimed and its impact may not be visibly felt for an undefined period. 
·--4 
• 
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Imperceptible at birth it exists enwrapped in a concept, growing or fluctuating 
with the numerous imponderables pouring into, and 
affecting the 
business. 
[942 F, H, 943 A, E-H, 944 Al 
Crultwell v. Lye, 1810, 17 Ves 335; Churton v. Douglas, 1859 John 
174; 
Tregu v. Hun1, 1896 A.C. 7; Commissioner of Inland Revenue v. Muller &: Co.'s 
Margarine Limited, [1901] A.C. 217. quoted with approval. 
3.

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