Income Tax Appellate Tribunal - Madras
Essa Abdul Careem vs Wealth-Tax Officer on 26 April, 1991
Equivalent citations: [1991]38ITD263(MAD)
ORDER
S. Kannan, Accountant Member
1. This appeal by the assessee is directed against the order dated 20-11-1989 of the Dy. Commissioner (Appeals), B-Range, Madurai. The assessee is an individual and the assessment year 1979-80, the relevant valuation date being 31-3-1979. The assessee was one of the two partners of a firm doing business in the name of 'Femina'. The assessee had half share in the profit/loss of the said firm which was constituted under a deed of partnership dated 18-7-1970. Subsequently, on 17-7-1978, the two partners added a codicil to the said partnership deed. The said codicil, which was operative from 17-7-1978, valued the goodwill of the firm at Rs. 5 lakhs.
2. One other material fact may be noticed and that is that, through a dissolution deed dated 7-6-1979, the partnership was dissolved with effect from 2-6-1979. It was also agreed that Habib Abdul Careem, the other partner, would take over the business of 'Femina' as a going concern with effect from the said date. For purposes of making the accounts in the context of dissolution of the firm, it was inter alia agreed that the value of the goodwill of the firm would be Rs. 5 lakhs as provided in the aforesaid codicil dated 17-7-1978.
3. The original wealth-tax assessment of the assessee was completed under Section 16(1) of the Wealth-tax Act, 1957 on a total wealth of Rs. 1,11,100. Subsequently, it was found that by the codicil dated 17-7-1978, the goodwill of the firm had been valued at Rs. 5 lakhs and that for purposes of making accounts in the context of the dissolution of the firm with effect from 2-6-1979, the said figure of Rs. 5 lakhs was adopted. The assessing officer, therefore, concluded that a sum of Rs. 2,50,000, being the assessee's share in the goodwill of the firm, escaped assessment. He, therefore, initiated reassessment proceedings and brought to tax the said sum of Rs. 2,50,000. In this regard, he went solely by the provisions of the codicil dated 17-7-1978 and the dissolution deed dated 7-6-1979.
4. The Dy. Commissioner (Appeals) declined to interfere in the matter.
5. Shri T.N. Seetharaman, the learned counsel for the assessee, attacked the impugned orders of the lower authorities from two angles. On the jurisdictional aspect, he vehemently contended that this was a case of mere change of opinion and hence the reassessment proceedings are bad in law.
6. On the merits of the case, he contended that the lower authorities were not justified in bringing to charge the said sum of Rs. 2,50,000. He drew our particular attention to the fact that Rule 2C of the Wealth-tax Rules, 1957, which deals with adjustments to be made in the value of assets not disclosed in the balance-sheet, talks of only "goodwill purchased by the assessee for a price". In this connection, he also drew our attention to Circular No. 5-D(WT) of 1966 dated 18-9-1966 which makes it clear that, even prior to the introduction of Rule 2C, the Departmental instructions were to the effect that "no attempt should be made to include the value of the goodwill unless it has been actually paid for by the assessee and is also shown as an asset in the balance-sheet". These executive instructions had been incorporated in Rule 2C(b).
7. In the case before us, the firm of which the assessee was a partner did not purchase the goodwill for a price, nor did it exhibit the goodwill in its balance-sheet. In support of this contention, Shri Seetharaman drew our attention to the copies of balance-sheets as on 31-3-1978 and 31-3-1979 which were included in the paper book submitted by him.
8. According to Shri Seetharaman, the fact that by the condicil dated 17-7-1978 the partners had agreed to value the goodwill of the firm at Rs. 5 lakhs was neither here nor there. He, therefore, contended that on merits also the assessee is entitled to succeed.
9. On his part, Shri P.A. Iyengar, the learned Departmental Representative, strongly supported the impugned orders of the lower authorities. He contended that the lower authorities were justified in taking into account the fact that the partners themselves had valued the goodwill of the firm at Rs. 5 lakhs.
10. On hearing the rival submissions, we are of the opinion that the assessee is entitled to succeed. It is well-settled that both from the point of view of law (Section 14 of the Partnership Act, 1932) and of accounting principles, goodwill is a realisable business asset. This is so even if the goodwill is a self-generated asset - See Paramanandbhai Patel v. CWT. It is equally well-settled that the interest of a partner in a partnership or Association of Persons will include his share in the goodwill of the firm. Normally, therefore, while valuing the interest of a person in a partnership or Association of Persons, the value of the goodwill of the firm must be taken into account, irrespective of whether the goodwill is self-generated or was purchased for a price. However, in cases where the goodwill of the firm was not purchased, the determination of the value of the goodwill is beset with various difficulties and is by the same token litigation-prone. There could be, for example, a dispute as to whether a firm had any goodwill at all. There could also be a dispute on the other aspect, namely, how to value the goodwill. It was, therefore, that initially executive instructions were issued and advisedly in our opinion, to the effect that no attempt should be made to include the value of the goodwill unless it had been actually paid for by the assessee and has also been shown as an asset of the business in the balance-sheet. And, as pointed out earlier, these executive instructions were subsequently incorporated in Rule 2C(b) of the Wealth-tax Rules, 1957.
11. The foregoing analysis will show that unless the goodwill in question was purchased for a price, there is no question of taking it into account for purposes of computing the value of the partner's interest in the firm. It should, therefore, follow that neither the codicil dated 17-7-1978 nor the deed of dissolution dated 7-6-1979 is conclusive of the matter. We have to be guided solely by the state of affairs as on 31-3-1979 and on that date the firm in which the assessee was a partner had not purchased any goodwill for a price. Therefore, there is no question of bringing to charge any amount in the hands of the assessee as and by way of his share of goodwill of the firm.
12. In the facts and circumstances of the case, therefore, we hold that the assessing officer, bound as he is by the instructions issued by the Board, could not have entertained a belief to the effect that there was escapement of net wealth in this case. On merits also, the assessing officer was not justified in bringing to charge the impugned sum of Rs. 2,50,000. We, therefore, delete the impugned addition of Rs. 2,50,000.
13. At this stage, we may point out that, excluding cases where the recourse taken by the assessing officer to reassessment provisions of the Act is held to be bad in law, the typology of cases in which reassessment proceedings have been initiated is broadly as follows :
The first category comprises cases where after validly taking recourse to reassessment provisions of the Act, the assessing officer drops the assessment proceedings because, on detailed examination, he finds that there is no escapement of income/net wealth.
The second category comprises cases where the reassessment proceedings are validly initiated, but on merits the reassessment as such is found to be unsustainable.
In the third category falls cases where on merits also the reassessment is found to be unexceptionable.
The fourth category takes within its fold cases where a decision on the merits of the case is also a decision on the validity of the reassessment proceedings initiated.
The case before us falls in the said last category. Here, the instructions issued by the Board are clear, namely, that no attempt should be made to include the value of the goodwill, unless it has been actually paid for by the assessee and is also shown as an asset in the balance-sheet. In the case under consideration, goodwill not having been purchased by the firm for a price, the assessing officer was in terms barred by the executive instructions from attempting to value the goodwill of the firm. This very bar simultaneously denies him access to Section 17 of the Wealth-tax Act, 1957.
14. Before taking leave of this case, we may point out that in the hands of Habib Abdul Careem, the other partner, who, on the dissolution of the firm, took over the business of 'Femina' as a going concern and who in that connection paid the assessee a sum of Rs. 2,50,000 towards the assessee's share of the goodwill of the firm, the sum so paid will be exigible to tax by virtue of the clear provisions of Rule 2C(b) of the Wealth-tax Rules, 1957.
15. In the result, the assessee's appeal is allowed.