[2000] 242 ITR 57 (MAD.)

HIGH COURT OF MADRAS

Commissioner of Income-tax

v.

K. Raffiuddin

N.V. BALASUBRAMANIAN AND P. THANGAVEL, JJ.

T.C. NO. 1122 OF 1985

JANUARY 8, 1998

 

JUDGMENT

At the instance of the Revenue, the following question of law is referred for the opinion of this court:

"Whether, on the facts and in the circumstances of the case, the Tribunal is justified in holding that the assessee is entitled to deduction from the sale consideration received in respect of the sale of the business of the cinema house as stated above, of the cost of the goodwill paid by him at the time of its acquisition?"

The assessee was carrying on business of exhibition of cine films in a theatre known as Gowri Theatre, which was subsequently changed by the assessee as Kohinoor Theatre. The abovesaid theatre was sold for a sum of Rs. 4,80,000 to one S. Gurunathan Chettiar. The assessee claimed Rs.2,00,000 for the goodwill on the ground of acquiring such goodwill for the abovesaid amount, apart from computing the profit/loss arising in respect of the sale transaction representing the written down value of land and building, machinery and equipment, etc. The Assessing Officer accepted the computation of profit/loss made by the assessee, in which deduction of Rs.2,00,000 as cost of the goodwill was claimed under section 45 read with section 2(47) of the Income-tax Act, 1961 (hereinafter referred to as "the Act"), and the said assessment was ordered by the Assessing Officer. In view of the audit objection, the assessment was reopened and reassessment was made, thereby withdrawing the deduction originally allowed in respect of the goodwill to an extent of Rs. 2,00,000 on the ground of non-application of section 45 read with section 2(47) of the Act.

The assessee preferred an appeal before the Commissioner of Income-tax (Appeals) stating that there was a transfer within the meaning of section 2(47) of the Act with regard to the goodwill acquired by him at a cost of Rs.2,00,000, that the cost of Rs. 2,00,000 towards goodwill was extinguished in view of the transfer referred to above and, therefore, the assessee is entitled to set-off against the capital gains with regard to the loss of Rs. 2,00,000. The abovesaid contention of the assessee was accepted by the Commissioner of Income-tax (Appeals) and deduction was allowed. Aggrieved by the order of the Commissioner of Income-tax, the Revenue preferred an appeal before the Income-tax Appellate Tribunal, Bench-A, Madras.

The Income-tax Appellate Tribunal found that there was a sale of cinema theatre and buildings, including plant and machinery, furniture and fittings, etc., by the assessee, that the abovesaid sale was along with the goodwill of the theatre also, that the abovesaid sale transaction will attract not only profit under section 41(2) of the Act, but also capital gains charge, that the assessee, who had acquired the goodwill at a cost referred to above, had not received any money towards the cost of goodwill, that there was extinguishment of asset relating to the goodwill in transfer of the cinema theatre under section 2(47) of the Act, thereby attracting the provisions of section 45 of the Act, that there was a loss of capital gain to the assessee, and, therefore, the assessee is entitled to the deduction as rightly concluded by the Commissioner of Income-tax (Appeals). Aggrieved by the abovesaid order of the Income-tax Appellate Tribunal, Madras, the Revenue has sought for the abovesaid question of law for reference. The rival submissions made by the Revenue as well as the assessee was considered in the light of the materials placed before this court for consideration. The fact remains that the cinema theatre in question, in this reference, was originally owned by one Thiru K.S. Ramalingam Pillai of Melaiyur, Kaveripattinam, Sirkali Taluk, and he was running the abovesaid theatre under the name Gowri Theatre. Admittedly, the abovesaid theatre was purchased by a firm consisting of Thiru K. Raffiuddin (assessee), his wife, his father-in-law, Thiru S.A. Kader Sahib, Tmt. Jaffar Nachier, wife of Yacub of Koothanallur, and one Thiru Abdul Rahim, son of Mohd. Kassim of Kollapuram. The abovesaid Tmt. Jaffar Nachier and Thiru Abdul Rahim left the abovesaid partnership firm, while Thiru S.A. Kadar Sahib died subsequently. On the death of Thiru S.A. Kader Sahib, his share in the firm came to the wife and mother-in-law of the assessee.

It is also not in dispute that the firm referred to above had purchased Gowri Theatre on October 7, 1967, along with the furniture and fittings, etc., from Thiru K.S. Ramalingam Pillai, and, at that time, the assessee has paid Rs. 2,00,000 towards goodwill of the abovesaid theatre. After the purchase of the abovesaid theatre, the assessee was running the abovesaid theatre changing the name to Kohinoor Theatre. Admittedly, the assessee had sold the theatre running under the name and style of Kohinoor Theatre to one Thiru S. Gurunathan Chettiar of Mayuram on July 17, 1974, under two separate documents for transfer. A registered document was executed for sale of land and cinema theatre on July 17, 1974, while a sale note was executed with regard to the movable properties, like cinema equipment, projector, machinery, furniture and fittings, generator, etc.

It is equally not in dispute that the vendee of the abovesaid theatre did not want to purchase the goodwill of the abovesaid Gowri Theatre even though the land and building were purchased for a sum of Rs. 2,00,000, while, machinery, furniture, etc., were purchased for a sum of Rs.1,80,000. In view of the fact that the goodwill of the abovesaid theatre, which was purchased by the assessee for Rs. 2,00,000 from its previous owner, was not sold to the present owner, namely, Thiru S. Gurunathan Chettiar, the assessee had treated the abovesaid sum of Rs. 2,00,000 as capital loss and deducted the abovesaid amount as loss in the capital gain and profit was shown in the return submitted by the assessee for the assessment year 1975-76. The fact remains that the abovesaid assessment made under section 143(3) read with section 147 of the Act, for the abovesaid assessment year, was accepted by the Assessing Officer on September 23, 1977, but, due to the audit objection raised subsequently, the abovesaid assessment was reopened by the Assessing Officer and disallowed the deduction already ordered for Rs. 2,00,000 on September 23, 1977.

Learned counsel for the Revenue would contend that since the goodwill was kept out of the sale transaction thereby retaining the same by the assessee, the extinguishment of such right is an extinguishment as a result of the unilateral act of the assessee and since the abovesaid transaction was not involved with more than one party, apart from non-passing of consideration therefor, the assessee is not entitled to claim deduction for goodwill under section 2(47) of the Act read with section 45 of the Act.

Though learned counsel for the assessee contended before the authorities below that there was extinguishment of rights in the asset of goodwill in the sale transaction relating to Gowri Theatre, the abovesaid contention was not pursued before this court. But learned counsel for the assessee would contend that the right of goodwill in the abovesaid theatre is inseparable from the assets of Gowri Theatre and on sale of the abovesaid theatre, the goodwill will also accompany the property, and, therefore, it cannot be said that the goodwill was retained by the assessee after selling the Gowri Theatre to Thiru S. Gurunathan Chettiar.

It is relevant to point out that the entire business of the cinema theatre, along with the land and building, cinema equipment, the projector, the machinery, furniture and fittings, generator, etc., were transferred as contemplated under section 2(47) of the Act. It is also relevant to point out that the goodwill of the theatre was purchased by the assessee from Thiru K.S. Ramalingam Pillai on October 7, 1967, for Rs. 2,00,000, and the goodwill was retained by him till the theatre was sold to Thiru S. Gurunathan Chettiar on July 17, 1974. It is, therefore, evident that the goodwill of the abovesaid theatre had been in existence long since in the hands of the assessee up to the transfer of the abovesaid theatre on July 17, 1974, to Thiru S. Gurunathan Chettiar.

The decision reported in CIT v. B.C. Srinivasa Setty [1981] 128 ITR 294 (SC), would disclose that goodwill generated in a newly commenced business cannot be described as an "asset" within the terms of section 45 of the Act, and the transfer of goodwill initially generated in a business does not give rise to a capital gain for the purposes of income-tax. It is also stated that goodwill denotes the benefit arising from connection and reputation. 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. Its value may fluctuate from one moment to another 1975-76. The fact remains that the abovesaid assessment made under section 143(3) read with section 147 of the Act, for the abovesaid assessment year, was accepted by the Assessing Officer on September 23, 1977, but, due to the audit objection raised subsequently, the abovesaid assessment was reopened by the Assessing Officer and disallowed the deduction already ordered for Rs. 2,00,000 on September 23, 1977. Learned counsel for the Revenue would contend that since the goodwill was kept out of the sale transaction thereby retaining the same by the assessee, the extinguishment of such right is an extinguishment as a result of the unilateral act of the assessee and since the abovesaid transaction was not involved with more than one party, apart from non-passing of consideration therefor, the assessee is not entitled to claim deduction for goodwill under section 2(47) of the Act read with section 45 of the Act. Though learned counsel for the assessee contended before the authorities below that there was extinguishment of rights in the asset of goodwill in the sale transaction relating to Gowri Theatre, the abovesaid contention was not pursued before this court. But learned counsel for the assessee would contend that the right of goodwill in the abovesaid theatre is inseparable from the assets of Gowri Theatre and on sale of the abovesaid theatre, the goodwill will also accompany the property, and, therefore, it cannot be said that the goodwill was retained by the assessee after selling the Gowri Theatre to Thiru S. Gurunathan Chettiar. It is relevant to point out that the entire business of the cinema theatre, along with the land and building, cinema equipment, the projector, the machinery, furniture and fittings, generator, etc., were transferred as contemplated under section 2(47) of the Act. It is also relevant to point out that the goodwill of the theatre was purchased by the assessee from Thiru K.S. Ramalingam Pillai on October 7, 1967, for Rs. 2,00,000, and the goodwill was retained by him till the theatre was sold to Thiru S. Gurunathan Chettiar on July 17, 1974. It is, therefore, evident that the goodwill of the abovesaid theatre had been in existence long since in the hands of the assessee up to the transfer of the abovesaid theatre on July 17, 1974, to Thiru S. Gurunathan Chettiar. The decision reported in CIT v. B.C. Srinivasa Setty [1981] 128 ITR 294 (SC), would disclose that goodwill generated in a newly commenced business cannot be described as an "asset" within the terms of section 45 of the Act, and the transfer of goodwill initially generated in a business does not give rise to a capital gain for the purposes of income-tax. It is also stated that goodwill denotes the benefit arising from connection and reputation. 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. 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, its location, its impact on the contemporary market, the prevailing socio-economic ecology, introduction to old customers and agreed absence of competition. There can be no account in value of the factors producing it. It is also impossible to predicate the moment of its birth. 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 from the start. It is generated as the business is carried on and may be augmented with the passage of time. It is also found that the charging section and the computation provisions together constitute an integrated code. When there is a case to which the computation provisions cannot apply at all, it is evident that such a case was not intended to fall within the charging section. It is further observed that all transactions encompassed by section 45 of the Act must fall under the governance of its computation provisions. A transaction to which those provisions cannot be applied must be regarded as never intended by section 45 of the Act to be the subject of the charge. What is contemplated by section 48(ii) of the Act is an asset in the acquisition of which it is possible to envisage a cost; it must be an asset which possesses the inherent quality of being available on the expenditure of money to a person seeking to acquire it. None of the provisions pertaining to the head "Capital gains" suggests that they include an asset in the acquisition of which no cost at all can be conceived. When goodwill generated in a new business is sold and the consideration brought to tax, what is charged is the capital value of the asset and not any profit or gain. Further, the date of acquisition of the asset is a material factor in applying the computation provisions pertaining to capital gain; but in the case of goodwill generated in a new business it is not possible to determine the date when it comes into existence.

It is evident from the abovesaid decision of the apex court that it is not possible to determine the date when the goodwill comes into existence with regard to the goodwill generated in the new business, and the goodwill generated in the business augments with the passage of time. It is also evident from the decision referred to above that the goodwill relating to the business depends upon the personality and the business rectitude of the owners, nature and character of the business, its name and reputation, its location, its impact on the contemporary market, the prevailing socioeconomic ecology, introduction to old customers and agreed absence of competition. In this case, the cinema business carried on by the assessee under the name and style of Kohinoor Theatre, after the purchase of Gowri Theatre on October 7, 1967, with the goodwill for a sum of Rs. 2,00,000, had continued for many long years, and it is not a new business.

The same principle has also been laid down by the apex court with regard to goodwill in Rustom Cavasjee Cooper v. Union of India [1970] 40 Comp. Cas. 325; AIR [1970] SC 564 as follows (page 385):

"Goodwill of a business is an intangible asset: it is the whole advantage of the reputation and connections formed with the customers together with the circumstances making the connection durable. It is that component of the total value of the undertaking which is attributable to the ability of the concern to earn profits over a course of years or in excess of normal amounts because of its reputation, location and other features. Goodwill of an undertaking therefore is the value of the attraction to customers arising from the name and reputation for skill, integrity, efficient business management or efficient service".

Learned counsel for the assessee has brought to the notice of this court, the decision reported in CED v. Mrudula Nareshchandra [1986] 160 ITR 342 (SC), in support of the contention of the assessee. In that case, the assessee was a partner in a firm having a 28 per cent. share. As per one of the clauses of the partnership deed, the firm shall not stand dissolved on the death of any of the partners and the partner dying shall have no right whatever in the goodwill of the firm. It was contended by the accountable person that on the death of the deceased, the value of the deceased's share in the goodwill of the firm did not pass and was not liable to estate duty, according to the clause, but such contention was not accepted by the Assistant Controller of Estate Duty, and, therefore, he levied the estate duty on the share of the deceased in the goodwill also. In appeal, it was decided by the Appellate Tribunal that the share of the deceased in the goodwill was liable to estate duty. On a reference to the High Court, it was held that the deceased's interest in the partnership did not include the goodwill, since the abovesaid case was not covered by either section 5 or section 7 of the Estate Duty Act, 1953. On appeal to the apex court, it was held as follows (headnote):

"(i) that the goodwill of the firm was an asset in which the deceased had a share and on his death his interest therein did not vanish or get extinguished but passed to the surviving partners;

(ii) that section 5 was applicable in the sense that the interest of the deceased in the goodwill passed on his death and, therefore, section 40 would not apply to its valuation;

(iii) that the value of the entirety of the interest of the deceased partner in the assets of the firm, which necessarily included goodwill, had to be determined under section 36 read with rule 7(c) of the Estate Duty Rules, 1953.

A partner has a marketable interest in all the assets of the firm including the goodwill even during the subsistence of the partnership. This interest is "property" within the meaning of section 2(15) of the Estate Duty Act, 1953".

It is evident from the principle laid down by the apex court that even if there is any clause in the agreement of partnership deed, with regard to non-transfer of right in the goodwill of a business, it will automatically get transferred in the event of the death of a partner. The abovesaid decision lends support to the contention of learned counsel for the assessee that the goodwill is inseparable from the business and on transfer of the abovesaid business, the goodwill also accompany it to the purchaser. In view of the abovesaid decision of the apex court, the contention raised on behalf of the Revenue that the goodwill was not sold, but was retained by the assessee at the time of sale of the theatre to Thiru S. Gurunathan Chettiar on July 17, 1974, and, therefore, it cannot be said that there was loss to an extent of Rs. 2,00,000 in the goodwill, for which, the assessee had paid Rs.2,00,000 at the time of the purchase of the said theatre on October 7, 1967, from Thiru K.S. Ramalingam Pillai, cannot be accepted.

It was also brought to the notice of the court about the decision reported in C. Leo Machodo v. CIT [1988] 172 ITR 744 (Mad). In that case, a ship was sunk in the high seas without any act on the part of any person and the entire ship was destroyed. A sum of Rs. 1,00,000 was paid by the insurance company to the assessee for destruction of the abovesaid property in high seas. In the abovesaid facts and circumstances of the case, it was held by the Division Bench of this High Court that the provisions of section 45 of the Act will not be attracted, that, where the moneys were paid by an insurance company consequent upon total destruction of the property and no transfer results from such destruction or extinguishment of all rights in the capital asset, the amount paid by the insurance company could not be described as a consideration as a result of the transfer of the capital asset, and that, therefore, the assessee was not liable to be assessed to capital gains in respect of the sum of Rs. 1,00,000 received from the insurance company. The principle laid down in the case cited above, has no application to the facts and circumstances of this case, and, therefore, it will not advance the case of either side in this matter.

If the facts stated supra are taken into consideration, we are of the opinion that the Tribunal has rightly come to the conclusion that the assessee is entitled to deduction from the sale consideration received in respect of the sale of the business of the cinema theatre as stated above the cost of the goodwill paid by him at the time of its acquisition. Accordingly, we answer the question of law referred to us in the affirmative and against the Revenue. In the circumstances of this case, there would be no order as to costs.