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Petitioner: COMMISSIONER OF INCOME-TAX, MADRAS VS Respondent: K. RATHNAM NADAR
Court Name: Madras High Court Judge(s): A. Alagiriswa mi, K. Veeraswa mi Title: COMMISSIONER OF INCOME-TAX, MADRAS vs K. RATHNAM NADAR Case No.:I. T. R. No. 20 of 1950 Cases Nos. 67 of 1965 and 34 of 1967 (References Nos.
JUDGMENT
Reported As: 1971 PTD 982 Result: order made Judgment JUDGMENT VEERASWAMI, J.---Three questions have been referred for decision under section 66(1) of the Indian Income-tax Act, 1922, two of them at the instance of the revenue, and one at the instance of the assessee. The questions referred at the instance of the revenue are: "(1) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that the sum of Rs. 65,898 should not be assessed in 1960-61 as capital gains. (2) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the assessee was entitled to the benefit of the substitution of the fair market price of the goodwill as on January 1, 1954?" And the question referred at the instance of the assessee is: "Whether there was any capital gains at all in respect of goodwill liable for assessment in relation to the facts of the case pertaining to section 12-B of the Indian Income-tax Act, 1922?" The reference at the instance of the revenue was made by the Tribunal; but the Tribunal having refused to refer the question wanted to be referred by the assessee, he applied to this Court in T. C. P. No. 56 of 1965 under section 66(2). This Court directed the Tribunal to refer to it the question already mentioned, reserv--ing however the preliminary objection raised by the revenue to the maintainability of the application and the maintainability of the reference. At that stage, the counsel for the assessee had also indicated that he would not raise any objection to the revenue raising a preliminary objection and this Court deciding the matter. Before deciding the other questions that arise in this case we shall deal with the preliminary objection to the question referred at the instance of the assessee. The facts which give rise to these questions are as follows:
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The assessee was a partner in a firm by name, Ar. A. Shenbaga Nadar and P. V. P. Valasubramania Nadar & Co., since its inception in 1943. The business of the firm was dealing in automobiles automobile spare parts and petroleum products. On December 31, 1958, a deed of dissolution of the partnership as between the assessee, called therein the retiring partner, and the other partners of the firm was executed. Under it, the assessee was paid Rs. 53,400, being his one-fifth share in the capital ; Rs.34,663, his one-fifth share of the balance in the current account ; Rs. 10,692 his one-fifth share in the reserve fund and the assessee's share of the profits from August 17, 1958 to December 31, 1958, Rs. 8,000. With these sums we are not concerned. A sum of Rs. 65,898 was payable to the assessee in three equal instalments on August 20, 1959, August 20, 1960 and August 20, 1961, without interest towards the assessee's share of the goodwill of the firm. The assessee credited the whole of this sum on January 1, 1959, in his books in an account called "advance capital" and debited an equal amount to the account of the firm from which he had retired. He started his own business from January 1, 1959. He closed his accounts on 16th August 1959. He maintained accounts for his business on the mercantile basis. He filed a declaration before the Income-- tax Officer that cash basis was the method of accounting adopted in respect of the goodwill amount. He filed a return in which he showed the sum of Rs. 65,898 with the note : "Receivable from Ar. A. Shenbaga Nadar and P. V. P. Valasubramania Nadar & Co. Without interest in three yearly instalments starting from August 20, 1959. As the instalment does not fall in the year of account it is not included". He contended that that sum could not be included in the assessment for 1960-61, as the amount was payable to the assessee in three instalments commencing from August 20, 1959. The Income-tax Officer took the view that under section 12-B of the Act profits and gains arising under the head "Capital gains" should be deemed to be the income of the previous year in which the sale, exchange or transfer was effected, and that the payment in instalments was not a relevant considera--petition. The Appellate Assistant Commissioner to whom the assessee appealed held that, when the assessee relinquished his capital asset on December 31, 1958, capital gains arose for being taxed in the relevant accounting year. He also held that the goodwill of the firm in which the assessee was a partner was never ascertained on any prior occasion and, therefore, it had no value either before or after January 1, 1954. In the result, he dismissed the appeal. Before the Tribunal, the assessee contended that there was an extinguishment of the right of the assessee in the firm of which he was a partner, and, therefore, no capital gains tax was exigible. He contended that the amount representing the goodwill was to be paid in three equal instalments without interest, and, therefore, the right to receive each instalment arose on the 20th of August of the subsequent year. He urged that the accounting year in the present assessment ended on August 16, 1959, but that the first instalment of the goodwill was payable only on August 20, 1959, and so on for subsequent years and even if the whole sum was liable to tax, the value of the asset as on January 1, 1954, should be taken into consideration before fixing the quantum. The contention of the revenue, on the other hand, was that the goodwill of the firm had been ascertained on December 31, 1958, and the assessee's share thereof quantified and that the capital gains, therefore, arose on that date. It was also contended that the fact that the payment had been postponed would not make any difference and that the profit arose on December 31, 1958, and was therefore, liable to be taxed in the assessment year 1960-61. To the contention of the assessee that January 1, 1954, should be taken to be the date on which the value of the goodwill should be taken, the reply was that there was no valuation on that date and so the assessee was not entitled to it. The Tribunal held that the right to receive the amounts arose only on the three dates referred to earlier and only a sum of Rs. 21,966 can be taxed in the current assessment year, and that the assessee was entitled to adopt the fair market value of the goodwill as on January 1, 1954. As regards the contention that the income in question was not taxable as capital gains at all, the Tribunal mentioned as follows:-
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"We are not aware how capital gains can arise when the assessee himself built the goodwill or, rather to put it in other words, the goodwill grew with the assessee's carrying on of the business. Further, no asset had been acquired, sold or relinquished, so as to invite the application of section 12-B. But, as the learned counsel for the assessee did not press this point very much, we are not travelling further on that road." During the course of the hearing in T. C. P. No. 56 of 1965, on behalf of the assessee, it was argued that the point was pressed but how far it was pressed was only a question of degree and, therefore, it cannot be said that the point was never raised before the Tribunal and, therefore, no reference in regard to it is competent. This would become relevant later when we discuss the question as to whether the income in question can be taxed at all as capital gains. We shall now deal with the question whether the preliminary objection on behalf of the revenue to the reference directed by this Court at the instance of the assessee can be upheld. We are of opinion that it ought to be. Under section 66 of the Act, either the assessee or the Commissioner may, by application in the prescribed form, require the Tribunal to refer any question of law arising out of an order under section 33(4) and the Appellate Tribunal shall draw up a statement of the case and refer it to the High Court. But, if on any application being made under subsection (1) of section 66, the Appellate Tribunal refuses to state the case on the ground that no question of law arises, the assessee or the Commissioner, as the case may be, may apply to the High Court, and the High Court may, if it is not satisfied with the correctness of the decision of the Tribunal, require it to state a case and refer it and, on such requisition, the Appellate Tribunal shall state the case and refer it accordingly. It is under this provision that the assessee had applied to this Court in T. C. P. No. 56 of 1965. The right of the assessee-we are not concerned in this case with the right of the Commissioner-under this subsection arises only when he is served with a notice of refusal under this subsection, and such a notice of refusal can arise only on an application being made under subsection (1) of that section. Under subsection (1), as already noticed, the assessee in this case should have applied in the prescribed form, accompanied by a fee of Rs. 100 and required the Appellate Tribunal to refer to the High Court any question of law. The assessee in this case did not apply under section 66(1) to the Tribunal. The application was not in the prescribed form, nor was it accompanied by the fee of Rs. 100. The assessee required a question of law to be referred only in his counter statement to the application made by the Commissioner. The requirement of an application under section 66(1) by him before the assessee can apply under section 66(2) is not a mere technical formality. The importance of an application in the prescribed form within the prescribed period accompanied by the prescribed fee is to ensure that no party should be given an opportunity to raise any question as and when it pleases and on any occasion as it pleases but that a question can be raised only when certain conditions are satisfied. Apparently, when the order under section 33(4) was served on the assessee, the assessee did not consider that any question of law, which had to be referred to the High Court, arose. We may in this connection refer to the decision in Commis--sioner of Income-tax v. Arunachalam Chettiar ((1953) 23 I T R 180). In that case the Supreme Court considered the question regarding the jurisdic--petition given to the High Court under section 66. Their Lordships held that that jurisdiction is conditional on an application under subsection (1) being refused by the Appellate Tribunal. The further question that arose in that case was that, if an application under subsection (1) was not well founded in that there was no order which could be properly said to be an order under subsection (4) of section 33, then the refusal of the Appellate Tribunal to state a case on such a misconceived applica--petition on the ground that no question of law arises will not authorise the High Court on an application under subsection (2) of section 66 to direct the Tribunal to state a case. Though it may be said that the observation in that case that the jurisdiction given to the High Court under subsection (2) of section 66 is condi--tional on an application under subsection (1) being refused
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by the Appellate Tribunal, it is not really so. Though the question arose only incidentally and the main question there was whether there could be an application under section 66 (1) without there being an order under section 33(4), the proposition of law laid down by the Supreme Court that the jurisdiction given to the High Court under section 66(2) is conditional on an application under section 66(l) being refused by the Appellate Tribunal, still holds good. If even an application under section 65(1) cannot clothe this Court with jurisdiction under section 66(2) if such an application is not well-founded, it follows that the total absence of an application under section 66(1) is a complete bar to an application under section 66(2). Therefore, in this case, as there was no application by the assessee under section 66(l) and it was not refused by the Appellate Tribunal, this Court had no jurisdiction to direct the Tribunal to state a case. Nor are we able to accept the contention on behalf of the assessee that the words "as the case may be" found in subsection (2) can lead to the inference that, where an application has been made by either the assessee or the Commissioner, it is open to a party other than the one which has made the application under section 66'1) to apply to the High Court under sub--section (2) of section 66. Subsection (2) only means that, where the assessee had made the application and his application has been refused, he can apply do the High Court and the Commissioner can apply to the High Court if he has made an application under section 66(1) and it has been refused. The assessee cannot make an application to the High Court under section 66(2) by making in the course of an application made by the Commissioner under section 66(1) a request to refer a question he wants to be referred; nor can the Commissioner file an application under section 66(2) as arising out of an application by the assessee under section 66(1). Reliance was, however, placed on behalf of the assessee on rules 40 and 41 of the Appellate Tribunal Rules, 1946. Rules 40 and 41 are as follows:- "40. On receipt of the notice of the date of hearing of the application, a respondent shall, at least 7 days before the date of hearing, submit a reply in writing to the application. 41. The reply to the application shall specifically admit or deny whether the question of law formulated by the applicant arises out of the order under subsection (4) of section 33. If the question formulated by the applicant is defective, the reply shall state in what particular the question is defective and what is the exact question of law which arises out of the said order. The reply shall be accompanied by two copies thereof, a list of documents (the particulars of which shall be stated) which in the opinion of the respondent should form part of the case and a translation in English of any such document, where necessary." The right of the assessee in an application filed by the, Commissioner was either to admit or deny whether the question of law formulated by the Commissioner arose out of the order under subsection (4) of section 33. If the question formulated was defective, it was open to the assessee to state in what particular the question was defective and what is the exact ques--petition of law which arises out of the said order. The suggestion of the assessee in this case was not that the question formulated by the Commissioner was defective ; nor did he state in what particular the question was defective and what was the exact question of law that arose out of the order. He suggested a completely different question altogether. He questioned the basic assumption in the question formulated by the Commis--sioner. Apart from this consideration, we cannot agree that the scope of section 66 should be decided by a reference to the rules which have been made under the Act. These rules were made by the Appellate Tribunal under subsection (8) of section 5-A, which reads as follows:- "Subject to the provisions of this Act, the Appellate Tribunal shall have power to regulate its own procedure, and the procedure of Benches of the Tribunal in all matters arising out of the discharge of its functions, including the places at which the Benches shall hold their sittings."
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The right of the Appellate Tribunal to regulate its own procedure cannot confer on it the power to frame a rule conferring a substantive right not contemplated by or conferred by section 66. Naturally, the same considerations would apply if in an application made by the assessee under section 66(1) the Commissioner sought to raise a new question for being referred to the High Court, without himself having made an apple--cation under section 66(t) and such application having been refused. Reliance was, however, placed on behalf of the assessee on the decision of the Bombay High Court in Girdhardas & Co. Ltd. v. Commissioner of Income-tax ((1957) 31 I T R 82), where it was held that, where a party which has lost the case before the Tribunal applies for a reference and a reference is determined upon, the party which has won may apply for reference of other questions of law which arise from the order of the Tribunal. The question is discussed as follows:- "Another question has been submitted to us by the Tribunal which was raised by the Commissioner, and Mr. Palkhivala has a preliminary objection to take to the raising of this question. His contention is that the application for a reference was made by the assessee and it was on that application that a question of law was submitted to us. As the Commissioner had made no application for reference, it was not open to the Commis--sioner on his application to ask for a reference of a question of law which, according to him, arose from the order of the Tribunal. Now, this point was considered by us in Commissioner of Income-tax v. Banthia Bank Ltd. Income-tax Reference No. 20 of 1950, decided on 10-10-1950 and we said there; 'Whoever may be the party who asks for a reference, once a reference is determined upon, all questions of law which arise out of the order of the Tribunal can be referred to the High Court for its determination. Questions may be suggested either by the party which wants a reference or by the party which is content with the decision of the Tribunal. Once the decision of the Tribunal is assailed and is to come before the High Court, there is no reason why the party that loses should be given the sole right of suggesting questions of law that arise from the order of the Tribunal. It is equally open to the winning party to point out to the Tribunal that the other questions of la vv arise from the order made by the Tribunal which may well be considered by the High Court. It is obvious that there may be cases where a winning party would be seriously prejudiced if it was precluded from raising a question of law merely because it had not made an application for a reference and the reference was asked for at the instance of the losing party. The winning party can never apply for a reference. But it may happen that if the Court takes a particular view on the reference asked for by the losing party, certain other questions of law may arise which may have to be decided in the interest of the winning party. Therefore, it would not be proper to shut out a party before the Tribunal from raising a question of law which clearly arises from the order of the Tribunal, merely because it so happens that it has not made an application for a reference. In this particular case, undoubtedly, the Commissioner could have made an application for a reference, but there may be cases, as we have just pointed out, where the Commissioner could not have made an applica--petition for a reference because he had won before the Tribunal. We therefore overrule the preliminary objection taken by Mr. Palkhivala." The Court relied upon its own earlier decision which is referred to therein. The Bench does not consider the actual wording of section 66, nor do they refer to it as supporting the view which they have taken. The Gujarat High Court has taken a similar view in Sm. D. R. Amin v. Commissioner of Income-tax ((1968) 70 I T R 194). The only reason which that Court gave for following the decision of the Bombay High Court was that they were bound by the decision of the Bombay High Court which was delivered prior to the bifurcation of the State of Bombay in 1960 and, therefore, they followed the Bombay High Court. The Madhya Pradesh High Court in Commis--sioner of Income-tax v. Jiwanji Rao Sugar Co. Ltd. ((1969) 71 I T R 319 (Appendix)) referred to the decision of the Bombay High Court
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and it was unable to agree with that High Court. And it held that a question cannot be referred to the High Court without an application under section 66(1) duly made by the party which wanted the reference to be made. This decision is also referred to by the Gujarat High Court. Naturally, being bound by the decision of the Bombay High Court, it had no occasion to consider which of the two views was preferable. With respect, we find ourselves unable to agree with the view taken by the Bombay High Court and followed by the Gujarat High Court. The view taken by the Madhya Pradesh High Court commends itself to us and we hold that, where either the Commissioner or the assessee has made an application under section 66(1) for a reference to the High Court, it is not open to the other party in reply to the application filed by the opposite-party to ask for reference of a question which it wants to be referred. The only way by which a party can ask for a reference of any question to the High Court is by filing an application under section 66(1) and, if that is refused, to apply to the High Court under section 66(2). We may also mention that the Rajasthan High Court in Educational and Civil List Reserve Fund No. I v. Commis--sioner of Income-tax ((1964) 51 I T R 112) has followed the Bombay High Court on this point without any discussion based on the wording of the section beyond quoting the words of the learned Judges of the Bombay High Court. It follows, therefore, that the preliminary objection raised by the revenue to the question referred by the Tribunal as directed by this Court has to be sustained. We now come to the question as to whether capital gains can be assessed on the transfer of a goodwill. Before doing so we may refer to the argument advanced on behalf of the assessee that there was no transfer of goodwill at ail but only an extinguishment and that, in any case, the document dated December 31, 1958, did not have the effect of transferring the assessee's share in the goodwill but that it was expected to be done in the future. This argument was based in particular on paragraph 6 of that document which is as follows:-- "The retiring partner shall sign and execute such instruments, deeds and documents and do such things as the continuing partners reasonably require for giving effect to the provisions thereof. The retiring partner shall execute a separate document releasing in favour of the continuing partners releasing, extinguishing, abandoning and otherwise cancelling his respective rights, claims, demands and interest in any manner and to any extent in respect of the business, properties, capital, stock-in-- trade, assets, goodwill and all effects of the partnership." The argument was that till the retiring partner signed and executed such instruments and documents as the continuing partners require for giving effect to the provisions of the deed of dissolution of partnership and till the retiring partner has also executed a separate document, releasing in favour of the continuing partners releasing, extinguishing, abandoning and otherwise cancelling his respective rights, claims and demands, there was no actual transfer. We are unable to accept this contention. Paragraph 1 of that document clearly says that the partnership was dissolved from December 31, 1958, and that the continuing partners shall be jointly and severally liable to the retiring partner for the payments mentioned in paragraph 2 and that the retiring partner shall accept the payments in full discharge of his rights on retirement in the partnership. Therefore, the assessee had released all his rights and the effect of the document taken as a whole is to transfer all his rights in the partnership firm to the continuing partners. What remained was only an obligation arising out of the document on the part of the continuing partners to pay the assessee what they had undertaken to pay under that document. The document seems to have been copied from some standard form ; paragraph 6 is merely a surplusage. We are not persuaded that the decision in P.I Chowdhury v. Commissioner of Income-tax ((1962) 46 I T R 1) really helps the assessee in this case. There it was only held that delivery of possession, pursuant to the agreement for sale before the actual conveyance, did not transfer title to the purchaser, and that, on a true construction of the agreement in that case, the property was not intended to pass until the full consideration was paid. In the present case we are satisfied that, on a
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true construction of the document, the assessee's title to his share in the partnership as well as the good--will passed on the date of the document, that is, December 31, 1958, itself. We, therefore, start with the fact that by the document dated December 31, 1958, the assessee transferred all his rights in the firm of which he was a partner and…
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