Remembering the old days - 32 years back - My Article on 'Goodwill: Tax Treatment' which was published in 1984 in Taxmann. Editorial Comments: Taxation of goodwill in cases involving its transfer has often presented innumerable problems culminating in the Supreme Court decision in the case of B.C. Srinivasa Setty holding that goodwill generated in a newly commenced business is not subject to capital gains tax. The author of this article first explains the meaning and nature of goodwill and thereafter discusses the debatable question as to whether goodwill can be regarded as a capital asset. He also goes into the question as to whether and when goodwill can be regarded as having a cost of acquisition. A typical case discussed by the author is of payment for goodwill in instalments acquired by a chartered accountant in which case the question arose whether the payments so made were deductible as business-expenditure. Thus, in this article, nearly all controversial aspects of tax treatment of goodwill have been dwelt on with reference to the relevant case law on the subject - Editor

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[1984]16 TAXMANN 41 (ART)
RAJEEV BABEL
Goodwill
Tax Treatment
Taxation of goodwill in cases involving its transfer has often presented innumerable
problems culminating in the Supreme Court decision in the case of B.C. Srinivasa Setty
holding that goodwill generated in a newly commenced business is not subject to capital
gains tax. The author of this article first explains the meaning and nature of goodwill and
thereafter discusses the debatable question as to whether goodwill can be regarded as a
capital asset. He also goes into the question as to whether and when goodwill can be
regarded as having a cost of acquisition. A typical case discussed by the author is of
payment for goodwill in instalments acquired by a chartered accountant in which case
the question arose whether the payments so made were deductible as business-
expenditure. Thus, in this article, nearly all controversial aspects of tax treatment of
goodwill have been dwelt on with reference to the relevant case law on the subject -
Editor
What is goodwill
1. The word goodwill is not a term of law and it has nowhere been defined in the provisions of the direct taxes acts. The
Courts have tried to define the precise meaning of term 'goodwill' in the course of their judgments. Some of them may be
analysed to see how the term 'goodwill' has been interpreted by the Courts.
In deciding the case of IRC v. Muller & Co. [1910] AC 217 (HL), Lord Macnaughten remarked that the word 'goodwill' is
easy to describe but it is nonetheless difficult to define. He observed that goodwill is the benefit and advantage of the good
name, reputation and connection of a business. It is one thing which distinguishes an old established business from a new
business at its first start.
The dictionary meaning of the term goodwill means 'friendly feeling'; privilege of trading as successor to well established
business.
Lord Eldon L.C. observed in Cruttwell v. Lye [1810] 17 Ves 335 that goodwill is nothing more that the probability that the
old customers will resort to the old place.
In Box v. COT [1952] 56 CLR 387, the Full Bench of the High Court of Australia observed that goodwill includes whatever
adds value to a business and different businesses derive their value from different considerations. The goodwill of some
businesses is derived almost entirely from the place where they are carried on. Some goodwills are purely personal and some
goodwills derive their value partly from the locality where businesses is carried, or partly from the reputation built up around
the name of the individual or firm or company under which it was previously being carried on.
In nutshell, goodwill may be defined as a profit value advantage or the capitalised value of the profits which are in excess of
normal rate of return in the invested capital.
Goodwill - Nature, character and classification
2.1 A fluctuating thing - Goodwill by its nature is a fluctuating thing. Goodwill could be destroyed in moment though built up
over the years, i.e., it is never constant.
As observed by Hidayatullah, J. in the case of S.C. Cambatta & Co. (P.) Ltd. v. CEPT [1961] 41 ITR 500 (SC), the goodwill
of a business depends upon a variety of circumstances or a combinations of them. The location, the service, the standing of
the business, the honesty of businessman who runs it and the lack of competition and many other factors go individually or
together to make up the goodwill though locality always plays a considerable part.
As per the judgment of the Bombay High Court in the case of Evans Fraser & Co. Ltd. v. CIT [1982] 137 ITR 493, merely
because goodwill of a business which had been started by someone else had been acquired and at the time of acquisition its
value ascertained, it does not mean that sometime or some years later the goodwill enjoyed by that business in the hands of
the purchaser is qualitatively the same goodwill which had been enjoyed at the moment of sale by the vendor. Goodwill
differs from a tangible asset such as immovable property or a share in a joint stock company which retains its shape and form
but of which the market value fluctuates.
2.2. Its magnetic nature - Goodwill has the magnetic attitude towards the business. In the case of Seethalakshmi Ammal v.
CED [1966] 61 ITR 317 (Mad.), it was described that goodwill is the magnetic quality of a particular trade or business
which attracts customers to it as a matter of course. Goodwill of a business is an intangible asset; it is whole advantage of the
reputation and connections formed with the customers together with circumstances making the connection durable—Rustom

2. Cavasjee Cooper v. Union of India [1970] 40 Com. Cas. 325 (SC).
In Whiteman Smith Motor Co. v. Chaplic [1934] 2 KB 35, the nature and classification of goodwill was described. The
instant case stated that to determine the nature of the goodwill in any given case, it is necessary to consider that which such
business is inherently likely to attract as well as all the surrounding circumstances. The goodwill of a business is a composite
thing referable in part to its locality, in part to the way in which it is conducted and the personality of those who conduct it
and in part to the likelihood of competition, many customers being no doubt actuated by mixed motives in conferring their
custom.
In Lord Lindley's words goodwill has no meaning except in connection with some trade, business or calling.
Question of existence of goodwill
3. Whether goodwill exists or not is a matter of fact. The question of existence of good will is rather more important. No hard
and fast principles could be laid down in this regard.
The Bombay High Court had stated in the case of Evans Fraser & Co. Ltd. (supra) that transactions such as sale or business
of undertakings take place between businessmen, and as a businessman does not pay more than the value of tangible asset, it
could be only for the purchase of something other than tangible assets which in such circumstances can be nothing else than
goodwill.
One mode of knowing the existence of the goodwill is advocated by M.C. Shukla and T.C. Grewal in their book Advanced
Accounts (7th edn.), Vol. II, p. 299 which is as follows:
a.debit the various assets (excluding goodwill) taken over at the values put on them by the purchasing company;
b.credit the various liabilities taken over by the purchasing company at the amounts agreed upon between the company and
the creditors;
c.credit the business purchase account with the purchase consideration;
d.if the debits exceed the credits a profit has been made and should be credited to capital revenue account;
e.if the capital exceeds the debits, the difference should be debited to goodwill account.
In a British case, namely, Attorney General v. Boden [1912] KB 539, it was held that the mere fact that the word 'goodwill'
was ascertained in some clauses of the partnership deed, it did not go to establish the existence of goodwill, where it did not
exist in fact.
Goodwill as a capital asset
4. It is not now disputed that the goodwill is a part of the asset of the firm in view of the legal position contained in the Act as
well as in the Indian Partnership Act—CED v. Kanta Devi Taneja [1981] 132 ITR 437 (Gauhati).
Acquisition of goodwill of a business is no doubt acquisition of capital asset and hence the purchase price would amount to
be capital expenditure.
It is immaterial whether the price is paid in instalments— Devidas Vithaldas & Co. v. CIT [1972] 84 ITR 277 (SC). But if
the transaction is not one of acquisition of goodwill, but for the right to use it, such expenditure would be treated as revenue
one.
Section 2( 14) which defines capital asset is very wide and embraces and comprises of all the property whether movable or
immovable and tangible and for professional or for private use—Haji AbdulKader Sahib v. CIT [1961] 42 ITR 296 (Ker.).
Property is a term of the widest importance and signifies every possible interest which a person can clearly hold and enjoy—
J.K. Trust v. CIT/EPT [1957] 32 ITR 535 (SC).
But the definitions given in section 2 are subject to an overall restrictive clause. That is expressed in the opening words of the
section "unless the context otherwise requires'. We must therefore enquire whether contextually section 45, in which the
expression capital asset is used; excludes goodwill".
The Delhi High Court also had explained in Shiv Shanker Lal v. CIT [1974] 94 ITR 433 that the applicability of the
provisions of sections 45 to 55A and also the question whether the concerned property is a capital asset must be settled after
considering all the facts and circumstances of the case.
Section 45 and goodwill - Cost of acquisition and its date
5. Section 45 speaks that any profits or gains arising from the transfer of a capital asset effected in the previous year shall,
save as otherwise provided in sections 53, 54, 54B, 54D, 54E and 54F, be chargeable to income-tax under the head 'Capital
gains' and shall be deemed to be the income of the previous year in which the transfer took place. Obviously, goodwill is an
asset if it falls within the contemplation of section 45.
The Madhya Pradesh High Court in CIT v. Jaswantlal Dayabhai [1978] 114 ITR 798 had expressed that section 45 which is
the charging section shows that the charge is on any profits or gains arising from the transfer of a capital asset and not on the
capital asset itself. The concept of profit or gains made chargeable under section 45 itself implied that there is something
received in excess of the cost of the capital asset which is transferred. In the case of a self-created or self-generated goodwill,
the assessee incurs no cost in terms of money. On the transfer of such goodwill, it cannot be said that assessee makes any

3. profits or gains chargeable under section 45.
If the whole of the consideration received on such a transfer is taken to be profits or gains to the assessee within the meaning
of section 45, it would amount to taxing the capital asset itself and not profit or gains arising from its transfer. Secondly, the
above construction of section 45 is supported by scheme of section 48 which provides that the income chargeable under
section 45 is to be computed by deducting from the full value of the consideration ; the cost of acquisition of the capital asset
and the cost of any improvement thereto.
The above views were also supported by the leading case entitled as CIT v. E.C. Jacob [1973] 89 ITR 88. In the instant case,
the Full Bench of the Kerala High Court held that in the case of certain categories of transfer of goodwill, it is not possible to
determine the cost of acquisition and the 'cost of improvement' referred to in section 48(i) for the purpose of computation of
'Capital gains' under section 48 and that without computation of profits or gains no tax can be levied under section 45.
The hypothesis as referred above, has also been affirmed in the Supreme Court's decision on CIT v. B.C. Srinivasa Setty
[1981] 128 ITR 294. The Court opined at page 295 that all transactions encompassed by section 45 must fall under the
governance to its computation provisions. A transaction to which those provisions cannot be applied must be regarded as
never intended by section 45 to be the subject of the charge. What is contemplated by section 48(ii) 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' suggest 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 material factor in applying the computation provisions
pertaining to capital gains ; but in the case of goodwill generated in a new business, it is not possible to determine the date
when it comes into existence.
Schedule VI of the Companies Act, 1956 and goodwill
6. It is also clear from Part I of Schedule VI of the Companies Act, 1956 it appears that under the said Act also goodwill is
recognised as a fixed asset.
Concept of self-generated or self-created goodwill - Whether can be treated as capital asset
7. It was earlier recognised as a fact that goodwill is a capital asset incapable of being either held independently or transferred
independently by the owner thereof but the same is invariably attached to his business and is usually sold or transferred by
him along with the business as going concern but that would render it such a capital asset that the transfer of it would hot give
rise to chargeable gain. The goodwill is an intangible asset but such characteristic will not make it a capital asset and the
transfer of it will not give rise to chargeable capital gain.
In CIT v. Home Industries & Co. [1977] 107 ITR 609 (Bom.), it was opined that self-created or self-generated goodwill is
not a capital asset which could be said to have been acquired by the assessee-firm at any particular point of time and is not a
capital asset which could be said to have cost something is term of money to the assessee. Such goodwill will not be a capital
asset and its transfer will not give rise to chargeable capital gain under either section 12B(1) of the 1922 Act or section 45 of
the 1961 Act.
The Supreme Court also recognised the above judgment in B.C. Srinivasa Setti's case (supra) and stated that goodwill
generated in a newly commenced business cannot be described as an 'asset' within the term of section 45 of the 1961 Act or
section 12B of the 1922 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.
Transfer of goodwill - Whether and when attracts capital gains tax
8. The definition of the word 'transfer', as defined in section 2( 47) is an inclusive one and gives an artificially extended
meaning to the term to include relinquishment of the capital asset or extinguishment of any right in it and also the
compulsory acquisition under any law.
In Jagdev Singh Mumick v. CIT [1971] 81 ITR 500 (Delhi) an optician sold his entire business to a company for Rs.
1,26,000 which were to be paid in kinds. The Delhi High Court held that excess price referable to the goodwill of the
optician's business was not liable to tax as capital gains as it had no cost of acquisition. Also, in the case of CIT v. K.
Rathnam Nadar [1969] 71 ITR 433 (Mad.), it was pointed out that though the British and American taxation laws seem to
proceed on the basis that capital gains are assessable on transfer of goodwill, while enacting section 12B of the 1922 Act, the
Legislature did not have it in contemplation that self-created assets like copyrights, patent and goodwill (now subject to the
provisions of section 80QQA will be subjected to tax as capital gains on their transfer. The Court was also satisfied on the
language of section 12B of the 1922 Act that it did not intend to subject to tax a self-created asset like goodwill.
In E.C. Jacob's case (supra), the Court opined that in certain categories of transfers of goodwill it is not possible to make a
computation of 'cost of acquisition' or 'cost of improvement' and that in a case where goodwill is purchased in respect of
going concern for a price and later sold for a price it is impossible to assess the capital gains on transfer of the goodwill as it

4. would be just like any other tangible asset sold in such a situation—see also CIT v. Dewas Cine Corpn. [1968] 68 ITR 240
(SC).
In CIT v. Chunnilal Prabhudas & Co. [1970] 76 ITR 566 , the Calcutta High Court expressed its views, that if there should
be taxation capital gain within the meaning of section 12B of the 1922 Act, there has to be (i) profit or gain; ( ii) capital asset;
(iii) the profit or gain must arise out of the transfer ; and (iv ) sale, exchange and relinquishment or transfer. It is difficult to
apply these tests to the case of goodwill. It is not a capital asset which can be divided into parts, fragments or fractions or
entered on the stock-book or register of capital assets, nor can it, like capital' asset, exist independently without the business
and have any value apart from the business usually associated with capital asset. Thus, on the interpretation of section 2(4A) ,
section 2( 6C) and section 12 of the 1922 Act and their express words and tenor, goodwill does not come within the obvious
meaning of capital asset.
But now it has been well settled in B.C. Srinivasa Setty's case (supra) that goodwill generated in a newly commenced
business cannot be described as an 'asset' within the terms of section 45 of the 1961 Act or section 12B of the 1922 Act and
the transfer of good will initially generated in a business does not give rise to a capital gain for the purpose of tax liability.
Implications of decision in B.C. Srinivasa Setty's case
9. However, in the latest case of the Bombay High Court entitled as Evans Fraser & Co. Ltd.'s case (supra), it was opined
that the applicability of the Supreme Court's decision in B.C. Srinivasa Setty's case (supra) is not confined to merely cases
where a newly started business comes to be sold for the first time and would also apply to a situation where the business
purchased along with its goodwill is subsequently sold by the purchaser. It was observed that the necessary factors of liability
to capital gains tax are that cost of asset and cost of improvement must be determinable for being deducted. Goodwill is a
fluctuating thing whose market value also fluctuates. As it is impossible to pinpoint when goodwill came into existence, so it
is equally impossible to pinpoint the moment at which goodwill increases or decreases. It was possible to ascertain in terms
of money, cost of acquisition of goodwill in case of newly started business, nor is it possible to ascertain cost of addition or
alteration to the quality of goodwill which led to increase in its value after a business purchased along with its goodwill was
resold. As regards the reasons for increase in the value of the goodwill it was opined that the same is a result of further self-
generation. It was, therefore, not possible to determine the cost of improvement even if the cost of acquisition was
ascertainable.
Thus, the capital gains tax in respect of goodwill relating to the sale of such business which was once again sold by the
purchaser, was not leviable.
Taxation of goodwill - When no cost had been incurred in its creation
10. Even if no cost has been incurred in the acquisition of the goodwill, such goodwill has been undoubtedly recognised as a
capital asset. The entire sale proceed in such cases would be liable to capital gain tax. Further our views are also supported by
the Supreme Court's decision in Devidas Vithaldas's Co.'s case (supra) . The Court opined in the instant case that acquisition
of the goodwill of the business is, without doubt, acquisition of a capital asset; and, therefore, its purchase price would be
capital expenditure whether it is paid in a lumpsum at one time or in instalments distributed over definite period.
The decision of the Calcutta High Court in Chunni Lal Prabhudas & Co.'s case (supra) is not now tenable here. The same
High Court's Division Bench later on recognised in the case of K.N. Daftary v. CIT [1977] 106 ITR 998 that the goodwill of
a business is undoubtedly a capital asset for the purpose of section 45—see also V.R. Sonti v. CIT [1979] 117 ITR 838 (Cal.).
Goodwill as a revenue receipt - When to be treated so
11. Goodwill may sometimes be treated as revenue receipt a part from the capital asset or fixed asset. It was held in Devidas
Vithaldas & Co.'s case (supra) that where the transaction is not one for acquisition of the goodwill but for the right to use it
the expenditure would be a revenue expenditure. In this context also see the decision in Gangadhar Baijnath v. CIT [1966]
60 ITR 626 (All.).
Resale of business along with its goodwill
12. After the well-known decision of the Supreme Court in the case of B. Srinivasa Setty, a question arose as to whether the
principles laid down in this case are also applicable where one has purchased the business along with goodwill and he
subsequently makes a sale of it. The point was dealt with in the case of Evans Fraser & Co. Ltd. (supra) . The case was
presented before the Bombay High Court and which observed in this case that capital gains tax in respect of goodwill relating
to the sale of such business which was once again sold by the purchaser was not leviable. The Court further observed that all
transactions encompassed by section 45 of the 1961 Act or section 12B of the 1922 Act must be governed by the relevant
computation provision and a transaction to which these provisions cannot be applied must be regarded as never intended by
section 45 to be the subject of the charge, for what is contemplated by clause ( ii) of section 45 is an asset in the acquisition of
which it is possible to envisage a cost, i.e., 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.
The Court went on stating that goodwill is a fluctuating thing and it increases and decreases. Merely because goodwill of a

5. business which had been started by someone else had been acquired and at the time of acquisition, its value ascertained, it
does not mean that sometime or some years later the goodwill enjoyed by that purchaser is qualitatively the same goodwill
which had been enjoyed at the moment of sale by the vendor. If it is the subsequent point of time, the value of the goodwill
enjoyed by that business has changed qualitatively. Just as it is impossible to pinpoint when goodwill came into existence, so
it is equally impossible to pinpoint the moment at which goodwill vexed or increased or it waned or decreased for the process
is imperceptible.
Goodwill and partnership firm
13.1 At the time of dissolution –Section 47(ii ) of the 1961 Act states that nothing contained in section 45 shall apply to any
distribution of capital assets on the dissolution of a firm, body of individuals or other association of persons.
Thus, the transfer of goodwill between the partners at the time of dissolution of partnership firm is only a distribution of the
asset, (i.e., goodwill) of the firm within the meaning of section 47(ii) and no capital gains accrue to the partner who retires
receiving the value of his share of goodwill—Bankey Lal Vaidya v. CIT [1965] 55 ITR 400 (All.) affirmed in CIT v. Bankey
Lal Vaidya [1971] 79 ITR 594 (SC).
In Dewas Cine Corpn's case (supra), the Supreme Court observed that adjustment of the rights among the partners in a
dissolved firm is not a transfer, nor is it for a price. The consequence of dissolution, division or allotment of assets to the
partners, which flows upon distribution. . . is nothing but a mutual adjustment of rights between the partners and there is no
question of any extinguishment of firm's right in the partnership asset within the meaning of section 2(47). Some
observations of the above decision were followed in the Malabar Fisheries Co. v. CIT [1979] 120 ITR 49 (SC) but see also
CIT v. C.K. Sunderaraja Naidu [1974] 95 ITR 450 (Ker.), Raman Lal Khanna v. CIT [1972] 84 ITR 217 (Punj. & Har.)
and CIT v. M.J. Vaidya [IT Reference No. 39 of 1971 decided by Gujarat High Court on September 26, 1973]
13.2 At the time of transfer of asset by a partner to firm - Whether the transfer of asset by a partner to firm falls within the
meaning of section 2( 47) is a controversial point among the various High Court's decision.
Some High Courts have held that when partner vests his personal property in the common hotchpotch of the partnership
firm's property, his individual rights over that property are extinguished and hence this should necessarily be treated as
transfer within the scope of section 2( 47)—CIT v. Kartikey V. Sarabhai [1981] 131 ITR 42 (Guj.) and Addl. CIT v. M.A.J.
Vasanaik [1979] 116 ITR 110 (Kar.).
Contrary to the above judgment, it has been held to be not a transfer within the scope of section 2( 47)—see D. Kanniah
Filial v. CIT [1976] 104 ITR 520 (Mad.), Dr. M.C. Kackkar v. CIT [1973] 92 ITR 87 (All.) and CIT v. CM. Kunhammed
[1974] 94 ITR 179 (Ker.).
The Supreme Court also has discussed the matter in its course of judgment of CIT v. Hind Construction Ltd. [1972] 83 ITR
211 , but the judgment is given under the 1922 Act where the word transfer did not include extinguishment of the right as in
section 2( 47) of the 1961 Act.
An appeal had been preferred against the decision in the case of CIT v. Kartikey V. Sarabhai ( supra). The decision in the
appeal will solve the controversial point between the various High Courts.
13.3 At the time of retirement from partnership firm - Where a partner retires from the firm, a question arises whether the
same principle as in the case of dissolution could be applicable here. In other words, can the retirement be said to have
designed, released or relinquished his interest in the partnership, in favour of the continuing partners and does the transaction
imply extinguishment of the firm's interest in the assets.
It has been held that there is a clear distinction between the dissolution of firm and retirement of partners inasmuch as the
consequence flowing from each are entirely different. In the case of retirement of a partner, the remaining partners continue
to carry on the business of the partnership as the firm— CIT v. H.R. Aslot [1978] 115 ITR 255 (Bom.).
Thus, after having established the known distinction between the retirement of the partner and dissolution of a partnership
firm, the absence or otherwise of the provisions analogous to section 47(ii) would be of no significance because section 47(ii)
expressively deals with a case of a dissolution of a partnership.
Each partner receives a certain amount on retirement, but this amount represents his share in the net partnership assets after
deduction of liabilities and prior charges and it is received by him in satisfaction of his share in the partnership firm. If there
is no transfer of any interest within the meaning of section 2(47 ), then no part of the amount received by any assessee in
respect of his share in the value of the goodwill could be regarded as capital gain, under section 45.
Profits or gains must be charged to tax for the purpose of capital gains tax only if such profits or gains arise from the transfer
of a capital asset.
In CIT v. Tribhuvandas G. Patel [1978] 115 ITR 95 (Bom.), the Court observed that the amount paid to partners at the time
of retirement for his share of goodwill cannot give rise to capital gain and hence no capital gains liability arises as the
goodwill in such a case is admittedly a self-generated asset which has cost nothing to the partners of the firm in terms of
money.

6. In CIT v. Dilip Engg. Works [1981] 129 ITR 688, the Gujarat High Court also held that where retired partners receive, in lieu
of their share in the partnership, any cash, or any asset is transferred or sold to them, it cannot be said that the said machinery
is sold by the firm to the concerned partners during the relevant years so as to attract the provisions of section 41(2).
In CIT v. Mohanbhai Pamabhai [1973] 91 ITR 393 , it was held by the Gujarat High Court that it is not possible to predict
whether a particular amount is received by the retiring partner in respect of his share in a particular partnership asset or that a
particular amount represents consideration received by the retiring partner for extinguishment of his interest in a particular
partnership asset. When the assessee retired from the firm there was no transfer of any interest of the assessee in the goodwill
of the firm and no part of the amount received by any of the assessee was assessable to capital gains tax under section 45.
Payment for goodwill in instalments acquired by chartered accountant's firm -Whether admissible as business
expenditure
14. The dispute whether an agreement is for the payment of price in stipulated instalments or for making annual payments in
the nature of income arose before the Supreme Court in the case of CIT v. B.M. Kharwar [1969] 72 ITR 603 . The Court
opined that there is no signal test of universal application for the solution of the question and that, therefore, the Court has to
look not only into the document relating to the transaction but also the surrounding circumstances to decide its true nature,
the name which the parties give to it being of little consequence. If the parties have chosen to cancel, by a device, the true
legal relation, it is open to it to unravel such device and to ascertain the true nature of the relationship. If the transaction is
embodied in a document, the liability to tax depends upon the meaning and content of the language used in it and in
accordance with the ordinary rules of construction.
Another question arose before the Supreme Court in the case of Devidas Vithaldas & Co. (supra) , as to whether the
consideration paid for the purchase of the goodwill by the assessee would be an admissible deduction under section 10 of the
1922 Act. The facts of the case were as follows:
'P' was carrying on profession of a chartered accountant entered into a profession with 'A' reserving to himself the goodwill.
On 'P's retirement, the partnership was dissolved. Under a deed of partnership, 'P' agreed to sell the goodwill to 'A' and as
consideration for the purchase price of goodwill 'A' agreed to pay certain share, out of net profits of the business, to 'P' or his
wife, or his son successively during their respective lives. 'A' having carried on business for sometime as sole proprietor took
a partner 'C'. As stipulated in the deed, the firm made payments to 'P's wife. The question arose whether the firm was entitled
to claim deduction of payments made to 'P's wife in computing its profits.
The Court held that the transaction was a licence and not a sale of goodwill and that the disbursement in question, therefore,
were in the nature of royalty and must be treated as admissible deduction. The payment could not be treated as capital
disbursement since it was for an indefinite period, there was absence of any expressed lump sum, and payment relating to
profits and was not tied with up with any fixed sum agreed to as the purchase price of capital asset on the basis of which
payments in question were made.
However, acquisition of goodwill of the business is without doubt acquisition of a capital asset and, therefore, its purchase
price would be capital expenditure. It would not make any difference whether it is paid in a lumpsum at on time or in
instalments distributed over the definite period.qq
41 General TopicVol. 16 - Sec.IVTAXMANJanuary, 1984

7. In CIT v. Dilip Engg. Works [1981] 129 ITR 688, the Gujarat High Court also held that where retired partners receive, in lieu
of their share in the partnership, any cash, or any asset is transferred or sold to them, it cannot be said that the said machinery
is sold by the firm to the concerned partners during the relevant years so as to attract the provisions of section 41(2).
In CIT v. Mohanbhai Pamabhai [1973] 91 ITR 393 , it was held by the Gujarat High Court that it is not possible to predict
whether a particular amount is received by the retiring partner in respect of his share in a particular partnership asset or that a
particular amount represents consideration received by the retiring partner for extinguishment of his interest in a particular
partnership asset. When the assessee retired from the firm there was no transfer of any interest of the assessee in the goodwill
of the firm and no part of the amount received by any of the assessee was assessable to capital gains tax under section 45.
Payment for goodwill in instalments acquired by chartered accountant's firm -Whether admissible as business
expenditure
14. The dispute whether an agreement is for the payment of price in stipulated instalments or for making annual payments in
the nature of income arose before the Supreme Court in the case of CIT v. B.M. Kharwar [1969] 72 ITR 603 . The Court
opined that there is no signal test of universal application for the solution of the question and that, therefore, the Court has to
look not only into the document relating to the transaction but also the surrounding circumstances to decide its true nature,
the name which the parties give to it being of little consequence. If the parties have chosen to cancel, by a device, the true
legal relation, it is open to it to unravel such device and to ascertain the true nature of the relationship. If the transaction is
embodied in a document, the liability to tax depends upon the meaning and content of the language used in it and in
accordance with the ordinary rules of construction.
Another question arose before the Supreme Court in the case of Devidas Vithaldas & Co. (supra) , as to whether the
consideration paid for the purchase of the goodwill by the assessee would be an admissible deduction under section 10 of the
1922 Act. The facts of the case were as follows:
'P' was carrying on profession of a chartered accountant entered into a profession with 'A' reserving to himself the goodwill.
On 'P's retirement, the partnership was dissolved. Under a deed of partnership, 'P' agreed to sell the goodwill to 'A' and as
consideration for the purchase price of goodwill 'A' agreed to pay certain share, out of net profits of the business, to 'P' or his
wife, or his son successively during their respective lives. 'A' having carried on business for sometime as sole proprietor took
a partner 'C'. As stipulated in the deed, the firm made payments to 'P's wife. The question arose whether the firm was entitled
to claim deduction of payments made to 'P's wife in computing its profits.
The Court held that the transaction was a licence and not a sale of goodwill and that the disbursement in question, therefore,
were in the nature of royalty and must be treated as admissible deduction. The payment could not be treated as capital
disbursement since it was for an indefinite period, there was absence of any expressed lump sum, and payment relating to
profits and was not tied with up with any fixed sum agreed to as the purchase price of capital asset on the basis of which
payments in question were made.
However, acquisition of goodwill of the business is without doubt acquisition of a capital asset and, therefore, its purchase
price would be capital expenditure. It would not make any difference whether it is paid in a lumpsum at on time or in
instalments distributed over the definite period.qq
41 General TopicVol. 16 - Sec.IVTAXMANJanuary, 1984