B.R. ADWALPALKAR, A.M. OREDR In this appeal directed against order of CIT(A) for asst. yr. 1979- 80 in his case, assessee has drawn up as many as six grounds. However, controversy raised, can be effectively summed up as under : " Whether, CIT(A) was right in upholding estimate made by ITO o f value of 'Goodwill' received by assessee on sale of his business at Rs. 4,32,000 as against Rs. 5,20,000 declared by assessee and in confirming addition of difference, i.e., Rs. 88,000 as 'short-term' capital gains. " 2 . facts of case may be summarised as follows : assessee, Shri G.N. Kamath, qualified mechanical engineer, carried on business of manufacturing mechanical drivers and couplings under style and name Handling and Processing Equipment. This business, which was his proprietary concern till 30th Nov., 1976, was, w.e.f. 1st Dec., 1976, taken over by partnership firm (constituted under deed of partnership dt. 14th Feb., 1977) consisting of Shri G.N. Kamath, assessee (holding 30 per cent share) and four other partners. firm in its turn, by deed of assignment dt. 31st July, 1977, transferred this business as going concern to limited company, viz., Concord Steel Works (P) Ltd. for total consideration of Rs. 23,21,315. This amount was shown to comprise Rs. 18,01,315 being value of firms' assets as per books and Rs. 5,20,000 as value of goodwill. It may be mentioned here that though there was no provision regarding goodwill in original partnership deed (dt. 14th Feb., 1977), in amendment to it, effected by agreement dt. 28th March, 1977, it was provided that goodwill of business shall belong to Shri G.N. Kamath (the assessee) exclusively. It was in pursuance of this provision in amended partnership deed that assessee was paid amount of Rs. 5,20,000 by purchaser company. This fact was duly recorded in books of firm which, for accounting period starting on 1st May, 1977 were closed on 31st July, 1977, i.e., date on which assignment of firm's business came into effect. 3. assessee, who follows financial year ending 31st March as his accounting year, showed aforesaid receipt in his return for asst. yr. 1979- 80 but claimed it to be exempt being consideration for transfer of self- generated asset. ITO, however, called upon assessee to furnish basis for computing value of goodwill at Rs. 5,20,000 and as there was no response from assessee, he proceeded to ascertain value of goodwill by applying 'the capitalisation of super profits' method. ITO found this method to be most suitable in context of nature of business and fact that it was carried on for six years (prior to its transfer to company) and had shown increase in profits from year to year. He computed average profits taking into account depreciation as per IT Rules, 1962, reasonable remuneration to Shri G.N.K. Kamath and interest on capital of proprietor and of partners. On this basis, super profits for period from 1st April, 1974 to 31st March, 1977 worked out to Rs. 4,91,683 and average annual profit came to Rs. 1,43,880. At three years purchase price value of goodwill amounted to Rs. 4,31,640 or say Rs. 4,32,000. Having arrived at this value of goodwill, ITO observed, that value of goodwill at Rs. 5,20,000 as per deed of assignment was clearly overstated. obvious inference, according to ITO, was that excess (of Rs. 88,000) represented compensation for transfer of Shri G.N. Kamath's valuable leasehold right/rights in land in MIDC plot in Thane (on which factory premises of business stood). ITO noted that assessee, Shri G.N. Kamath, who had paid premium of Rs. 2,15,400 to obtain such leasehold rights had shown to have transferred them at cost whereas it should have been at market value as on date of transfer. He, therefore, added aforesaid 'excess' value of goodwill to amount of Rs. 2,15,400 at which assessee's rights in MIDC plot were stated to have been transferred and arrived at gross value of transfer of Rs. 3,03,400 (Rs. 2,15,400 + Rs. 88,000). As difference between two values exceeded 15 per cent, ITO invoked provisions of s. 52(2) of IT Act, 1961 ('the Act'). Then finding that assessee who had obtained leasehold rights in question under lease agreement dt. 26th Sept., 1975 and had transferred them (to company) by agreement dt. 8th Sept., 1978, i.e., in less than three years, ITO treated amount of Rs. 88,000 as 'short-term' capital gain and assessed it as such in assessee's hands for asst. yr. 1979-80. 4 . assessee challenged this addition in appeal before CIT(A) mainly on plea that ITO had incorrectly linked value of goodwill with transfer of immovable property on surmises and conjectures. statement giving basis for computing goodwill in question at Rs. 5,20,000 was also submitted before CIT(A). latter found said working of value of goodwill to be 'thoroughly unsatisfactory'. He observed that assessee had taken profit for asst. yr. 1979-80 at Rs. 2,61,648 and capitalised it at two years purchase amounting to Rs. 5,23,296 which was rounded off to Rs. 5,20,000. He pointed out that period relevant for asst. yr. 1979-80 was taken from 1st May, 1977 to 31st July, 1977, which was incorrect. That besides, it was not clear how profit was determined at Rs. 2,61,648. He further observed that in same working sheet assessee had cited estate duty case where goodwill was calculated at three years purchase price on basis of average maintainable profit of four years. He added that, on other hand, ITO had elaborately given basis of working super profits and considered all relevant aspects, e.g., remuneration of working partner, i.e., assessee, interest on capital, etc., for these reasons, CIT(A) upheld valuation of goodwill made by ITO. He also confirmed ITO's decision to treat excess of Rs. 88,000 as consideration for increased market value of assessee's leasehold rights which he pointed out could not have remained same as on 26th Sept., 1975 (i.e., date on which assessee had acquired them from MIDC) and that there was bound to be rise. O n this reasoning he confirmed assessment and dismissed assessee's appeal. Hence, present appeal by assessee to Tribunal. 5. On behalf of assessee, Shri M.J. Lalchandani, learned counsel, submitted that working of value of goodwill done by ITO was erroneous inasmuch as he had mixed up income assessed in hands of assessee 'Individual' and that assessed in hands of firm, Handling & Processing Equipment ; that since latter, i.e., firm, was 'assignor' of business, it was firm's income that was relevant for valuation of goodwill. He pointed out that firm was assessed to income-tax for asst. goodwill. He pointed out that firm was assessed to income-tax for asst. yrs. 1978-79 and 1979-80 on profits as under : (i) 1st Dec., 1976 to 30th April, 5 Rs. 1977 months 2,25,498 (ii) 1st May, 1977 to 31st July, 4 . 1977 months 9 Rs. . months 3,49,721 That after providing for partners' salary and interest on partners' capital, ITO had come to aggregate profits for said nine months of Rs. 4,04,863 and in that context, profit for twelve months would work out to (4,04,863 / 9) x 12 = 5,39,817 which when capitalised at three years purchase would yield value of goodwill of Rs. 16,19,451. Shri Lalchandani urged that, in these circumstances, value of goodwill received by assessee was quite reasonable and realistic and ought not to have been disturbed by ITO. He added that, at any rate, ITO's inference that value of goodwill received by assessee included element of compensation for value of leasehold rights of assessee in MIDC plot had no basis and deserves to be discarded as pure surmise or conjecture. He urged that, consequently, question of any capital gains under s. 52(2) did not arise. Shri Viswanathan, learned Departmental Representative, on his part, strongly relied on reasoning given in order of CIT(A) as well as in that of ITO. 6 . We have carefully, considered submissions made and arguments advanced on behalf of assessee vis-a-vis facts of case as they emerge from records. It is needless to emphasise that first question to be considered in this case is whether value of 'Goodwill' has been overstated in assignment deed dt. 31st March, 1977 and secondly, if so, whether there was justification to infer that excess value represented compensation for transfer of leasehold rights whose value had gone above cost. On first point it is pertinent to note that no basis for valuing 'Goodwill' at Rs. 5,32,000 is given either in deed of assignment or in course of assessment proceedings. Even basis furnished at time of appeal proceedings before CIT(A), was obviously tentative. At any rate it was, to say least, naive on part of assessee's counsel to suggest that only profit of accounting year relevant for asst. yr. 1979-80 should be taken into consideration for valuing goodwill ; for, it is well accepted principle that 'goodwill' builds up over years of performance of business and in present case especially business which was founded by Shri G.N. Kamath in 1971 had progressed from year to year by dint of his efforts. It was in this context significant that by amendment deed dt. 28th March, 1977 goodwill of business was declared to belong to Shri G.N. Kamath exclusively. In these circumstances, argument that partnership firm being assignor of business to company, only firm's profits should be taken into account for valuing goodwill is untenable. assessee's counsel himself has indicated absurd results to which such approach would lead by calculating 'goodwill' at Rs. 16,19,451. On other hand, we find ITO's valuation of goodwill to be on sound, well settled principles of valuation as already explained above. We, therefore, hold that CIT(A) has rightly upheld said valuation, i.e., Rs. 4,32,000. This naturally raises question as to what represents balance amount of Rs. 88,000 received by assessee. You must remember that only other asset which Shri G.N. Kamath as 'Individual' parted with in favour of company [Concord Steel Works (P) Ltd), was his leasehold rights obtained in perpetuity from MIDC. On this point Shri Lalchandani argued that assessee could not transfer lease freely to company ; that there were several restrictions to which lease was subject. However, these aspects of lease do not detract from fact that transfer to company was effected and that assessee was only confirming party to such transfer having been original lessee of MIDC plot in question. It does not stand to reason that assessee would agree to transfer of lease without adequate compensation commensurate with rise in market value of lease rights relating to such scarce asset as plot in industrial estate. Since assessee could not overtly charge premium, he has thought it fit to include it in value of 'goodwill' which has added advantage of being exempt from tax in view of principles laid down by Supreme Court regarding self-generated assets. We, therefore, hold that there was good reason for ITO to treat excess amount of Rs. 88,000 as compensation for rise in value of leasehold rights shown to have been transferred at cost. Since transfer of said leasehold rights was effected within three years of their acquisition, 'capital gains' were rightly assessed as 'short-term' capital gains. Accordingly, we confirm decision of CIT(A) whereby he has upheld decision of ITO on both points at issue. 7. In result, assessee's appeal is dismissed. *** G.N. KAMATH v. INCOME TAX OFFICER