Self-generated goodwill without acquisition cost was held outside capital gains treatment on business transfer.

Surplus on transfer of self-generated goodwill was held not to be assessable as capital gains where the goodwill had no cost of acquisition and was not shown as an asset in the books. The business was transferred as a whole at book value, no separate consideration was received for goodwill, and the provision for capital gains could not be applied to an estimated difference treated as income. The stated principle is that self-generated goodwill without acquisition cost does not fall within the capital gains charging machinery in the first proviso to section 12B(2) of the Indian Income-tax Act, 1922.

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Issues: Whether the surplus arising on transfer of self-generated goodwill was liable to be assessed as capital gains under the first proviso to section 12B(2) of the Indian Income-tax Act, 1922.

Analysis: The assessee transferred its business as a whole to a private limited company at book value, and the goodwill was not shown as an asset in its books. No separate consideration was received for goodwill, and the goodwill was admittedly self-generated rather than acquired for cost. On these facts, the provision governing capital gains could not be applied to treat the difference estimated by the Income-tax Officer as taxable income. The principle applied was that where an asset has no cost of acquisition and is self-generated, its transfer does not give rise to assessable capital gains in the manner contemplated by the provision.

Conclusion: The surplus was not assessable to tax as capital gains, and the question was answered in the negative, in favour of the assessee.

Ratio Decidendi: Self-generated goodwill with no cost of acquisition does not attract capital gains tax under the first proviso to section 12B(2) of the Indian Income-tax Act, 1922 on transfer.

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