Capital gains on goodwill turn on workable computation rules; a pure legal objection on taxability can be raised later.

Capital gains tax on transfer of business goodwill depends on whether the statutory computation machinery can operate for that asset. The Court stated that goodwill is a capital asset, but where cost of acquisition or improvement cannot sensibly be ascertained under the charging scheme, the capital gains charge does not apply. It also noted that an executory agreement for transfer of the business had not been fully effectuated while section 12B was in force, so no taxable transfer arose on the earlier dates suggested. A pure question of law on goodwill's taxability could be raised as an additional ground within a broad tax reference.

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Issues: (i) Whether the transfer of the business along with its goodwill, assets and liabilities gave rise to capital gains chargeable under section 12B of the Indian Income-tax Act, 1922. (ii) Whether the Tribunal was justified in refusing to permit the assessee to raise the contention that goodwill was not liable to capital gains tax under section 12B of the Indian Income-tax Act, 1922.

Issue (i): Whether the transfer of the business along with its goodwill, assets and liabilities gave rise to capital gains chargeable under section 12B of the Indian Income-tax Act, 1922.

Analysis: Goodwill is a capital asset, but chargeability to capital gains depends upon the operation of both the charging provision and the computation machinery. The Court applied the principle that where the statutory computation provisions cannot be worked in relation to a particular asset, the charge itself does not operate. Relying on the nature of goodwill as an intangible and fluctuating asset, the Court held that the cost of improvement to goodwill cannot be ascertained in money terms in the manner contemplated by the charging scheme. The Court further held that the transfer in question was not completed on the earlier dates suggested by the Revenue, because the agreement was executory and the contemplated conveyance of the entire business had not been effectuated when section 12B was in force.

Conclusion: No capital gain arose on the transfer of goodwill, and the transaction did not attract capital gains tax under section 12B.

Issue (ii): Whether the Tribunal was justified in refusing to permit the assessee to raise the contention that goodwill was not liable to capital gains tax under section 12B of the Indian Income-tax Act, 1922.

Analysis: The contention concerning goodwill was only an additional legal ground in support of the assessee's consistent case that no capital gains tax was payable. The question referred to the Court was wide enough to include the taxability of goodwill, since goodwill formed part of the business assets transferred. The Court held that a pure question of law going to the chargeability of the transaction could be entertained even if not separately argued before the Tribunal, and that refusing to consider it would merely multiply proceedings.

Conclusion: The Tribunal was not justified in refusing to allow the assessee to raise the contention.

Final Conclusion: The references were answered for the assessee, holding that the transfer did not attract capital gains tax and that the assessee's legal contention on goodwill was maintainable.

Ratio Decidendi: Capital gains tax cannot be levied where, in relation to the asset transferred, the statutory computation provisions for determining cost of acquisition or cost of improvement cannot sensibly operate, and a pure question of law bearing on chargeability may be raised as an additional ground within the scope of a broad tax reference.

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