Self-generated goodwill and capital gains tax: transfer on incorporation was held outside the charge because no ascertainable cost existed.

Capital gains tax was held inapplicable to the transfer of self-generated goodwill on incorporation of a business into a private limited company. The controlling principle was that capital gains arise only where the transferred capital asset has an ascertainable cost to the assessee in money terms, because both the charging provision and the computation mechanism depend on actual cost and the excess over that cost. Self-created goodwill, having no identifiable monetary acquisition cost, falls outside that framework and is not capable of producing a chargeable gain on transfer. The earlier view that the transaction was not a real sale was treated as no longer decisive; the decisive factor was the self-generated character of the goodwill.

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Issues: Whether capital gains tax was payable on the transfer of self-generated goodwill on incorporation of the business into a private limited company.

Analysis: The governing principle was that capital gains arise only where a capital asset has cost the assessee something in terms of money, because the charging provision for capital gains and the computation machinery both proceed on the basis of actual cost and the excess over that cost. Self-created or self-generated goodwill, not having been acquired for any ascertainable monetary cost, falls outside that charging framework. The earlier view that the transaction was not a real sale was no longer the basis of the decision; the controlling consideration was the character of the goodwill as self-generated and therefore not a capital asset capable of producing chargeable gain on transfer.

Conclusion: The transfer of self-generated goodwill did not attract capital gains tax, and the question was answered in the negative in favour of the assessee.

Ratio Decidendi: Capital gains tax is chargeable only where the transferred capital asset has an ascertainable cost to the assessee in money terms; self-generated goodwill with no such cost is outside the charging provision.

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