Self-created goodwill and capital gains tax: absence of ascertainable acquisition cost kept the transfer outside the charging provision.

Self-created goodwill built up by a firm through its own trading activities, and not acquired for a monetary price, was treated as outside the capital gains charge under section 12B(1) of the Indian Income-tax Act, 1922, because the charging provision presupposes an ascertainable cost of acquisition in monetary terms. The machinery provisions could not be used to tax a capital asset where no such cost existed. The commentary also states that a broader legal contention on this point could be raised in the reference, since it arose from admitted facts already on record and did not require fresh evidence.

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Issues: (i) Whether a self-created or self-generated goodwill transferred by a firm to a private limited company attracts capital gains tax under section 12B(1) of the Indian Income-tax Act, 1922. (ii) Whether the assessee was entitled to raise, in the reference, the contention that no capital gains arose because the goodwill had no ascertainable cost of acquisition in monetary terms.

Issue (i): Whether a self-created or self-generated goodwill transferred by a firm to a private limited company attracts capital gains tax under section 12B(1) of the Indian Income-tax Act, 1922.

Analysis: The goodwill in question was built up by the firm through its own trading activities and was not acquired for a monetary price. The charging provision under section 12B(1) fastens tax on profits or gains arising from transfer of a capital asset, and the concept of profit or gain necessarily presupposes an ascertainable cost of the asset in monetary terms. The machinery provisions cannot be used to extend the charge to an asset which, on the facts, had no cost of acquisition to the assessee. On that construction, self-created goodwill of this kind falls outside the charge.

Conclusion: The transfer of the self-created goodwill did not attract capital gains tax under section 12B(1), and this issue is answered in favour of the assessee.

Issue (ii): Whether the assessee was entitled to raise, in the reference, the contention that no capital gains arose because the goodwill had no ascertainable cost of acquisition in monetary terms.

Analysis: The question referred was framed broadly enough to include the broader liability to capital gains tax on the transfer of goodwill. A distinct legal aspect of the same question could therefore be urged for the first time before the High Court, provided it arose on the facts already on record and did not require fresh investigation. The contention concerned only the legal effect of admitted facts and was within the scope of the reference.

Conclusion: The assessee was entitled to raise the contention, and it was properly considered.

Final Conclusion: The reference was answered against the revenue, holding that the transfer of the self-generated goodwill in the circumstances of the case did not give rise to chargeable capital gains.

Ratio Decidendi: Where goodwill is self-created, has not been acquired for a monetary cost, and no ascertainable cost of acquisition exists, its transfer does not fall within the charging provision for capital gains.

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