Self-generated goodwill in a new business is outside capital gains tax where acquisition cost cannot be ascertained.

Section 45 of the Income-tax Act applies only where transfer of a capital asset produces a gain that can be computed under the capital gains machinery. The scheme of sections 48, 49, 50 and 55 proceeds on the basis that the asset has an ascertainable cost of acquisition and a determinable date of acquisition. Self-generated goodwill in a newly commenced business has no such ascertainable cost or certain acquisition date. On that basis, its transfer is outside the charging framework for capital gains and is not taxable under section 45.

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Issues: Whether the transfer of goodwill generated in a newly commenced business gives rise to taxable capital gains under section 45 of the Income-tax Act, 1961.

Analysis: Section 45 applies only where a transfer of a capital asset gives rise to profit or gain capable of computation under the capital gains machinery. The expression "capital asset" is wide, but the charging provision and the computation provisions form an integrated scheme. Section 48 proceeds on the basis that the asset transferred is one in respect of which a cost of acquisition can be ascertained. The connected provisions, including sections 49, 50 and 55, also contemplate an asset with an identifiable acquisition cost and date of acquisition. Goodwill generated in a newly started business is self-generated, its cost of creation cannot be conceived in the statutory sense, and its date of acquisition cannot be determined with certainty.

Conclusion: Goodwill of a newly commenced business is not an asset within section 45 for purposes of capital gains, so its transfer is not taxable as capital gains.

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