Self-generated goodwill and partnership takeover credits were held outside capital gains where no specific transfer or cost of acquisition existed.

During a partnership takeover, crediting goodwill to the partners did not amount to a transfer of any specific partnership asset, because a partner has no proprietary right in particular partnership property while the firm subsists; capital gains were therefore not attracted on that basis. Self-generated goodwill with no ascertainable cost of acquisition was also treated as outside the capital gains charging provision, as business-created goodwill did not fit the statutory scheme on these facts. On that reasoning, the additions made on account of capital gains from goodwill were held unsustainable.

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Issues: (i) Whether the crediting of goodwill in favour of the partners on the takeover of the firm's business amounted to a transfer giving rise to capital gains. (ii) Whether self-generated goodwill, having no cost of acquisition, could be brought to tax as a capital asset under the capital gains provision.

Issue (i): Whether the crediting of goodwill in favour of the partners on the takeover of the firm's business amounted to a transfer giving rise to capital gains.

Analysis: During the subsistence of a partnership, a partner has no proprietary right in any specific item of partnership property and cannot deal with such property as his own. On the facts found, the goodwill was created in the firm's books and the partners merely received their share on the revaluation and takeover arrangement. There was no transfer by the partners of any identified interest in goodwill so as to constitute a taxable transfer in their hands.

Conclusion: No transfer giving rise to capital gains was made out against the assessee.

Issue (ii): Whether self-generated goodwill, having no cost of acquisition, could be brought to tax as a capital asset under the capital gains provision.

Analysis: The prevailing judicial view treated self-generated goodwill as an asset that did not cost anything to the assessee in money terms and whose acquisition point could not be identified. In such a situation, the charging provision for capital gains was held not to extend to the realisation of goodwill merely created by business effort and entered in the books at takeover. Where two views were possible, the construction favourable to the assessee was preferred.

Conclusion: Self-generated goodwill with no cost of acquisition was not taxable as capital gains on these facts.

Final Conclusion: The additions made on account of capital gains from goodwill were unsustainable, and the assessees succeeded on the central question in dispute.

Ratio Decidendi: A partner's share in partnership property, including goodwill, is not a transfer of a specific asset during the subsistence of the firm; moreover, self-generated goodwill with no ascertainable cost of acquisition falls outside the capital gains charging provision.

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