Separate juristic personality controls capital gains treatment on asset transfer, but goodwill without ascertainable cost is not taxable.

Transfer of business assets to a private limited company controlled by the assessee was treated, in substance, as a transfer by a separate juristic person, so the excess realised on machinery and furniture over book value was chargeable as capital gain under section 12B. By contrast, the amount received for goodwill was not taxable as capital gain because goodwill had no ascertainable actual cost in money terms to the assessee for computation under the charging provision. The result was that only the identifiable excess on the transfer of tangible assets fell within capital gains tax, while the goodwill component remained outside the charge.

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Issues: (i) whether the transfer of the business assets to a private limited company controlled by the assessee constituted a sale or transfer giving rise to taxable capital gains under section 12B of the Indian Income-tax Act, 1922; (ii) whether the amount received towards goodwill was liable to be assessed as capital gain under section 12B of the Indian Income-tax Act, 1922.

Issue (i): whether the transfer of the business assets to a private limited company controlled by the assessee constituted a sale or transfer giving rise to taxable capital gains under section 12B of the Indian Income-tax Act, 1922.

Analysis: A company is a separate juristic person distinct from its shareholders, even where the assessee and his nominees hold the shares. The legal effect of the transaction must be determined according to its true legal form, and the transfer of machinery and furniture to the company for consideration in the form of shares resulted in an excess realisation over book value. That excess was therefore capable of being treated as capital gain.

Conclusion: The excess amount of Rs. 33,624 arising from the transfer of machinery and furniture was rightly assessed as capital gain under section 12B and the question was answered against the assessee on this aspect.

Issue (ii): whether the amount received towards goodwill was liable to be assessed as capital gain under section 12B of the Indian Income-tax Act, 1922.

Analysis: Goodwill is an intangible asset, but its acquisition or creation does not ordinarily involve an ascertainable cost in money terms for the assessee. Since section 12B contemplated computation of capital gain after deducting the actual cost to the assessee, the amount received for transfer of goodwill could not be brought within the charging provision on the facts of the case.

Conclusion: The amount of Rs. 50,000 received towards goodwill was not liable to be taxed as capital gain and this part was decided in favour of the assessee.

Final Conclusion: The reference was disposed of by holding that only part of the consideration was exigible to capital gains tax, while the balance attributable to goodwill was outside the charge.

Ratio Decidendi: For capital gains taxation, the legal effect of a transfer to a company must be determined according to the separate juristic personality of the company, and goodwill is not chargeable where no ascertainable actual cost in money terms to the assessee can be shown.

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