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Assessment of goodwill as income under the head "Capital gains" in the hands of the assessee-firm under the first proviso to section 12B(2) of the Indian Income-tax Act, 1922. Analysis: The case involved the transfer of a registered firm into a private limited company, where all assets and liabilities, including goodwill, were transferred at book value without any consideration for the goodwill. The Income-tax Officer estimated the fair market value of the goodwill and treated the difference as the assessee's income under the head "Capital gains." The Appellate Assistant Commissioner upheld this addition, but the Tribunal later deleted it, stating that goodwill was a self-generated asset and no income on its transfer was assessable. The Tribunal reframed the question broadly to allow all aspects to be considered by the High Court. The High Court noted that the assessee did not receive any consideration for the goodwill, as it was not even listed as an asset in the books and was self-generated. Therefore, the provisions of section 12B(2) were deemed inapplicable. Citing the Supreme Court decision in CIT v. B. C. Srinivasa Setty [1981] 128 ITR 294, the High Court held that the surplus determined by the Income-tax Officer was not assessable as capital gains since the goodwill was self-generated and did not involve any cost to the assessee. In conclusion, the High Court answered the question of law in the negative and in favor of the assessee, ruling that the sum determined as income from the transfer of goodwill was not liable to be assessed as capital gains. No costs were awarded in the matter.
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