1986 (1) TMI 91 - HC - Income Tax

Summary

Issues:
Interpretation of capital gain on transfer of goodwill without cost of acquisition or improvement.

Analysis:
The case involves a reference under section 256(1) of the Income-tax Act regarding the tax treatment of the transfer of goodwill without any cost of acquisition or improvement. The question posed was whether the Tribunal was correct in holding that no capital gain arose to the assessee on the transfer of goodwill for a consideration of Rs. 50,000 due to the absence of any cost involved in the acquisition of the goodwill. The assessment year in question was 1969-70, where the assessee, an individual, sold a proprietary firm for Rs. 80,000, with Rs. 50,000 attributed to goodwill.

The Appellate Assistant Commissioner initially ruled in favor of the assessee, stating that the amount of Rs. 50,000 could not be added to the taxable income as it did not constitute a capital gain. The Income-tax Appellate Tribunal, Patna Bench, upheld this decision, leading the Department to appeal to the High Court. The core issue revolved around whether capital gain could be realized in the absence of any cost of acquisition of the goodwill.

The High Court referred to the Supreme Court decision in CIT v. Srinivasa Setty [1981] 128 ITR 294, which clarified that for an asset to fall under the purview of capital gains, there must be a conceivable cost of acquisition. The Supreme Court emphasized that goodwill generated in a new business, without any associated acquisition cost, cannot be taxed as capital gain. In the present case, since the goodwill was developed by the assessee in a new business without any acquisition cost, the consideration of Rs. 50,000 for the goodwill could not be taxed as capital gain.

Consequently, the High Court concluded that no capital gain arose to the assessee on the transfer of goodwill, and the Tribunal's decision was deemed correct. The reference was answered in favor of the assessee, against the Revenue. Additionally, since the matter had been settled by a Supreme Court decision post the reference, no costs were awarded. The High Court directed the transmission of the order to the Income-tax Appellate Tribunal, Patna Bench "A" in accordance with the Income-tax Act.