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Issues involved: Interpretation of whether goodwill of a business is a capital asset for the purpose of taxation under the Income-tax Act, 1961.
Summary: The High Court of Calcutta addressed a reference under section 256(1) of the Income-tax Act, 1961 regarding the treatment of goodwill of a business as a capital asset for taxation. The case pertained to the assessment year 1965-66, where the assessee sold the goodwill of a business to a company and the Income Tax Officer brought the proceeds to tax under "capital gains." The Tribunal rejected the assessee's contention that goodwill is not a capital asset, citing conflicting judicial opinions. The assessee argued that goodwill, being intangible and not incurring acquisition cost, should not be considered a capital asset. However, the revenue contended that goodwill is indeed a capital asset, taxable under "Capital gains." The Court examined previous decisions and concluded that goodwill of a business is a capital asset, as established by the Supreme Court in Devidas Vithaldas & Co. v. CIT. The Court rejected the argument that goodwill should not be taxed under "capital gains" due to lack of acquisition cost, stating that even with a "nil" cost, the proceeds must be taxed. The judgment was made in favor of the revenue, affirming that goodwill is a capital asset for taxation purposes. The separate judgment by Sudhindra Mohan Guha concurred with the decision of the Court.
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