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Issues involved: Determination of liability to tax on capital gains u/s 12B of the Indian Income-tax Act, 1922 in a case involving the sale of goodwill to a limited company.
Summary: The High Court of Bombay, in a judgment delivered by Kantawala C. J., addressed the issue of whether capital gains tax was payable in a case where an individual, carrying on business since 1949, sold goodwill to a limited company. The Income-tax Officer assessed capital gains on the sale of goodwill, which was contested by the assessee leading to cross-appeals. The Tribunal, relying on previous court decisions, held that no capital gains tax was payable. The revenue sought a reference based on subsequent Supreme Court rulings. The court considered conflicting contentions regarding the nature of the goodwill as a self-generated asset and its impact on tax liability. The court analyzed the history of the business, noting that it was started by the assessee in 1949 and later sold to the limited company in 1959. Referring to the provisions of the Income-tax Acts, the court emphasized that tax liability arises from profits or gains exceeding the cost of the capital asset transferred. It was established that self-created goodwill, lacking a cost to the assessee, falls outside the scope of capital assets subject to capital gains tax. Citing a previous judgment, the court concluded that in cases of self-generated goodwill, no tax on capital gains is applicable upon transfer to another entity. In conclusion, the court ruled in favor of the assessee, stating that no tax on capital gains was payable in the case of the sale of goodwill to the limited company. The revenue was directed to bear the costs of the assessee.
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