No Cost of Acquisition, No Capital Gain

shrinivasa shetty vs commisioner of income tax




P.N. Bhagwati, V.D. Tulzapurkar & R.S. Pathak, JJ.

Civil Appeals Nos. 1146 of 1975 c/w Civil Appeals Nos. 1378 of 1976 & 926 of 1973

19th February, 1981

(1981) 49 CCH 0137 ISCC

(1981) 21 CTR 0138 : (1981) 128 ITR 0294 : (1981) 5 TAXMAN 0001

Legislation Referred to

Sections 2(14), 45(1), 48

Case pertains to

Asst. Year 1966-67

Decision in favour of:



Capital gains—Capital asset—Goodwill—When goodwill is sold the consideration represents capital value of the asset and not profit or gain—Date of acquisition of goodwill incapable of exact determination—Goodwill generated initially in a business is not an asset contemplated by s. 45—Transfer of goodwill does not give rise to capital gains for income-tax purposes

Held :

Goodwill denotes the benefit arising from connection and reputation. The benefit to the business varies with the nature of the business and also from one business to another. No business commenced for the first time possesses goodwill from the start. It is generated as the business is carried on and may be augmented with the passage of time. A variety of elements goes into its making, and its composition varies in different trades and in different businesses in the same trade, and while one element may preponderate in one business, another may dominate in another business. And yet, because of its intangible nature, it remains insubstantial in form and nebulous in character. In a progressing business goodwill tends to show progressive increase. And in a failing business it may begin to wane. Its value may fluctuate from one moment to another depending on changes in the reputation of the business. It is affected by everything relating to the business, the personality and business rectitude of the owners, the nature and character of the business, its name and reputation, its location, its impact on the contemporary market, the prevailing socio-economic ecology, introduction to old customers and agreed absence of competition. There can be no account in value of the factors producing it. It is also impossible to predicate the moment of its birth. It comes silently into the world, unheralded and unproclaimed and its impact may not be visibly felt for an undefined period. Imperceptible at birth it exists enwrapped in a concept, growing or fluctuating with the numerous imponderables pouring into, and affecting, the business. Sec. 45 charges the profits or gains arising from the transfer of a capital asset to income-tax. The asset must be one which falls within the contemplation of the section. It must bear that quality which brings s. 45 into play. Sec. 48 provides that the income chargeable under that head shall be computed by deducting from the full value of the consideration received or accruing as a result of the transfer of the capital asset : “(ii) the cost of acquisition of the capital asset….”. What is contemplated is an asset in the acquisition of which it is possible to envisage a cost. The intent goes to the nature and character of the asset, that it is an asset which possesses the inherent quality of being available on the expenditure of money to a person seeking to acquire it. There are other provisions which indicate that s. 48 is concerned with an asset capable of acquisition at a cost. Sec. 50 is one such provision. So also is sub-s. (2) of s. 55. None of the provisions pertaining to the head “Capital gains” suggests that they include an asset in the acquisition of which no cost at all can be conceived. Yet there are assets which are acquired by way of production in which no cost element can be identified or envisaged. From what has gone before, it is apparent that the goodwill generated in a new business has been so regarded. The elements which create it have already been detailed. In such a case, when the asset is sold and the consideration is brought to tax, what is charged is the capital value of the asset and not any profit or gain. In the case of goodwill generated in a new business there is the further circumstance that it is not possible to determine the date when it comes into existence. The date of acquisition of the asset is material factor in applying the computation provisions pertaining to capital gains. It is possible to say that the “cost of acquisition” mentioned in s. 48 implies a date of acquisition, and that inference is strengthened by the provisions of ss. 49 and 50 as well as sub-s. (2) of s. 55. It may also be noted that if the goodwill generated in a new business is regarded as acquired at a cost and subsequently passes to an assessee in any of the modes specified in sub-s. (1) of s. 49, it will become necessary to determine the cost of acquisition to the previous owner. Having regard to the nature of the asset, it will be impossible to determine such cost of acquisition. Nor can sub- s. (3) of s. 55 be invoked, because the date of acquisition by the previous owner will remain unknown. Hence the goodwill generated in a newly commenced business cannot be described as an “asset” within the terms of s. 45 and, therefore, its transfer is not subject to income-tax under the head “Capital gains”.—CIT vs. K. Rathanam Nadar (1969) 71 ITR 433 (Mad) : TC20R.426#1, CIT vs. Chunilal Prabhudas & Co. (1970) 76 ITR 566 (Cal) : TC20R.425, Jagdev Singh Mumick vs. CIT (1971) 81 ITR 500 (Del), CIT vs. E.C. Jacob (1973) 89 ITR 88 (Ker)(FB), CIT vs. Home Industries & Co. (1977) 107 ITR 609 (Bom), CIT vs. Michel Postel (1978) 112 ITR 315 (Bom) and CIT vs. Jaswantlal Dayabhai (1978) 114 ITR 798 (MP) approved;CIT vs. Mohanbhai Pamabhai (1973) 91 ITR 393 (Guj) and K.N. Daftary vs. CIT 1976 CTR (Cal) 23 : (1977) 106 ITR 998 (Cal) : TC20R.420 overruled;CIT vs. B.C. Srinivasa Setty (1974) 96 ITR 667 (Kar) : TC20R.150 affirmed.

Conclusion :

Goodwill generated in a newly commenced business cannot be considered an “asset” within the terms of s. 45 and hence the transfer of goodwill initially generated in a business does not give rise to a capital gain for the purposes of income-tax.


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