Whether Capital Gain will arise on sale of self generated goodwill of profession?

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Issue

Whether Capital Gain will arise on sale of self generated goodwill of profession?

Provision

Cost of acquisition: Section 55 of Income Tax Act 1961

  • Goodwill of business
  • Trademark or brand name associated with business
  • Tenancy rights
  • Loom hours
  • Right to carry on any business or profession
  • Stage carriage permits
  • Right to produce or purchase any article or thing

In case of acquisition from previous owner: Cost of acquisition is purchase price.

In case of self generated: Cost of acquisition is Nil.

Cost of acquisition of self generated asset other than mentioned in section 55 of Income Tax Act 1961 is not determinable.

The Supreme Court in CIT v. B.C.Srinivasa Shetty (1981) 128 ITR 294 (SC) held that no capital gains tax is payable by an assessee where it was not possible to compute the capital gains under section 48 of the Income Tax Act 1961.Section 48 of the Income Tax Act 1961 deals with mode of computing capital gains. Since cost of acquisition of asset is not ascertainable section 48 cannot be applied thus no capital gain arises.

 

 

The case was applicable to all self generated assets but later amendment was made under section 55 to supersede the decision of Supreme Court. Accordingly in case of self generated asset cost of acquisition is Nil in following asset.

  • Goodwill of business
  • Trademark or brand name associated with business
  • Tenancy rights
  • goodwill of profession, therefore the Supreme Court Loom hours
  • Right to carry on any business or profession
  • Stage carriage permits
  • Right to produce or purchase any article or thing.

The above list do not cover Judgement CIT v. B.C.Srinivasa Shetty (1981) 128 ITR 294 (SC) is still applicable on goodwill of profession.

Conclusion

Cost of acquisition of self generated asset other than mentioned in section 55 of Income Tax Act 1961 is not determinable. Therefore as per the judgement of Supreme Court in case of B.C.Srinivasa Shetty (1981), no capital gain will arise on the self generated assets other than those mention in section 55 of Income Tax Act 1961. That is no capital gain will arise on sale of self generated goodwill of profession.

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