(1981) 128 ITR 294 (SC)
Capital gains — charging section; mode of computation
No. The charging section and the computation provisions together form an integrated code. Where the computation provision cannot apply because no cost of acquisition is identifiable, the charge itself fails.
Can capital gains be charged on the transfer of self-generated goodwill, where the asset has no ascertainable cost of acquisition?
The assessee was a registered firm dealing in iron, steel and hardware. On its reconstitution, the old firm's assets — including its goodwill — passed to a newly constituted firm. The goodwill had not been purchased from anyone; it had accreted over the years of the firm's own trading, and no amount had ever been paid for it or entered in the books as its cost. The Income Tax Officer took the view that the transfer of goodwill on dissolution attracted capital gains, and since nothing had been paid to acquire it, treated the cost of acquisition as nil and brought the entire value to tax.
The Appellate Assistant Commissioner and the Tribunal both ruled in the assessee's favour. The Karnataka High Court answered the reference against the Revenue. The Revenue appealed to the Supreme Court, where the question was heard together with connected appeals raising the same point.
For the assessee
Goodwill generated in the course of one's own business has no cost of acquisition at all. The computation provision in Section 48 proceeds on the footing that a cost exists and can be deducted; where none does, the section simply cannot be worked. A nil cost cannot be assumed, because the statute nowhere says so, and a charge cannot be raised by supplying words the legislature omitted.
For the Revenue
Section 45 is a charging provision of wide import covering the transfer of any capital asset. Goodwill is indisputably a capital asset. Where nothing was paid to acquire it, the cost is properly taken as nil, with the result that the whole of the consideration represents the gain. Any other reading would let a valuable asset escape tax entirely.
Justice Pathak, delivering the judgment, began from the proposition that a charging section and the corresponding computation provisions together constitute an integrated code. When there is a case to which the computation provisions cannot apply at all, it is evident that such a case was not intended to fall within the charging section. The Court examined the structure of Section 48, which contemplates deducting from the full value of the consideration the cost of acquisition and the cost of improvement. That structure presupposes an asset in whose acquisition it is possible to envisage a cost. Goodwill generated in a business of one's own making is different in kind: it arises gradually, cannot be traced to any point of outlay, and its value fluctuates with the reputation and conduct of the business. The Court declined to treat 'no cost' as equivalent to 'nil cost', observing that it is not open to the Court to supply a deemed cost the legislature had not provided. Because the machinery failed, the asset fell outside the charge altogether, and the transfer of self-generated goodwill was not exigible to capital gains tax.
The integrated-code principle survives under Sections 67 and 72. Its practical reach is now much narrower, because Section 90 expressly assigns a nil cost of acquisition to self-generated assets such as goodwill, tenancy rights and route permits — precisely the deeming fiction whose absence decided this case. Srinivasa Setty therefore remains the authority to invoke only for assets for which the statute still prescribes no cost mechanism, and it continues to be cited across the Act wherever a charge is sought to be raised on a computation that cannot be worked.