CIT v. BC Srinivasa Setty

(1981) 128 Income Tax Reports 294 (SC)Supreme Court of India1981Law of Taxation

Rule established

Where cost of acquisition of a capital asset is indeterminate, the computation machinery fails and capital gains cannot be charged.

Facts

The assessee was a partner in a firm that was dissolved
On dissolution, the goodwill of the firm was distributed among partners
The assessee subsequently sold the goodwill for a substantial sum
The Revenue sought to tax the profit as capital gains under S.45
The assessee contended that since goodwill was self-generated, its cost of acquisition was nil/indeterminate, making computation under S.48 impossible

Issue

Whether capital gains can be computed under S.48 when the cost of acquisition of the capital asset (self-generated goodwill) is nil or cannot be determined.

Held

S.48 mandates that capital gains shall be computed by deducting "cost of acquisition" from the full consideration received
Where the cost of acquisition of a capital asset is indeterminate (as in self-generated goodwill), the computation mechanism prescribed by S.48 becomes unworkable
The charging section (S.45) and the computation provisions (S.48) form an integrated code; if the computation cannot be made, the charge fails
Self-generated goodwill has no determinable cost of acquisition

Ratio Decidendi

The charging section (S.45) and computation provisions (S.48) of capital gains form an integrated code. When the computation machinery fails due to the impossibility of determining cost of acquisition (as in self-generated goodwill), the charge itself fails. No capital gains tax can be levied on transfer of an asset whose cost of acquisition is inherently indeterminate.

How to use it in an exam

"Where cost of acquisition is indeterminate, computation fails and capital gains cannot be charged" (BC Srinivasa Setty)
Use when discussing the computation formula under S.48, self-generated assets (goodwill, trademarks created internally), or the relationship between charging section and computation provisions
Key line: "The charging section and computation provisions form an integrated code. If computation fails, the charge fails."
Note: This principle was subsequently overridden by inserting S.55(2)(a) which deems cost of acquisition as nil for goodwill of a profession, thereby enabling taxation. But the principle remains valid for other self-generated intangibles not covered by S.55(2).

Source

Source: (1981) 128 ITR 294 (SC)

This is an educational summary, not the judgment itself. Cite the reported version in professional or academic work.

Cited in study notes

Law of TaxationCapital GainsComputation of capital gains under S.48; what happens when cost of acquisition is indeterminate