receipt of money towards goodwill

[CA siba prasad mishra]

Can some one make me conform whether receipt of money towards goodwill  is a capital or revenue receipt.with supporting caselaws..

[probal_shome]

It would depend on whether the amount was received for user of goodwill or for transfer of goodwill.

Goodwill is a capital asset and so an amount received for transfer of goodwill will be a capital receipt as held in Addl. Commissioner of Income-tax vs Smt. Mahinderpal Bhasin][url]Addl. Commissioner of Income-tax vs Smt. Mahinderpal Bhasin[/url] [1979] 117 ITR 26 (ALL.) (http://law.incometaxindia.gov.in/DitTaxmann/incometaxacts/2007itact/%5B1979%5D117ITR0026%28All%29.htm)

On the other hand, if a sum is received as rent for user of goodwill then it will obviously be a revenue receipt.

[CA siba prasad mishra]

many more thanks sir for your prompt reply....For other doubt shall i come back 2 u...

[satyanveshi]

It appears that reply that the transfer of goodwill is a capital receipt may be correct. However, that the statement that it is not taxable is not correct. the Case law is not applicable to the present situations. Because after the case laws sec. 55(2)(a) has been amended wherein it is enacted that the cost of acquisition for the self generated good will should be considered as "Nil" the explanatory memorandum for the finance act,1994 is as under -   

Capital gain on  transfer of assets where there is no cost of acquisition

33.1 By virtue of the provisions of section 45 of the Income-tax Act, capital gains arising on transfer of a capital asset is subjected to income-tax. Section 48 lays down the method of computing capital gains. The cost of acquisition and expenditure relating to the transfer are deducted from the full value of consideration to arrive at capital gains. Section 2(14) defines "capital asset" to include all kinds of property except a few specified ones.

Finance Act, 1994

33.2 In a number of cases, the courts have decided that in case of self-generated assets like goodwill or where the cost of assets to an  assessee (not covered by situations mentioned in section 49) is nil, no tax on capital gains consequent to transfer of such assets could be charged. They have interpreted that only if an asset did cost something to the  assessee in terms of money that the provisions relating to the levy of tax on any capital gains under section 45(1) read with section 48(ii) would apply. A transaction to which these provisions cannot be applied has been held to be one never intended by section 45(1) to be the subject of the charge. The courts have further interpreted that the intent of levying capital gains tax goes to the nature and character of the asset, that it is an asset which possesses the inherent quality of being available on expenditure of money to a person seeking to acquire it. The courts have held that none of the provisions pertaining to the head "Capital gains" suggests that "capital assets" include an asset in the acquisition of which no cost at all can be conceived. The leading case propounding this interpretation is  CIT v. B.C. Srinivasa Setty [1981] 128  ITR  294 (SC).


Therefore, the transfer of goodwill is now taxable.