Capital gain tax on professional goodwill for doctors

Hi,

Sale of goodwill of professionals is taxable under the head Capital Gains.

The sale consideration will be the amount received for the goodwill.

The cost of acquisition of such goodwill shall be NIL if the goodwill is self generated. Otherwise it will be the amount paid for purchasing the goodwill (in case business was earlier purchased from someone else). (Refer section 55 of income tax act)

Such amount shall be taxable as capital gains.

Please feel free to call/ revert in case you need more clarity.

Thanks and regards

Abhishek Dugar

CA CS B.Com

Hi,

Goodwill is taxable as capital gains and no exemption is there for doctors.

Regards,

Nikhil.

Hi Raju,

As per the income tax act, since the goodwill of business or profession cannot be computed. As such the same shall not be taxable under any head of income. There is a settled case law also on the similar kind of scenario.

Thanks

Damini

What is the constitution of the hospital?.

Generally there is no capital gain on sale of self-generated assets as the cost of acquisition of such assets can not be computed. Therefore, there is no capital gain on sale of goodwill of a profession.

Case law- CIT Vs. B.C. Srinivasa Setty (1981) 128 ITR 294 (SC).

Thanks

Hi Raju,

Sale of goodwill will be taxable under the head Capital Gains. The cost of acquisition of goodwill under section 55 shall be Nil, post amendment.

Earlier, such sale was not taxable as capital gains. Post amendment in the law, it is taxable.

Please don't refer to case laws of pre amendment period.

Hi Raju,

In the original case BC Srinivasa Setty (1981), a supreme court judgement, it was held that the Cost of acquisition of a self generated asset is indeterminate. therefore, capital gains cannot be computed when a self generated asset is transferred.

To nullify this judgement, the ammendment was bought and intorduction section 55(2) took place, where few assets were notified where cost of acquisition is considered to be "Nil"and hence the whole amount shall be taxable as capital gains. Those assets are:

- Goodwill of business

- Tenancy rights

- Stage carriage permits

- Loom hours

- The right to manufacture, produce or process

- a trademark or brandname associated with business

- a right to carry on business

Except these, no other self generated assets covered. The inference drawn post this amendment was that this section does not cover Goodwill of (Profession) in any way. Hence, no capital gains could be attracted on sale of self generated goodwill of profession.

However, the person further acquiring this goodwill of a profession would be liable on capital gain taxation if he sells the same in future as at that time it will no more remain the self generated goodwill.

Thanks

Damini

It is not taxable as quoted by Ms. Damini also. You can refer any book of income tax for A.Y. 2018-19.

Supreme court decision and section 55(2) are in itself are valid references.

second thing if it is a conversion of firm into private limited company by way of succession then also not taxable subject to fulfillment of certain conditions as mentioned in Section 47(xiii)

.

It says right to carry on profession and not goodwill. Sale of goodwill of profession is not taxable.

(1) in relation to a capital asset being goodwill of a business or a right to manufacture, produce or process any article or thing or right to carry on any business 76[or profession] shall be taken to be nil ; and

Do you mean that the shareholders of private limited company will sale shares to somebody else?

In that case it will be sale of shares and not goodwill.

Please feel free to call/ revert in case you need more clarity.

Thanks and regards

Abhishek Dugar

CA CS B.Com

Hi,

If the position is taken that sale of goodwill of professionals is not taxable, then you can sale the goodwill first and then you can consider selling the shares.

But the partners of the firm should hold 50% of the shareholding for 5 years from the date of conversion. The difference amount is goodwill of profession which is exempt from tax. Assuming you have not recognized any goodwill in the books of accounts as it is self generated for which no transaction is possible.

I assume that the query is already resolved by other fellow experts, feel free to get back in case you have any unresolved points.

Trust this clarifies your query.

Feel free to call / get back in case of further clarifications.

Thanking You.

Regards,

Rohit R Sharma

BCOM, FCA, LLB, CERT. FAFP

Considering the above, goodwill may not be taxable.

Regards,

Nikhil.