The computation of capital gain in the case of self-generated assets is relatively straightforward. Since the cost of acquisition of a self-generated asset is nil, the capital gain is simply the full value of consideration received or accruing as a result of the transfer of the asset.

However, there are a few exceptions to this general rule. For example, if you self-generate a capital asset that is used in your business, you may be able to claim depreciation on the asset. This will reduce the cost of acquisition of the asset and hence reduce the capital gain when you transfer it.

Another exception is in the case of goodwill. If you self-generate goodwill in your business and then sell the business, the goodwill will be treated as a capital asset and you will be liable to pay capital gains tax on its transfer. However, the cost of acquisition of goodwill is deemed to be nil, so the capital gain will be equal to the full value of consideration received for the goodwill.

Here is a summary of the computation of capital gain in the case of self-generated assets under Income Tax Act:

Capital gain = Full value of consideration received or accruing as a result of the transfer of the asset – Cost of acquisition of the asset

Cost of acquisition of a self-generated asset = Nil

Therefore, capital gain in the case of a self-generated asset = Full value of consideration received or accruing as a result of the transfer of the asset

EXAMPLES

1. Facts under Income Tax Act:

• A is a self-employed lawyer.
• In 2010, he started his own law firm.
• Over the years, he has built up a strong reputation for being a skilled and experienced lawyer.
• In 2023, he decides to sell his law firm to a larger law firm.

Computation under Income Tax Act:

• The goodwill of Mr. A’s law firm is a self-generated asset.
• The cost of acquisition of a self-generated asset is nil.
• Therefore, the capital gain on the sale of the law firm is nil.

1. Facts

• B is a self-employed author.
• She has written several books over the years, which have been bestsellers.
• In 2023, she decides to sell the copyright to her books to a publishing house.

Computation under Income Tax Act:

• The copyright to Ms. B’s books is a self-generated asset.
• The cost of acquisition of a self-generated asset is nil.
• Therefore, the capital gain on the sale of the copyright is nil.

3. Facts under Income Tax Act:

• C is a self-employed painter.
• He has painted several paintings over the years, which have been sold for high prices.
• In 2023, he decides to sell one of his paintings to a private collector.

Computation under Income Tax Act:

• The painting is a self-generated asset
• The cost of acquisition of a self-generated asset is nil.
• Therefore, the capital gain on the sale of the painting is nil.

Important Notes under Income Tax Act:

• There are a few exceptions to the rule that self-generated assets do not have a cost of acquisition. For example, if a self-employed person incurs any expenses in creating or acquiring a self-generated asset, those expenses can be deducted from the sale proceeds to compute the capital gain.
• Additionally, if a self-employed person sells a self-generated asset to a related person, the capital gain on the sale may be taxable.