Commissioner of Income Tax vs New Suraj Transport Corporation (P.) Ltd.

S.S. Sodhi, J.—The controversy here, in the context of the levy of capital gains tax, is with regard to the value, if any, to be ascribed to route permits sold along with the buses.

The matter here pertains to the assessment year 1974-75. The asses-see is a private limited company which was previously carrying on a business in plying passenger buses, but it discontinued doing so during the accounting period in question having sold its fleet of buses along with 24 route permits to Messrs. Jolly Engineers & Contractors Private Limited. This sale was made under an agreement dated January 10, 1973, for a total consideration of Rs. 14,50,000. A sum of Rs. 2,88,475 was credited by the assessee as profit from sale of its vehicles while Rs. 5,00,000 was credited under the head "goodwill" in its profit and loss account. The Income Tax Officer held that there was no sale of "goodwill" and that the entire price realised by the assessee represented the sale price of the buses sold. This order was later upheld in appeal by the Appellate Assistant Commissioner. The Tribunal, however, agreed with the assessee and held that the route permits were property which were acquired free of cost and hence no capital gain could be computed. It was further held that the value of Rs. 5,00,000 placed upon them by the assessee was not unreasonable. It is in this factual background that the following three questions came to be referred to this court for its opinion, namely :

"(1) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is right in law in deleting the additions of Rs. 3,66,330 u/s 41(2) of the Income Tax Act, 1961, and Rs. 1,15,343 as capital gains made by the Income Tax Officer on account of sale of 21 passenger buses of the fleet of the assessee-company to Messrs. Jolly Engineers and Contractors (P.) Ltd., by construing the agreement of sale dated January 10, 1973, as included in the total consideration of Rs. 14,50,000 a sum of Rs. 5 lakhs, credited under the head ''goodwill'' in its profit and loss account, as representing the value of route permits numbering 24 which were passed on with a stipulation to pass on permits to be received in future by the assessee-company ?

(2) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in repelling the contention of the Revenue to the effect that even if some price was intended to be paid under the agreement for the various rights and advantages mentioned therein, the price so payable could only be described as trading profit or short-term capital gain liable to Income Tax ?

(3) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the route permits were capital assets acquired free of cost by the assessee-company and the price realised on their sale was not liable to capital gains ?"

It was the contention of Mr. Ajay Mittal, appearing for the Revenue, that the sale consideration of Rs. 14.5 lakhs constituted the sale consideration for buses and route permits transferred by the assessee and was thus profit within the purview of Section 41(2) of the Income Tax Act, 1961 (hereinafter referred to as "the Act"), and thus exigible to tax, the argument being that the value of the route permits was inherent in the value of the buses. In this behalf, it was further added that the cost of the route permits was not indeterminable. Route permits, it was said, had a cost of acquisition even if it may be nil. In other words, it was argued that, if the cost of acquisition of a capital asset is determinable, capital gains tax is leviable, even if such asset has a nil cost of acquisition. To put it in another way, it was contended that it cannot be said in respect of an asset whose cost of acquisition is determinable that there is no cost of acquisition because the cost, according to Section 55(2) of the Act, would be the fair market value of such an asset, even if its cost of acquisition is nil. The point thus canvassed was that it is only where the cost of acquisition is not determinable that no capital gains tax is exigible.

Turning specifically to route permits, counsel for the Revenue cited in support the two judgments of the High Court of Madras in K. Balasubramania Nair Vs. Commissioner of Income Tax, and Commissioner of Income Tax Vs. Shri Venkateswara Bus Union, , where it was held that a route permit was not a self-generated asset and that some cost would have to be incurred in its acquisition and, after working out such cost, its sale consideration would be amenable to capital gains tax, in accordance with the provisions of the Act.

As regards route permits and their sale, in the context of capital gain or profit, there is, in fact a conflict of judicial opinion on the subject, namely, whether or not such gains or profits are amenable to capital gains tax. Both the High Court of Kerala as also that of the Andhra Pradesh have taken a contrary view in Commissioner of Income Tax Vs. P.S.N. Motors (P.) Ltd., and Addl. Commissioner of Income Tax Vs. Ganapathi Raju Jegi, Sanyasi Raju, , respectively, it being held in Commissioner of Income Tax Vs. P.S.N. Motors (P.) Ltd., , that where a person obtains a route permit for the first time and then transfers it, such transfer is akin to the transfer of goodwill, a self-generated asset. It would have no cost of acquisition and since no cost of acquisition can be predicated for the route permit obtained for the first time, no tax on capital gains can be levied in respect of the transfer of such route permit, it being observed, "before any capital gains tax can be levied, the asset sold must be such as is capable of having a cost of acquisition as contemplated u/s 48 of the Act. An asset to which section 48 cannot be applied cannot be brought to tax u/s 45 since the asset must possess the inherent quality of being available on expenditure of money to a person seeking to acquire it before it can be subjected to capital gains." A similar view finds expression in Ganapathi Raju Jegi, Addl. Commissioner of Income Tax Vs. Ganapathi Raju Jegi, Sanyasi Raju, .

The judicial precedent of significant relevance comes from the Supreme Court in Commissioner of Income Tax, Bangalore Vs. B.C. Srinivasa Setty, , where the question posed was whether the transfer of "goodwill" of a newly commenced business could give rise to a capital gain u/s 45 of the Income Tax Act, 1961. In dealing with this matter, it was observed that Section 45 of the Act is the charging section and, for the purposes of imposing the charge, Parliament has enacted detailed provisions in order to compute the profits or gains under that head. It was, accordingly, held that a transaction to which these provisions could not be applied must be taken as never intended by Section 45 to be the subject of the charge. Further, it was observed that none of the provisions pertaining to the head "Capital gains" suggests that they include an asset in the acquisition of which no cost at all can be conceived. It was, accordingly, held that "goodwill" generated in a newly commenced business cannot be described as an asset within the terms of section 45 and, therefore, its transfer was not subject to Income Tax under the head "Capital gains".

After giving the matter our most earnest consideration, we, with respect, prefer the view of the High Court of Kerala in Commissioner of Income Tax Vs. P.S.N. Motors (P.) Ltd., as being more in accord with the context of the provisions and the scheme of the Income Tax Act, 1961, and the judgment of the Supreme Court in Commissioner of Income Tax, Bangalore Vs. B.C. Srinivasa Setty, . We, consequently, hold that the route permit acquired for the first time must be treated as a self-generated asset, the consideration for the sale of which is not amenable to capital gains tax. We, accordingly, answer all the questions referred in the affirmative, in favour of the assessee and against the Revenue. This reference is disposed of accordingly. There will, however, be no order as to costs.