Commissioner of Income Tax vs T.G. Rathinaswamy Nadar

V. Ramaswami, J.—The assessee, an individual, was plying three route bases with a spare bus between Akkur and Shiyali. These buses

were acquired by the assessee in the years 1950, 1952 and 1957, for a cost of Rs. 1,14,086 and their written down value at the commencement

of the previous year relevant to the assessment year 1958-59 was Rs. 51,942. The previous year concerned is the year ending with March 31,

1958. In March, 1958, the four buses were sold for a total consideration of Rs. 1,40,000. In the original assessment proceedings for the

assessment year 1958-59, the Income Tax Officer considered that the sale consideration included, the value of goodwill. Accordingly, he broke up

the sale consideration of Rs. 1,40,000, into consideration for sale of buses and value of goodwill and fixed the value of the goodwill at Rs. 84,000

and the sale of buses at Rs. 56,000. The difference of Rs. 4,058 between the sale value of the buses as thus apportioned and the written down

value was assessed to tax as profit u/s 10(2)(vii) of the Income Tax Act, 1922 (hereinafter called ""the Act""). The value of goodwill of Rs. 84,000

was assessed as capital gain u/s 126 of the Act.

The assessee filed an appeal and contended that the value of the goodwill as on January 1, 1954, was not less than Rs. 90,000 and that,

therefore, there was no capital gain at all which could be assessed u/s 12B. The Appellate Assistant Commissioner rejected this contention and

confirmed the assessment.

On a further appeal, by an order dated July 31, 1961, the Tribunal held that the sum of Rs. 84,000 is not assessable as capital gain and this

conclusion was arrived at on the following reasoning:

... 10. There are two ways of looking at the question. One is, having regard to the income estimated by the department from Us very inception

that the good-will had not undergone any change, it was the same both at the beginning and at the end. Therefore, the value of goodwill as on

January 1, 1954, may be taken to be the same as the one fixed by the Income Tax Officer in which case there would not be any profit to be

assessed as capital gains.

The other is that there is no basis for evaluating the goodwill at Rs. 84,000. We have referred to the circumstances in which the buses came to

be sold. These would indicate that the assessee was not in a bargaining position as to compel payment for an intangible asset over and above the

fair value of the buses themselves ...

The Income Tax Officer considered that in this order of the Tribunal, while holding that the sum of Rs. 84,000 was not a capital gain, it impliedly

gave a finding that the entire sum of Rs. 1,40,000 represented the fair market value of the buses. This finding of the Tribunal was treated as an

information coming into the possession of the Income Tax Officer and, accordingly, the Income Tax Officer invoked his powers u/s 34(1)(b) and

issued a notice to the assessee proposing to assess that portion of the difference between the sale value of Rs. 1,40,000 and the written down

value of Rs. 51,942 as would fall u/s 10(2)(vii) as the income of the assessee. The assessee filed a revised return as per the original assessment

order excluding the capital gains. After hearing the assessee''s representative, the Income Tax Officer passed an order dated March 8, 1963,

holding that the assessee had sold his buses for Rs. 1,40,000, the original cost of which amounted to Rs. 1,14,086 and that the profit limited to the

extent of depreciation allowed, namely, Rs. 62,144, was liable to be treated as profits u/s 10(2)(vii), and, in that view, included the said sum of Rs.

62,144 in the computation of the income of the assessee.

The assessee preferred an appeal to the Appellate Assistant Commissioner and challenged the jurisdiction of the Income Tax Officer to invoke

his powers u/s 34(1)(b) in addition to the grounds taken by him on the merits. While holding that Section 34(1)(b) was applicable to the facts and

circumstances of the case, he held on the merits after calling for a finding from the Income Tax Officer that the fair market value of the buses was

only Rs. 83,000. Probably, the Appellate Assistant Commissioner was of the view that the remaining consideration paid was with reference to the

route value.

The assessee filed an appeal in I.T.A. No. 3281 of 1965-66 and the revenue filed I.T.A. No. 3708 of 1965-66 in so far as the Appellate

Assistant Commissioner fixed the fair market value of the buses at Rs. 83,000. The Appellate Tribunal in construing the two paragraphs in the

order dated July 31, 1961, above-quoted, observed :

... the Tribunal did not give any specific finding either to the effect that the value of the goodwill as on January 1, 1954, was Rs. 84,000, or to the

effect that the price of the goodwill as on the date of sale was nil. Ail that they did was to opine that in either view of the matter the assessee did

riot make a capital gain of Rs. 84,000 on the sale of buses. The absence of any specific finding by the Tribunal and the mere disposal of the appeal

before them in favour of the assessee cannot constitute ''information'' within the meaning of Section 34(1)(b) of the Income Tax Act, 1922. All the

facts available to the Tribunal were before the Income Tax Officer also at the time of the original assessment and, in our opinion, there is no fresh

''information'' which can be said to have come to light as a result of the Tribunal''s order so as to vest jurisdiction in the Income Tax Officer for the

purpose of reassessment u/s 34(1)(b) of the Income Tax Act, 1922 ...

In this view, the Tribunal held that Section 34(1)(b) was not applicable and the reopening of the assessment was bad in law. In view of this

finding of lack of jurisdiction, the Tribunal did not consider it necessary to go into the other ground as regards the quantum of profits determinate

u/s 10(2)(vii) of the Act.

The revenue filed two applications for reference in these Income Tax appeals before the Tribunal. But the Tribunal considered that since it had

made a consolidated order and disposed of the two appeals, there is no need for making two references, and it is enough if one reference is made,

and accordingly referred the following question of law u/s 66(1):

Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the Income Tax Officer acted without jurisdiction

in reopening the assessment u/s 34(1)(b) of the Indian Income Tax Act, 1922.

The point that arises for consideration in this reference really depends on the interpretation to be placed on paragraphs 10 and 11, quoted

above, in the Tribunal''s order dated July 31, 1961.

It is the contention of the learned counsel for the revenue that the finding of the Tribunal in effect in those two paragraphs was that there was no

sale of goodwill and the entire amount of Rs. 1,40,000 realised by the assessee represented the fair market value of the buses themselves On the

other hand, the learned counsel for the assessee contended that at best the order of the Tribunal could be interpreted as meaning that there was no

sale of goodwill, but it cannot be stated that the Tribunal has given a finding that the entire sum of Rs. 1,40,000 or any portion of the same was the

fair market value of the buses themselves. In this connection, the learned counsel pointed out that the buses as such could not have been sold for

such a huge consideration but for the fact that it has got route permit and for the purpose of ascertaining the income chargeable to tax u/s 10(2)

(vii), the value of the route permit could not be considered. In other words, the argument of the learned counsel is that the Income Tax Officer, in

the original assessment, fixed the value of the buses at Rs. 56,000 and considered the remaining Rs. 84,000 as representing the value of the route

permit and/or goodwill. The Tribunal had only given a finding that the goodwill was not sold, but there was no consideration as to whether the

route permit as such was sold or not. By invoking his powers u/s 34(1)(b) the Income Tax Officer is trying to refix the value of the buses which he

had originally fixed at Rs. 56,000 and this, according to the learned counsel, amounts to a change of opinion, which will not confer any jurisdiction

on the Income Tax Officer to invoke the powers u/s 34(1)(b). We have carefully considered the two relevant paragraphs in the earlier order of the

Tribunal.

In order to understand the first paragraph, we have to state that in an earlier portion of the order, the Tribunal has said that the income from the

buses was at the same figure of Rs. 5,000 per bus right from the beginning and, therefore, the goodwill, if any, on the date of sale could not be

different from what it was on January 1, 1954. The Tribunal, therefore, said in the first paragraph above quoted that since the goodwill bad not

undergone any change, there could not have been any capital gain. But the Tribunal had not given any finding as to what was the value of the

goodwill as on January 1, 1954. In fact, in the next paragraph, the Tribunal stated that there was no basis for evaluating the goodwill at Rs.

84.000. The result, therefore, is that there was no specific finding as to whether there was any goodwill at all either on January 1, 1954, or on the

date of sale, much less its value. But what the Tribunal stated in the next paragraph is the only relevant thing for the purpose of deciding the

question at issue. In that paragraph, after referring to the circumstances in which the buses came to be sold, the Tribunal stated that those

circumstances would indicate that the assessee was not in a bargaining position as to compel payment for an intangible asset over and above the

fair market value of the buses themselves. We are of the view that, on a reasonable interpretation, this might be considered as a finding that there

was no sale of goodwill and that the entire price realised by the assessee is the fair market value of the buses themselves. This is the interpretation

placed by the Income Tax Officer and on this interpretation only, he invoked his powers u/s 34(1)(b). We are unable to agree with the learned

counsel that in the original order of the Income Tax Officer, he had fixed the value of buses at Rs. 56,000 and the balance of Rs. 84,000,

therefore, represented the route value. Before the Income Tax Officer, at the stage of original assessment, the assessee did not furnish any

particulars regarding the actual sale value agreed upon and the route value or that the goodwill was included in the amount of Rs. 1,40,000. The

Income Tax Officer only bifurcated this total consideration and fixed the capital gain at Rs. 84,000 as representing the sale of goodwill. That is how

the Tribunal on the earlier occasion also understood the order of the Income Tax Officer as it is stated in that order specifically that the Income Tax

Officer broke up the sale consideration as under:

Rs.

For sale of the buses as such, i.e., little over the written down value of the 56,000

(1) bases

(2) Value of goodwill 84,000

It is the question whether there was any sale of goodwill and whether in such sale, there was any capital gain that was considered by the

Tribunal and while holding that there was no sale and no capital gain, the Tribunal in so many words stated that the assessee got only a fair market

value of the buses themselves. The learned counsel for the assessee pointed out that the buses were very old and in fact they were condemned in

two or three years after the sale and that only because of the value of the route permit the same has realised so much as consideration. In this

connection, he also referred to the decision of this court in Y. Vijayaranga Mudaliar v. Commissioner of Income Tax, [1963] 47 ITR 653 wherein

this court had observed that the buses have little value shorn of their permits to ply on particular routes and that in case of sale of buses, it is an

open secret that the consideration paid by the purchaser of the vehicles is only commensurate with their earning capacity which is intimately

connected with the routes on which they operate. The learned judges also observed therein that we can almost take judicial notice of the fact that

whenever a bus with a permit is transferred, a fair portion of the consideration would represent the value attributable to the pecuniary gain derived

by operating on the route.

It might or might not be said that the portion of the sale consideration of Rs. 1,40,000 represented the value of the route permit. But we are

concerned with the question whether on a reasonable interpretation of the Tribunal''s order, the Income Tax Officer could be said to have any

information in his possession which will raise a reasonable belief that the income, profits or gains chargeable to Income Tax have escaped

assessment or have been under-assessed or assessed at too low a rate or have been made the subject of excessive relief under the Act. We are

unable to hold that the interpretation placed by the Income Tax Officer on the order of the Tribunal was not reasonable or in any way perverse.

Once we come to the conclusion that it is a reasonable interpretation though ultimately the assessee might be able to convince the Income Tax

Officer that the entire amount does not represent the fair market value of the buses themselves, the jurisdiction of the Income Tax Officer to reopen

the assessment could not be questioned We are, therefore, of opinion that the Tribunal was in error in holding that Section 34(1)(b) was not

applicable to the facts and circumstances of the case. We, accordingly, answer the reference in the negative and in favour of the revenue. As we

have already pointed out, the Tribunal had not gone into the other grounds as regards the quantum of profits determinable u/s 10(2)(vii) in view of

its opinion that Section 34(1)(b) was not applicable. The result of our answering the reference in favour of the revenue would mean that the

appeals filed by the revenue and the assessee before the Tribunal would have to be restored to file and heard on the merits. The parties will be at

liberty to adduce any evidence relating to the route value and the fixation of the fair market value of the buses. The revenue will be entitled to its

costs. Counsel''s fee Rs. 250.