K. Balasubramania Nair vs Commissioner of Income Tax

Sethuraman, J.—The following question has been referred to this court by the Appellate Tribunal u/s 256(1) of the I.T. Act, 1961:

Whether, on the facts and in the circumstances of the case, the gains arising to the assessee by the transfer of the route permits held by her could

be brought to tax u/s 45 of the Income Tax Act, 1961, for the assessment year 1966-67?

The assessee is a HUF carrying on the business of bus transport. During the accounting year ending with December 31, 1965, relevant for the

assessment year 1966-67, six buses were sold. The written down value of these buses as on January 1, 1965, was Rs. 68,329. The buses were

sold for Rs. 1,85,000. The assessee had been allowed a depreciation of Rs. 45,268 in respect of these buses. The ITO computed the profit

assessable u/s 41(2) at Rs. 45,268 which represents the depreciation which had been allowed for the earlier years and which had been recouped

by the sale. The ITO further held that there were capital gains arising to the assessee by the sale of the buses and the amount of capital gains had

been computed at Rs. 71,400. The assessee appealed against this assessment to the AAC, contending that the assessment as made by the ITO

represented in effect the sale of the route permits and that no capital gains could arise therefrom. The AAC dismissed the appeal. The assessee

appealed to the Appellate Tribunal, contending that the route permits were not capital assets and that even assuming that they were capital assets,

the amount of surplus was not liable to be assessed to capital gains, The Tribunal rejected these submissions. This is how the matter has come to

this court by way of this reference.

The Tribunal''s findings were that a permit issued to a person is not heritable in the sense that on his death his heirs would automatically use the

same, and that under the Motor Vehicles Act the heirs could do so only for the limited period of currency of the permit, and have to get a permit

granted in their favour for running the buses subsequently. In the view of the Tribunal, the gain arising to the assessee by the transfer of a route

permit was liable to be taxed u/s 45 as it is "" property "". It was also pointed out that some expenses have to be necessarily incurred for acquiring

the route permit in the shape of fees for making the applications, etc., and that, therefore, there is some cost of acquisition. In such a case, in the

view of the Tribunal, the assessee would be liable to capital gains tax. It is this conclusion of the Tribunal that is now challenged.

Learned counsel for the assessee submitted that the present case is in line with the decision of this court in COMMISSIONER OF Income Tax,

MADRAS Vs. K. RATHNAM NADAR., and that there is no question of any liability to capital gains in view of that decision. The decision in

COMMISSIONER OF Income Tax, MADRAS Vs. K. RATHNAM NADAR., was rendered in. connection with a self-generating asset, viz.,

the goodwill. In that case, the assessee was carrying on his business and the goodwill grew with the growth of the business. It was, therefore,

considered to be a self-generating asset. The assessee had not to pay anything as the cost of acquisition of such an asset and, therefore, it was held

that any surplus arising from the sale of the goodwill could not be brought within the scope of the provisions of Section 45 of the Act. In the

present case, the route permit is not a self-generaing asset. The route permit is one granted to the assessee as a result of an application having been

made therefore and as a result of the assessee succeeding in the appeal and subsequent proceedings before courts, in case there is any objection

by any one else to the grant. We do not have any material to show that the assessee purchased the buses along with the route permits and then

sold the buses along with the route permits to third parties. If the assessee had so purchased the buses with the route permits, then the purchase

price would itself include consideration for the purchase of the route rights and, therefore, there would be cost to that extent, of the route permits.

As pointed out by the Tribunal itself, if the assessee had not paid for the route permits at the time of the purchase of the buses or commencement

of the running of the buses, still the assessee had to incur some cost by way of taking proceedings for the acquisition of the permits. In such a case,

we do not consider that the principle of the decision in COMMISSIONER OF Income Tax, MADRAS Vs. K. RATHNAM NADAR., would

have any application. The principle of the decision in COMMISSIONER OF Income Tax, MADRAS Vs. K. RATHNAM NADAR., is to be

applied only to those cases where there is no cost of acquisition for a self-generating asset. Even in the case of a goodwill, if the assessee had paid

for it and if the goodwill is subsequently sold with the business, the principle of that decision would not be applicable. In a similar case, which came

before a Bench of this court, viz., in T.C. No. 380 of 1974 S. Vaidyanathaswami Vs. Commissioner of Income Tax, , it was pointed out (p. 371):

The Tribunal only stated that certain prescribed fee has to be paid for applying for the permit and eventually the permit is allotted, and that the

cost incurred by the assessee may be negligible, but nevertheless some cost must have been incurred in the process of acquiring the property. But

on the basis that there is no evidence to show as to the amount of cost incurred, the entirety of the amount of Rs. 22,500 had been held to be liable

to tax as capital gains. This approach of the Tribunal, we are afraid, is not correct. The Tribunal ought to have given a finding as to what was the

cost of acquisition on the basis of the evidence available. Only if it comes to the conclusion that there was some cost incurred for the acquisition,

the question of capital gains could arise at all. In the absence of such finding, we are unable to answer this reference. But we direct the Tribunal to

go into the question as to whether there was any cost for the acquisition at all, and if so, what was the amount that was spent for the acquisition of

this asset.

In a case, where the assessee does not produce any material to show the actual cost of acquisition, but it is clear that there was acquisition of

the route permit, then it would be necessary for the ITO or the appellate authorities to estimate the cost of such route permits and, then bring to tax

the balance of the sale proceeds. The cost cannot be taken as nil.

In the present case, the Tribunal does not appear to have applied its mind to what was observed in the order of the AAC. The relevant passage

in the order of the AAC may be extracted here ;

In this case the assets which have now been sold, namely, the buses, were once part of the assets of the firm and later before the sale were the

assets of the appellant family. At each of these stages the assets have gained depreciation from the department. Out of the six buses sold, four had

come from the family to the firm and to the present appellant, one had , been bought by the firm and on its dissolution had passed on to the present

appellant and the sixth had been purchased by the appellant family itself.

The Tribunal will have/to consider the question of the cost of acquisition of each bus, in the light of the materials which may be available relating

to the respective buses as shown in the above passage.

In the particular circumstances, as done in S. Vaidyanathaswami Vs. Commissioner of Income Tax, we return the reference unanswered and the

appeal itself will be decided afresh by going into the question in the light of all facts and contentions. There will be no order as to costs.