Kerala H.C : Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that no tax on capital gains can be levied in respect of the transfer of route permits which were acquired by the assessee for the first time ?

Sections 45, 48

Asst. Year 1974-75

Counsel Appeared

Menon, for the Revenue : Jose Joseph for the Assessee

S. PARIPOORNAN, J. :

At the instance of the Revenue, the Tribunal has referred the following question of law for the decision of this Court:

“Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that no tax on capital gains can be levied in respect of the transfer of route permits which were acquired by the assessee for the first time ?”

The respondent-assessee is a private limited company. It is a transport operator. We are concerned with the asst. yr. 1974-75 for which the previous year ended on June 30, 1973. During the relevant accounting period, the assessee sold 12 buses along with pucca route permits. As on July 1, 1972, the written down value of 9 buses was only Rs. 1,52,021. The assessee claimed that out of the consideration received for the sale of 9 buses, Rs. 2,50,000 was the value of the route permits, that this was analogous to goodwill, that there was no cost of acquisition with regard to the route permits, that it was a self-generated asset and so no capital gains accrued or arose for the levy of tax. The ITO held that the entire sale proceeds represented the value of buses. According to him, the route permits can be transferred only with the permission of the Regional Transport Authority and the assessee had no power to transfer the route permits. Therefore, no value could be attached to the route permits. He did not therefore, exclude any portion of the consideration (Rs. 2,50,000) from capital gains. In appeal, the CIT (A) held that the sale price of the vehicles did include certain route value. He rejected the plea of the assessee that the route value is a self-generated asset. According to him, the assessee incurred expenditure to obtain the permits and the expenses so incurred constituted the cost of acquisition. He estimated the value of the route permit per bus at a flat rate of Rs. 5,000. The ITO was directed to assess a sum of Rs. 45,000 being the route value of 9 buses after deducting the cost of acquisition. The matter was taken in appeal by the assessee before the Tribunal. The Tribunal, after placing reliance on the decision of the Andhra Pradesh High Court in Addl. CIT vs. Ganapathi Raju Jegi, Sanyasi Raju (1979) 119 ITR 715 (AP), held that tax on capital gains can be assessed in relation to transfer of route permits which the assessee had acquired from other parties at a cost but capital gains is not exigible in the case of transfer of route permits which were acquired by the assessee for the first time, as no cost of acquistion can be envisaged with regard to such permits. Since details were lacking in this behalf, the Tribunal remitted the matter to the ITO for fresh decision in the light of the above finding. On motion made by the Revenue, the Tribunal has referred the question of law formulated hereinabove for the decision of this Court.

We heard counsel for the Revenue, Mr. P. K. R. Menon, as also counsel for the assessee, Mr. Jose Joseph.Counsel for the Revenue contended that the Tribunal was in error in drawing a dichotomy between the transfer of route permits by the assessee, acquired from other parties at a cost, and transfer of route permits by the assessee which were obtained by him for the first time. It was also argued that the route permits cannot be considered to be analogous to goodwill to say that there will be no cost of acquisition or that it is a self-generated asset and since no cost at all can be conceived for the acquisition of the assets, it is not possible to compute the capital gains as per the provisions of the IT Act. Counsel for the Revenue mainly placed reliance on the decisions of the Madras High Court in K. Balasubramania Nair vs. CIT (1979) 119 ITR 504 (Mad) and CIT vs. Shri Venkateswara Bus Union (1979) 12 CTR (Mad) 374 : (1979) 119 ITR 507 (Mad) to contend that the cases of transfer of the route permits cannot be treated as, analogous to the sale of goodwill nor can it be called a self-generating asset and so the profit obtained by the transfer of the route permits is exigible to capital gains tax.

On the other hand, counsel for the assessee submitted that this is not a case where the assessee acquired route permits from other parties at a cost, that the route permits were acquired by the assessee for the first time, that it is a self generating asset and analogous to goodwill, that it is not possible to compute capital gains in the case of transfer of goodwill as per the provisions of the Act as also in the case of transfer of the route permits which were acquired by the assessee for the first time, that this is not a case where the transfer disclosed a separate value fixed for buses and route permits and so in the case of transfer of the route permits which were acquired by the assessee for the first time, no capital gains tax is exigible. Counsel further pleaded that the obtaining of the route permit is analogous to the acquisition of an import licence by a person, that notwithstanding that some initial fee will have to be remitted and some nominal expenditure may have to be incurred for obtaining the route permit or import licence, it cannot be stated that the asset possessed the inherent quality of being available on payment of a price and so the principles applicable in the case of goodwill should apply in the case of transfer of a permit which was obtained by the assessee for the first time. The reasoning and conclusion of the Tribunal was sought to be supported on the above reasonings. Counsel for the assessee also placed reliance on the decisions in S. Vaidyanathaswami vs. CIT (1979) 8 CTR (Mad) 88 : (1979) 119 ITR 369 (Mad); Addl. CIT vs. Ganapathi Raju Jegs, Sanyasi Raju (1979) 119 ITR 715, 721 (AP) Addl. CIT vs. K. S. Sheik Mohideen (1979) 8 CTR (Mad) 84 (FB) : (1978) 115 ITR 243 (Mad) (FB) and CIT vs. Modiram Laxmandas (P) Ltd. (1982) 30 CTR (Bom) 209 : (1983) 142 ITR 702 (Bom). Both sides also read relevant passages from the decision of the Supreme Court in CIT vs. B. C. Srinivasa Setty (1988) 128 ITR 294 (SC).

On hearing the rival contentions, the following facts are clear : The buses sold by the assessee were not new. Consideration was not separately shown as relating to the route permits in any deed of transfer. According to the assessee, the vehicles were sold for a consideration of Rs. 10,39,493 while the written down value of the vehicles was only Rs. 1,52,021. It was stated that the above facts will show that a portion of the consideration related to the route permits. The Tribunal accepted the plea of the assessee that Balaji Motors, to whom six buses were sold by the assessee for Rs. 9 lakhs, was allowed depreciation only on the amount of Rs. 6,80,000 and the Department allocated Rs. 2,20,000 as consideration for the cost of the route permits. The Tribunal held that the CIT (A) has, in the present case, accepted the position that a portion of the consideration related to the route permits and had made a rough allocation for the same. In the light of the above, the Tribunal concluded that a portion of the consideration represented consideration for the route permits. On the basis of the above finding, the Tribunal took the view that the transfer of the route permits, which were acquired by the assessee for the first time, is akin to a transfer of goodwill and is a self-generated asset. It will be governed by the principles laid down by the Supreme Court in Srinivasa Setty’s case (supra). The Tribunal concluded that tax on capital gains can be levied only with regard to the route permits which were acquired by the assessee at a cost and in such cases, a reasonable allocation of the consideration between the bus and the route permit should be done. In the case of transfer of permits obtained by the assessee for the first time, no capital gains tax is exigible.

The decisions of the Madras High Court in Vaidyanathaswami’s case (supra) and of the Andhra Pradesh High Court in Ganapathi Raju Jegi’s case (supra) are pointers to hold that in a case where a person obtains the route permit for the first time and it is transferred, it is akin to a transfer of “goodwill”, a self-generated asset. It will have no cost of acquisition. Since no cost of acquisition can be predicated for the route permit obtained for the first time by a person, in the light of the decision in Srinivasa Setty’s case (supra) , Vaidyanathaswami’s case (supra), Modiram Laxmandas (P.) Ltd.’s case (supra) and Sheik Mohideen’s case (supra), we hold that no tax on capital gains can be levied in respect of the transfer of such route permits. We are of the view that 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 under s. 48 of the Act. An asset to which s. 48 cannot be applied cannot be brought to tax under 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. The route permits cannot be considered as assets which are capable of acquisition, initially, for a price. When such assets are transferred, there can be no question of capital gains.

7. We answer the question referred to us in the affirmative, against the Revenue and in favour of the assessee.

[Citation :180 ITR 345]