Sujata V. Manohar, J.
1. The assessees are a limited company. They were doing, inter alia, the business of manufacturing art silk. The business of manufacturing art silk was sold by the assessees under a sale deed dated 21st September, 1963, to a firm known as M/s. Asawa Silk Mills. As a result of this transfer, import licenses standing in the name of the assessees were also transferred to the firm of M/s. Asawa Silk Mills along with the goodwill of the company. On the basis of the import licences so transferred, the new firm imported yarn. On account of these imports the firm made a profit of Rs. 86,119. For the assessment year 1964-65, the ITO came to the conclusion that if the import licences had not been transferred to a new firm, the assessees could have made a profit of Rs. 86,119. He brought to tax the sum of Rs. 86,119 in the hands of the assessee-company as short-term capital gains. He also taxed the value of the goodwill, which he fixed at Rs. 20,000, as long-term capital gains on the sale of the goodwill.
2. The AAC upheld the addition of these amounts in principle. He, however, reduced the amount of short-term capital gains by Rs. 17,673 and also reduced the value of the goodwill from Rs. 20,000 to Rs. 7,020.
3. In appeal, the Tribunal held that the existing quota rights which had a limited duration could not be treated as a capital asset and, therefore, provisions relating to capital gains could not be applied to such quota rights. The Tribunal deleted the addition sought to be made on the transfer of quota rights. The Tribunal also deleted the value of the goodwill in view of the decision in CIT v. K. Rathnam Nadar : 71ITR433(Mad) , CIT v. Chunilal Prabhudas & Co. : 76ITR566(Cal) and Jagdev Singh Mumick v. CIT : 81ITR500(Delhi) . From this order, at the instance of the Commissioner, the following questions have been referred to us for opinion :
'(1) Whether, on the facts and in the circumstances of the case, where the business of the assessee-company was transferred by way of sale along with its goodwill and quota rights to obtain import licences to the firm 'Asawa Silk Mills', the profits relatable to the quota rights and the import licenses in the hands of the assessee-company arising from the said transfer were assessable to tax under the head 'Capital gains' ?
(2) Whether, on the facts and in the circumstances of the case, the profits relatable to the goodwill of the said business arising to the assessee-company from the said transfer referred to in question No. 1 above were assessable to tax under the head 'Capital gains' ?
(3) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that no capital gains relatable to the goodwill of the business can arise where the business along with its good-will is sold or transferred for value ?'
4. The first question relates to the transfer of import licence. The Supreme Court in its decision in the case of CIT v.B. C. Srinivasa Setty : 128ITR294(SC) , has held that for the purpose of computing capital gains, s. 45, which is the charging section, must be read together with the computation provisions under s. 48. 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. 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 the expenditure of money to a person seeking to acquire it before it can subject to capital gains. In the present case, there was no cost of acquisition of the import licenses, These were granted to the assessee-company on its complying with the conditions prescribed by the Government for the grant of such licences, Such licenses 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. In the case of Addl. CIT v. K. S. Sheikh Mohideen : 115ITR243(Mad) , a Full Bench of the Madras High Court has held that there will be no liability to capital gains tax on the sale of an import entitlement certificate. In order that there may be capital gains, there must be a cost of acquisition of the asset in terms of money, which is absent in the case of an import entitlement certificate or goodwill.
5. In the present case also there was no cost of acquiring import licencnes. Transfer of such licences cannot give rise to any capital gains. We also agree with the finding of the Tribunal that import licences for the import of raw materials which are the stock-in-trade in the business, and which import licences are of a short duration, cannot be looked upon as capital assets. In either view of the matter, transfer of such import licences cannot give rise to any capital gains.
6. On the question of sale of goodwill, the Supreme Court in the case of Srinivasa Setty : 128ITR294(SC) , referred to earlier, had held, applying the same principle, that since the goodwill is a self-generating asset and its cost of acquisition cannot be ordinarily computed in terms of money, it cannot be brought to tax under the provisions of s. 45. The sale of goodwill, therefore, also cannot give rise to any capital gains.
7. Under the circumstances, the question are answered as follows :
Question No. 1 : In the negative, that is to say, in favour of the assessee and against the Department.
Question No. 2 : In the negative, that is to say, in favour of the assessee and against the Department.
Question No. 3 : In the affirmative, that is to say, in favour of the assessee and against the Department.
8. The applicant to pay to the respondent the costs of the reference.