1. This appeal by the assessee relates to the assessment year 1974-75, for which the accounting period ended on 30-6-1973.
2. The assessee is a registered firm engaged in the business of plying buses. During the accounting period, the assessee sold six vehicles for Rs. 4,56,000, the written down value of which, as on 1-7-1972, was Rs. 1,18,961. The assessee claimed that the value of the route permit for the six vehicles came to Rs. 3,29,500 and that this was not assessable to tax on capital gains for the reason that the route permits had no cost of acquisition and that their value of improvements cannot also be ascertained. The claim was rejected by the ITO on the ground that the assessee has no powers to transfer the route, that the transfer of the route could have been effected only by the regional transport authorities, that the route permits are being renewed periodically by the regional transport authority who has the discretion in the matter and that the sale proceeds can, therefore, be considered only as the value of the buses and not as the value of the routes.
3. The Commissioner (Appeals) held that the route permits were acquired not by the assessee but by the predecessor in interest of the assessee, that the route value had been generated over a period of twenty years, that the assessee sold away the buses within two years of their acquisition by the assessee, that during these two years the buses were run at a loss, that the routes had, therefore, no value at all and that the sale proceeds, therefore, constituted the price of the vehicles and not of the route. He, therefore, dismissed the appeal filed by the assessee.
4. The grounds taken by the assessee are lengthy and argumentative.
They are only to the effect that the Commissioner (Appeals) erred in holding that the route permits had no value and that the sale proceeds constituted the value of the buses only, that the value of the route permits is tantamount to the value of the goodwill, that in the present case the cost of acquisition of the route permits was nil, that the sale consideration for the route permits cannot, therefore, be brought to tax in the light of the decisions of the Madras High Court in the cases of CIT v. K. Rathnam Nadar  71 ITR 433 and S.Vaidyanathaswami v. CIT  119 ITR 369, that of the Andhra Pradesh High Court in the case of Addl. CIT v.Ganapathi Raju Jegi, Sanyasi Raju  119 ITR 715, that of the Supreme Court in the case of CIT v.B.C. Srinivasa Setty  128 ITR 294 and that of the Madhya Pradesh High Court in the case of CIT v. Jaswantlal Dayabhai  114 ITR 5. At the time of the argument, reliance was placed upon the decision of the Bombay High Court in the case of Evans Fraser & Co. Ltd. v. CIT  137 ITR 493 and that of the Kerala High Court in the case of CIT v. B.C. Jacob  89 ITR 88 (FB) and it was argued that the value for the route permit is not assessable to tax on capital gains also for the reason that the value of improvements of the route permit cannot also be ascertained.
6. Before dealing with the contentions advanced, it is necessary to state some more facts. The route permits for the six vehicles were originally obtained not by the assessee but by a predecessor in interest, namely, P.S.N. Motors (P.) Ltd. The permits seem to have been issued about twenty years earlier. On 1-7-1971 the buses were transferred to the assessee-firm at the written down value of the buses. The partners of the assessee-firm were the shareholders of P.S.N. Motors (P.) Ltd. Apart from paying the written down value, the assessee-firm did not pay anything towards the route value. It is relying upon this that the assessee contends that there was no cost of acquisition for the route permits. The assessee purchased new buses to replace the old vehicles transferred to them from P.S.N. Motors (P.) Ltd. The assessee ran the buses only for about two years. During the assessment year 1973-74, they suffered a loss of Rs. 72,483. For the assessment year 1974-75, now under appeal, they suffered a loss of Rs. 89,677. This was without taking into consideration the profit under Section 41(2) of the Income-tax Act, 1961 ('the Act') and the capital gains arising out of the sale of the buses by the assessee.
7. Before us, the learned representative for the assessee advanced the arguments as set out in the grounds of appeal, which have been extracted earlier. Relying upon the decisions referred to therein, it is contended by the learned representative for the assessee that the route permit is a capital asset, that there was no cost of acquisition as far as the assessee is concerned, that the cost of improvement of the route value cannot also be ascertained as in the case of goodwill and that the capital gains arising from the transfer of the route permits cannot, therefore, be assessed to tax in the light of the rulings mentioned. With regard to the finding recorded by the Commissioner (Appeals) that the sale proceeds represented the value of buses only and not that of the routes, the learned representative for the assessee pointed out the following facts: The value of a new bus during the relevant accounting period was only Rs. 1,16,168. The buses sold by the assessee were three years and four years old. Even taking the value of the new bus at Rs. 1,16,168 and allowing the normal depreciation of 20 per cent, the value of the buses at the time of the sale would have been only between Rs. 16,168 and Rs. 23,234 each, but the value received by the assessee on transfer of the buses and the route varied from Rs. 1,30,000 to Rs. 34,000 each. Deducting the value of the buses, the balance amount, which comes to Rs. 3,37,794, can represent only the value of the routes and not the value of the buses.
As against this, the claim of the assessee as value of the route is only Rs. 3,29,500. The particulars of the buses and the details of the computation as set out above have been furnished at page 2 of the paper book of the assessee.
8. As against this, it is contended by the departmental representative that the case of the assessee is covered by the decision of the Kerala High Court in IT Reference No. 118 of 1979, dated 14-6-1983 in the case of the very same assessee in a reference arising out of the order of the Tribunal with regard to an earlier assessment year. It was then contended by the learned departmental representative that the route value cannot be equated with goodwill, because it cannot be said that the permit had no value at all and that the entire value was built up by the efforts of the permit holder. It was, therefore, claimed that the decisions relied upon by the assessee, which related to goodwill, are not applicable to the present case. It is also pointed out that the route permits had been obtained by the predecessor in interest of the assessee and that a cost of acquisition can, therefore, be envisaged with regard to the routes as far as the assessee is concerned. It is pointed out that the fact that the assessee had not actually paid any consideration is irrelevant. Reliance was placed for this position on the decision of the Calcutta High Court in V.R. Sonti v. CIT  117 ITR 838 and that of this Tribunal in the case of Raman Krishnan v. ITO  2 ITD 611 (Coch.).
9. We have considered the scope of the decision of the Kerala High Court in the case of the very same assessee in IT Reference No. 118 of 1979, dated 14-6-1983. In that case, the assessee has not adduced any viable evidence before the ITO to show that a portion of the consideration related to the route value. It was for this reason that the High Court upheld the finding of the Tribunal that the assessee has not discharged the burden on him to show that a portion of the sale consideration represented the value of the route. In our opinion, the position is entirely different in the present case because here the assessee has adduced sufficient materials to show that the sale consideration could not have been for the buses only and that a portion of the consideration must have been on account of the route value. The position in the present case is similar to the position obtaining in the case of P.S.N. Motors (P.) Ltd. v. ITO [FT Appeal No. 414 (Coch.) of 1981] which was disposed of by the Tribunal on 30-11-1983. The assessee has furnished the value of new buses according to the quotations of T.V. Sundaram Iyengar & Sons and this was the value during the accounting period. The buses were purchased three to four years earlier and the value would have been less. Even treating the value as given in the accounting year as the value of a new bus and reasonable depreciation is allowed, it will be clear from the computation set out in paragraph 7 supra that the consideration realised by the assessee cannot be for the vehicles alone which were three to four years old. The fact that the consideration varied between the routes will also show that the routes had their own value. Another important circumstance is that in the case of Murugan Bus Transport, who had purchased one of the buses from the assessee for Rs. 1,20,000, the department itself had allocated Rs. 70,000 as value of the bus and Rs. 50,000 as the route value for the purpose of working out the claim for depreciation by Murugan Bus Transport. It is not fair for the department to claim that the route has no value when it comes to the assessment of capital gains on the assessee. The assessee has, therefore, established that a portion of the sale consideration was for the routes. It is true that separate mention had not been made of the sale consideration in the documents between the parties. But, it has been observed by the Madras High Court in the case of G. Vijayaranga Mudaliar v. CIT  47 ITR 853 that it is an open secret that when buses are transferred, the consideration paid by the purchasers of the vehicles is only commensurate with their earning capacity which is intimately connected with the routes on which they operate, that no transferor admits having received any consideration for the transfer of the permit and that judicial notice of the same can be taken. The High Court also rejected the contention that it is not permissible to transfer the permits under the Motor Vehicles Act, 1939, and noted that the transfer could be effected with the approval of the regional transport authority. The circumstances relied on by the Commissioner (Appeals) that the assessee was running the buses at a loss for a period of two years does not militate against the case of the assessee because the facts and figures clearly show that the value paid is much more than the possible value of the buses. We, therefore, accept the case of the assessee that a portion of the sale consideration represents the value of the route.
10. This leads us to the question whether the consideration received on account of the route value can be assessed to tax on capital gains. The rulings relied upon by the learned representative for the assessee mainly relate to the transfer of goodwill. It was contended by the learned departmental representative that the route value cannot be equated with goodwill. In this connection, it is pointed out that while the goodwill is totally built up by a person, the route permit will have some value of its own even at the moment it is granted and that in these days when the buses are filled to capacity and passengers find it difficult to get sufficient accommodation in the buses, the route will have its own value irrespective of the manner in which the bus is run by the owner of the permit. We are unable to accept this contention in toto because there can be contribution on the part of the owner of the route to the value of the route by putting good vehicles on the road and by running the services efficiently and promptly. Whatever it may be, the Tribunal has in its order dated 30-11-1983 in the case of P.S.N. Motors (P.) Ltd. (supra) referred to the conflict of decisions on the question as to whether the route permit is a self-generated asset and followed the decision of the Andhra Pradesh High Court in the case of Ganapathi Raju Jegi, Sanyasi Raju (supra) wherein it was held that it is only over a number of years because of various factors, namely, the development of roads, passenger traffic, the frequency of buses plying on the route, that the permit acquires some value, that when an operator obtains a permit for the first time, the cost of acquisition of the asset is nil and that the sale of the permit by such an operator will be similar to the sale of goodwill by an assessee and that the consideration in terms of money realised on the transfer of the capital asset cannot be brought to tax as capital gains as there has been no cost of acquisition. It was also held by the Tribunal that in the light of the ruling of the Supreme Court in the case of B.C.Srinivasa Setty (supra) the position is well settled that no tax on capital gains can be levied when no cost at all can be conceived for the acquisition of the assets and that it will not be possible to compute the capital gains as per the provisions of the Act in the case of a goodwill. The Tribunal also relied upon the decision of the Bombay High Court with regard to the sale of quota rights and import licence in the case of CIT v. Modiram Laxmandas (P.) Ltd.  142 ITR 702 wherein it was held that to attract Section 45 of the Act, it must be an asset which possesses an inherent quality of being available on the expenditure of money to a person seeking to acquire it before it can be the subject of capital gains. Ultimately the Tribunal held that the sale proceeds arising out o f the transfer of a route permit obtained by the assessee for the first time cannot attract capital gains and that tax on capital gains can be levied only with regard to the sale of route permits which were acquired by the assessee at a cost in which case a reasonable allocation of the consideration between the buses and the route permit will have to be done. We find no reason to take a different view of the matter. We are, therefore, unable to accept the contention of the department that the profit from the sale of route permit cannot be treated as similar to the profit from the sale of goodwill.
11. As already stated, in the present case, the route permits were not obtained by the assessee but by P.S.N. Motors (P.) Ltd. The assessee purchased the buses and the route permits from P.S.N. Motors (P.) Ltd. Because of this, in the light of the finding recorded by the Tribunal in the case of P.S.N. Motors (P.) Ltd. (supra), the sale of the route permits by the assessee would have attracted capital gains. But the learned representative for the assessee advanced two arguments to distinguish the present case.
12. It was first contended that the assessee had not paid any consideration for the route permits, that the consideration paid was only for the buses and that there was, therefore, no cost of acquisition with regard to route permits as far as the assessee is concerned. This contention is not tenable. The assessee himself is contending that the route permit has a separate value when the holder of the permit sells the same. The assessee cannot, therefore, contend that no cost of acquisition could be envisaged with regard to route permits. It may be that the assessee actually did not pay any consideration for the route permit on account of the fact that some of the partners of the assessee-firm were shareholders in P.S.N. Motors (P.) Ltd. But it cannot be contended that no cost of acquisition could be envisaged in the case of the route permits when the assessee acquired the same from P.S.N. Motors (P.) Ltd. In Raman Krishan's case (supra) it was held by this Tribunal that in B.C. Srinivasa Setty (supra) the Supreme Court was concerned with the asset of goodwill in respect of which no cost of acquisition in terms of money was conceivable and that the ratio of the decision would not apply to a case where the cost of acquisition can be envisaged with regard to a capital asset. The position is also well settled by the decision of the Kerala High Court in the case of E.C. Jacob (supra) which will be referred to later in some greater detail. From the mere fact that the assessee did not actually pay anything for the route permit and got the same free, it cannot be contended that no cost of acquisition can be envisaged with regard to the same.
13. The second contention advanced by the learned representative for the assessee was that even if it is possible to envisage a cost of acquisition for the route permit when an assessee acquires a permit from a person who had obtained the permit earlier, it is not possible to assess the cost of subsequent improvements of the permits and in such a contingency also no tax on capital gains will be attracted. In support of the contention, the learned Counsel relied upon the decision of the Bombay High Court in Evans Fraser & Co. Ltd.'s case (supra). The Bombay High Court held that merely because the goodwill of a business, which had been started by someone else, had been acquired, and at the time of acquisition its value ascertained, it does not mean that some time or some years later the goodwill enjoyed by that business in the hands of the purchaser is qualitatively the same enjoyed at the moment of the sale by the vendor and that as the cost of improvement of goodwill cannot be ascertained, the gains arising on its transfer would not also be liable to tax on capital gains. For this, the Bombay High Court relied upon the decision of the Supreme Court in the case of B.C.Srinivasa Setty (supra). It may be noted that the Supreme Court decision rested on the unascertainability of the cost of acquisition only. The Bombay High Court now extended the ratio of the decision to a case where the cost of improvement cannot also be ascertained. The scope of the decision of the Bombay High Court in the case of Evans Eraser & Co. Ltd. (supra) was considered by this Tribunal in the case of Collis Lines (P.) Ltd. [IT Appeal Nos. 368 to 376 (Coch.) of 1980].
The Tribunal in its order dated 20-1-1984 held that the decision of the Bombay High Court will in any case be applicable only when there could be a claim for value of improvements and not where there could be no claim of value of improvements at all, because in such cases the ascertainment of the value does not arise. This view taken by the Tribunal stands confirmed by the decision of the Kerala High Court in the case of E.C. Jacob (supra) which was also relied upon by the learned representative for the assessee in support of the position that there can be no tax on capital gains when the cost of improvement cannot be ascertained. What we have in mind is the following observations of the Kerala High Court: It is possible to envisage a case where a person purchases the goodwill of a business or profession for a definite amount and without any further addition to its value by his own efforts later on sells it for a higher price and thereby secures a determinate profit or gain. In such a case, goodwill ishardly distinguishable from any other capital asset and there is nothing in Section 45 or other relevant provisions of the Income-tax Act that excludes such profits or gains from liability to assessment.... (p. 93) It is, therefore, clear that the Kerala High Court has not gone to the extent to which the Bombay High Court has gone in the case of Evans Fraser & Co. Ltd. (supra). We would, therefore, hold that the assessee can escape the liability to tax on capital gains only if it is shown that the assessee has improved the value of the route permit after it was acquired by the assessee. It is not possible to assume the position in the present case because it has been pointed out by the Commissioner (Appeals) that although the assessee put in new buses after the acquisition of the route, the business was running at a loss during the two assessment years during which the assessee operated the buses. But the matter has not been investigated from the angle indicated above.
Further, in view of the finding recorded by us earlier that a portion of the sale proceeds is attributable to the route permit, a reasonable allocation of the sale proceeds between the buses and the route permit has also to be done. We are, therefore, compelled to restore the matter to the ITO for framing a fresh assessment according to law and the observations above and with particular reference to the question whether the assessee has improved the value of the route permits after it acquired the route and what will be the reasonable value to be allocated for the route permit. Ordered accordingly. The appeal will be treated as allowed in part for statistical purposes.