1. This appeal is filed by the department. It is in the case of the assessee, City Transport (P.) Ltd., Coimbatore, relating to its Income-tax assessment for the year 1981-82. The assessee is a private limited company running passenger bus service. It is stated that the previous year for the assessment year 1981-82 consists of 15 months from 1-1-1980 to 31-3-1981. During the material previous year the assessee under an agreement dated 14-12-1979 sold three transport buses. According to the agreement, the consideration for the transfer of the three buses along with its respective route permits comes to Rs. 2,50,000. The agreement further provided that the transferee will pay a sum of Rs. 4 lakhs as consideration for the transfer of business name 'City Transport'. The assessee agreed to assign and transfer to the transferees the business name which is stated as the goodwill of the company since its registration from the year 1946. The ITO in the assessment made for the relevant year determined the capital gains of Rs. 3,98,000 by holding that the sum of Rs. 4 lakhs was received for the transfer of route permits only, though in the agreement it is mentioned that Rs. 2,50,000 is for sale of buses and also for permits.
He estimated the cost of the route permit to the assessee at Rs. 2,000 and deducting this amount of Rs. 2,000 from the amount of Rs. 4 lakhs determined the capital gains as Rs. 3,98,000.
2. In the appeal against the assessment, the Commissioner (Appeals) held that no capital gains resulted from the transfer. Aggrieved by his order, the department is in appeal.
3. The department's contention in the grounds of appeal is that the Commissioner (Appeals) had wrongly applied the ratio of the Supreme Court decision in CIT v. B.C. Srinivasa Setty  128 ITR 294 to the facts of this case because that case related to the goodwill which is a self-generating asset whereas route permit is not such an asset.
Reliance was placed also on the decisions of the Madras High Court inK. Balasubramania Nair v. CIT  119 ITR 504 and CIT v. Shri Venkateswara Bus Union  119 ITR 507. The learned Counsel for the assessee pointed out that what the assessee transferred is not merely the three buses along with route permits but also certain other obligations and rights such as the obligation on the part of the transferee to take over the liability in respect of its employees and the right to use the business name. Thus, what the assessee transferred was its transport business and the parties clearly stated in the agreement that the consideration for the transfer of the three buses together with the route permits will be Rs. 2,50,000 while for the transfer of the business name representing its goodwill it will be a sum of Rs. 4 lakhs. It is argued that when the parties have clearly stipulated different considerations for different assets, it is not open for the department to hold otherwise by rewriting the agreement. He also relied on the Andhra Pradesh High Court decision in Add!. CIT v. Ganapathi Raju Jegi, Sanyasi Raju  119 ITR 715 wherein it was held that the route permit does not cost anything and the case is similar to that of a sale of goodwill and the consideration in terms of money realised on the transfer of the said capital asset cannot be brought to tax as capital gains. Order of the Tribunal, Madras Bench 'A', in the case of Annamalai Bus Transport [IT Appeal Nos. 1188 and 1293 (Mad.) of 1977-78] is also relied on. The departmental representative contended in reply that what the parties agree to in the agreement is not binding on the department and it is entitled to pierce the veil and look into the reality of the transaction.
4. On a consideration of the facts and circumstances of the case and submissions of the parties, we find no merits in the department's objections. There can be no manner of doubt, that, according to the decisions relied on by the department, route permit constitutes property and that if there was cost of acquisition, then any profit arising from the transfer thereof will be chargeable as capital gains.
In the present case, the points that arise for consideration are firstly, whether in spite of the agreement to the contrary, the sum of Rs. 4 lakhs received by the assessee can be held to relate to the transfer of route permits. Secondly, whether the route permit has any cost of acquisition to the assessee and thirdly, if it has, what was the amount of the cost. The departmental authorities are undoubtedly entitled to pierce the veil of any transaction embodied in any formal document and to look into the reality of the transactions. But that can be done only when the material and circumstances support that action.
For this it was incumbent on the department to establish that the sum of Rs. 2,50,000 would not and did not represent the value of the buses along with route permits and secondly, that Rs. 4 lakhs was the reasonable price for obtaining route permits. Beyond mere suspicion based on no evidence the ITO has held that the sum of Rs. 4 lakhs is for the transfer of route permits. He has further held, again without any basis or material, that there is no goodwill for the transfer of business and his reasons are totally devoid of any substance. The agreement clearly shows that the business was in existence since 1946 and it is incorrect to say that in the competitive field passenger transport business of a transport company which is in existence for about three decades has no goodwill. In a transport business the goodwill is acquired by the prompt and efficient service, behaviour of the personnel and record of accident, free transport, etc. It is, therefore, idle to say that nobody would be bothered about travelling by any particular transport. Again the ITO has not, by bringing any comparative material, shown what would be the market price for acquiring route permit from the existing transport business, but has simply assumed that Rs. 4 lakhs represents the consideration for the transfer of route permits. Further, he has also not, by any material brought on record, shown what will be the reasonable cost of acquisition, but has merely estimated a nominal amount of Rs. 2,000 as cost of acquisition. If route permit can be obtained for mere Rs. 2,000, it is difficult to uphold that the value can rise to Rs. 4 lakhs. There is no proper basis and relevant material to come to the conclusion that either the sum of Rs. 4 lakhs was consideration for the transfer of route permit or that there was nominal cost of acquisition or no cost at all and also that the agreement entered into by the parties are mere camouflage to conceal the real consideration for the transfer of route permit. In the circumstances, we find no merit or substance in the department's contentions and uphold the finding of the Commissioner (Appeals). We have no material on record brought by the department to discredit the consideration of Rs. 4 lakhs paid as for the transfer of the goodwill of the business of the assessee and since it is not the case of the department that the goodwill was obtained by the assessee at any particular cost, applying the ratio of the Supreme Court decision in B.C. Srinivasa Setty's case (supra), we hold that there is no capital gains chargeable.
1. I have carefully considered the order passed by my learned brother and I am unable to agree entirely with his views and conclusion. In this case the assessee sold its transport business, lock, stock and barrel, so to say. This is clear from the first sentence of the order of the Commissioner (Appeals) according to which, the transport business was transferred as a going concern. The agreement dated 14-12-1979 (paragraph No. 1 at p. 3) shows that the assessee agreed to assign all its rights of the passenger transport business to and in favour of the transferees. The entire fleet of 3 buses was transferred along with route permits. At the time of transfer the route permits were in force. Some of the transferees, viz., Shri V. Jagadeesan, V.Selvadurai and Shri K. Veerappan, were connected with Jagadeesan Transports, 297, Trichy Main Road, Namakkal, Salem District. Thus, the transferor and the transferees were persons interested in transport business and they are well-acquainted with the value of route permits.
The central issue in this case is whether the sale consideration paid by transferees includes any payment for route permits or whether it relates to only goodwill. The case of the assessee was that the amount of Rs. 4 lakhs was entirely for the transfer of goodwill of the business and trade name, namely, 'City Transport', while the amount of Rs. 2,50,000 was for the transfer of 3 buses along with route permits.
The case of the ITO was that there was no goodwill of the business and the sum of Rs. 4 lakhs was for the transfer of route permits only.
Although the stand taken by the ITO is extreme, I consider the stand taken by the assessee also is on the other extreme. The truth of the matter lies in-between the opposite views says the maxim. I agree with my learned brother when he says that the assessee's transport business has goodwill as the company was incorporated in 1946 and has been carrying on business thereafter till the material time when the business has been sold, Goodwill could be built up by prompt and efficient service, behaviour of the personnel and record of accident-free transport, etc., as stated by my learned brother. But the question is whether the entire sum of Rs. 4 lakhs meant to be consideration for transfer of goodwill or name of the business entirely pertains to it or it is a camouflaged payment for route permits also to the extent of unexpired period of route permits. No doubt, the departmental authorities are entitled to pierce the veil of any transaction embodied in any formal document and to look into the reality of the transactions.
2. There is no dispute regarding the fact that according to the decisions cited by the department, route permit constitutes property and the profits arising on the sale thereof is chargeable to capital gains tax as the Courts have held that route permit is not self-generating asset. A perusal of the agreement dated 14-12-1979 (paragraph No. 1 at p. 3) shows that the assessee-company has agreed to assign 'all its rights of the passenger transport business to and in favour of the transferees'. Therefore, the consideration received for transfer of all its rights must and should include the right to exploit the route permits which is also a valuable property. The preamble to the agreement (last paragraph at p. 2) shows that the transferees have 'offered' to take over the passenger bus service of the company with its three routes [Emphasis supplied]. Thus, there is a clear offer on the part of the transferee to take over not only the buses but also their respective route permits. The route permits, in my view, can be compared to the rails on which a train runs, be it called super-fast or express or mail with all the reputation attached to it. Take out the rails the train cannot run. Thus, the goodwill of the business depends on the route through which the transport business is carried on.
Therefore, in my opinion, the goodwill and the route value are the obverse and the converse of the same coin and both go hand in hand in a transport business. In this case the town bus routes in route Nos. 3 and 4 are always crowded as the passenger traffic is heavy. This is a material fact found by the ITO which has vital bearing on deciding the issue before us. The recital part of the agreement (paragraph No. 1 at p. 5) shows that the company has agreed to transfer 3 buses TNB 5079, TNB 5277 and TNB 1479 on 'as is where is basis' with their respective route permits for a consideration of Rs. 60,000, Rs. 65,000 and Rs. 1,25,000, respectively, totalling to Rs. 2,50,000. The order of the ITO shows at page 2 thereof the particulars of purchase price of the buses and the respective sale price. A perusal of the same shows that the buses were transferred at depreciated value although the written down values of the buses were not shown. Thus, although the recital shows that the buses were transferred along with route permits and the transferees have offered to take over the routes also, no specific amount is either earmarked or assigned for the route permits taken over. Thus, no consideration has been mentioned for the route permits offered to be taken over by the transferee along with the buses. The omission cannot be countenanced as oversight or accidental. The matter assumes very great significance. In paragraph No. 2 of the recital part (paragraph No. 2 at p. 5) reads as under : It is hereby agreed that joint application be made under the Motor Vehicles Act to the regional transport authority, for transfer of the route permits, to transfer and issue the route permits to and in favour of the transferees or to their firm to be constituted referred to above and the company will do all that is necessary for the transferees obtaining such transfer.
The above recital shows that there was a condition precedent for the parties to make a joint application to the regional transport authority for transfer of the route permits in favour of the transferees or the firm constituted by them and the assessee-company should also do all that is necessary for enabling the transferees to obtain the transfer of route permits. Thus, it is abundantly clear that the primary consideration of acquiring the transport business is not merely to purchase the depreciated buses but also the valuable rights of route permits on which the transferees might ply buses acquired by them.
Thus, I am of the firm view that the real intention of the parties was camouflaged so as to bring the entire payment of Rs. 4 lakhs under goodwill of the business which is a self-generating asset and thereby the surplus arising on sale of such an asset could escape the net of taxation within the ratio of the Supreme Court in the case of B.C.Srinivasa Setty (supra). As has been stated earlier, the decisions of the Madras High Court relied upon by the ITO clearly show that the route permit is not a self-generating asset and some costs must necessarily have to be incurred for acquiring them and the sale of such permits attracts capital gains.
3. My learned brother has observed that the ITO has not proved the actual cost of acquisition of route permits nor brought evidence to show the market price for acquiring such route permits from existing business nor what could be the reasonable cost of acquisition of route permits. Unfortunately, the nature of the property is such that the real cost of acquisition of the property cannot be ascertained nor divulged by the person for obvious reasons. The fact is within the personal knowledge of the person who acquires the route permit. In such a situation, it is impossible and impracticable to ascertain the market value of acquisition of route permits from the existing business or the reasonable cost of acquisition. Therefore, the ITO cannot be blamed for not bringing on record any evidence in this regard. In this connection, I would like to emphasise the fact that the parties to the agreement have only paid lip sympathy to the route permits by making casual and uncommittal reference to the route permits in the preamble and the recital of the agreement whereas they have taken every care to see that they apply for transfer of route permits in the names of the transferees and the assessee was also obliged to see to it that the transferees obtain the route permits. Thus, the real intention was to acquire the valuable route permits along with the depreciated buses although the payment of Rs. 4 lakhs is designated as payment for goodwill. I agree that there is also goodwill which is also transferred inasmuch as the goodwill goes with the business and the trade name.
There is no magic talisman in the trade name, at any rate to the transferees unless the routes are commercially viable or profitable.
Therefore, I cannot subscribe to the view of my learned brother that the entire consideration of Rs. 4 lakhs was towards the transfer of goodwill of the business as such so as to make the resultant capital gains not liable to tax by virtue of the ratio of the Supreme Court in the case of B.C. Srinivasa Setty (supra).
4. As has been already indicated earlier, the assessee has transferred the entire transport business as a going concern and transferred all rights which obviously include goodwill and value of route permits. As such, a part of the consideration of Rs. 4 lakhs must relate to the right of route permits and the capital gains attributable thereto should be liable to capital gains tax. In the absence of any evidence regarding cost of acquisition of route permits, it should be taken at Rs. 2,000 as estimated by the ITO while as a matter of fact it should be substantially more. The quantum of goodwill of the business also requires to be determined on the basis of super-profits earned during the last three years of the business before transfer and taking one year as the purchase price thereof. Consequently, following the maxim, I am of the view that the orders passed by the Commissioner (Appeals) and also the ITO require to be set aside and the matter should be restored to the ITO for fresh adjudication in accordance with law after ascertaining the goodwill of the business as directed above and also computing the capital gains with reference to consideration for transfer of route permits.
Whereas we are unable to agree on the points set out below for the assessment year 1981-82, we refer the following points of difference of opinion to the President for reference to Third Member, under Section 255(4) of the Income-tax Act, 1961 : 1. Whether the consideration of Rs. 4 lakhs agreed to between the assessee and the transferees in this case for transfer of business name 'City Transport' should be held to be entirely for transfer of goodwill and, consequently, not liable to capital gains on the facts of this case or it should be held to be in part for transfer of route permit also 2. If in part the consideration is to be held for transfer of route permit, whether any capital gain is chargeable in respect of the same 3. If capital gain is so chargeable in respect of part of the consideration of Rs. 4 lakhs as relatable to transfer of route permit, whether cost of acquisition is to be held to be Rs. 2,000 only 1. On a difference of opinion between the learned Members, who heard the appeal originally, the following points of difference were stated : 1. Whether the consideration of Rs. 4 lakhs agreed to between the asses-see and the transferees in this case for transfer of business name 'City Transport' should be held to be entirely for transfer of goodwill and, consequently, not liable to capital gains on the facts of this case or it should be held to be in part for transfer of route permit also 2. If in part the consideration is to be held for transfer of route permit, whether any capital gain is chargeable in respect of the same 3. If capital gain is so chargeable in respect of part of the consideration of Rs. 4 lakhs as relatable to transfer of route permit, whether cost of acquisition is to be held to be Rs. 2,000 only The case having been assigned by the President to himself under Section 255(4), it has come up for hearing before me.
2. The assessee is a private limited company running a passenger bus service. The proceedings relate to its assessment for the assessment year 1981-82 for which the previous year consists of 15 months, i.e., from 1-1-1980 to 31-3-1981. It is common ground that the assessee has sold its transport business as a going concern under an agreement dated 14-12-1979 for a sum of Rs. 6,50,000. In terms of the agreement, the sum of Rs. 2,50,000 is attributable to the value of the three buses along with their three route permits and Rs. 4 lakhs to the transfer of the goodwill and use of the assessee's name 'City Transport' and 'C.T.'. The transferees have, it may be stated, inter alia, taken over all the existing employees of the assessee-company with all obligations as to their provident fund and gratuity and all other liabilities arising thereunder, etc.
3. The aseessee's contention that no part of the amount of Rs. 4 lakhs was liable to be taxed as income under the head 'Capital gains' as it represented the sale price of the self-generated goodwill, has been rejected by the ITO. He has held that there was no goodwill of the transport business and that there was no separate computation for the same. The amount was mutually arrived at and this in fact represented the sale price of the route permits. Estimating the cost of the route permits at Rs. 2,000 the ITO computed the surplus liable to tax as capital gains at Rs. 3,98,000. The Commissioner (Appeals) has, for reasons given in paragraph No. 2 of his order, accepted the assessee's submission. He has held that even if it were to be assumed that the ITO's finding to the effect that the sum of Rs. 4 lakhs ostensibly received for the transfer by the assessee of its goodwill, represented in reality the consideration for the transfer of the route permits, no capital gain resulted from the transfer as the acquisition of the route permits cannot be said to have any cost to the assessee.
4. As already stated, the learned Members who heard the appeal originally have differed. The learned Judicial Member has for detailed reasons given in paragraph No. 4 of his order held that the assessee-company has a goodwill as it was running the passenger transport business for about three decades. He found no material on record for holding that the sum of Rs. 4 lakhs represented not the price of the goodwill but the price of the route permits. He also did not find any material to justify the conclusion that the route permits had cost a sum of Rs. 2,000 as estimated by the ITO. For these and other reasons, he has, following the Supreme Court decision in the case of B.C. Srinivasa Setty (supra) held that no capital gains were chargeable in the case of the assessee. The learned Accountant Member has, on the other hand, dealt with the controversy in paragraph Nos. 2 to 4 of his order. He has taken the view that the primary consideration of acquiring the transport business was not merely to purchase the depreciated buses but also the valuable rights over the route permits on which the transferees might ply the buses acquired by them.
According to him, the real intention of the parties was to camouflage the payment so as to bring the entire amount of Rs. 4 lakhs to the goodwill of business which is a self-generated asset and thereby avoiding tax on the surplus arising on sale thereof. Observing that at best the sum of Rs. 4 lakhs might represent the value of the goodwill as well as the route permits, he directed the ITO to compute the value of the goodwill and treat the balance as the price of the route permits for the purpose of taxing the same under the head 'Capital gains'.
5. The parties have been heard at length. The departmental representative has strongly relied on the order of the learned Accountant Member. The counsel for the assessee has, on the other hand, relied on the order of the learned Judicial Member. In response to a query from the Bench it was stated on behalf of the assessee that two of the three buses were about two years old and the third one was comparatively a new bus having been used for about a year only. Their respective cost of acquisition and written down values were found to be as under : Bus. No.Cost price Written Unexpired Sale value of down period of the buses with value the route the route TNB 5079 60,000 50,993 2 months 65,000 TNB 5277 65,000 55,667 1 year & 60,000 2 months TNB 1479 1,25,000 1,13,350 2 months 1,25,000 6. I have heard the rival contentions carefully. The agreement of sale admittedly provides that the buses along with route permits are sold for Rs. 2,50,000 and that the sum of Rs. 4 lakhs represents the value of the goodwill and the assessee's name. The transferees have also undertaken certain liabilities under the agreement. No doubt it is open to the departmental authorities to go behind the agreement and find the facts if they are really different from what have been mentioned in the agreement. For this purpose, it would be necessary to see whether the terms of the agreement are on the face of it absurd. Having regard to the unexpired period of the route permits in the case of the three buses which is two months, one year and two months and two months, it is difficult, if not impossible, to hold that the route permits would have a very high market value. That apart there is no material on record that the sale price of the buses, which is certainly higher than the written down values, does not include the reasonable price attributable to the unexpired period of route permits. It is true that on the face of it the value of the goodwill at Rs. 4 lakhs seems to be a little excessive. However, having regard to the fact that the assessee-company has been running the passenger transport services for about 30 years and that the transferees have taken over certain liabilities also, it cannot be accepted without anything more on record that the sum of Rs. 4 lakhs could not represent the value of the goodwill. I am also in agreement with the learned Judicial Member that the expenditure on making application for route permit does not represent the cost of route permit. For these and other reasons given by the learned Judicial Member, with which I agree, I hold that the assessee is not liable to capital gains on the sale of its business as a going concern.
7. Moreover, goodwill is something which is easy to describe but very difficult to define. The Supreme Court has made an attempt to define it in its decision in the case of S.C. Cambatta & Co. (P.) Ltd. v. CEPT  41 ITR 500 in the following words : ...the goodwill of a business depends upon a variety of circumstances or a combination of them. The location, the service, the standing of the business, the honesty of those who run it, and the lack of competition and many other factors go individually or together to make up the goodwill, though locality always plays a considerable part. Shift the locality, and the goodwill may be lost.
At the same time, locality is not everything. The power to attract custom depends on one or more of the other factors as well....
Therefore, even route permits in the case of a transport business can and will form part of the goodwill.
8. The Third Member's order will now go to the Division Bench for deciding the appeal according to the majority view.