1. In the relation to the assessment year 1967-68 of an individual assessee, the Income-tax Appeallate Tribunal has referred the following question of this court for our opinion-
"Whether on the facts and in the circumstances of the case, it has been rightly held that there would be no liability to capital gains tax on the sale of import entitlement certificates in the assessee's case ?"
The facts necessary for answering this question had been stated in para. 2 of the statement of the case which we reproduce.
2. The assessee made remittances under the National Defence Remittance Scheme and such remittances earned import entitlements which were sold by the assessee resulting in a profit of Rs. 19,974/-. The Income-tax Officer assessed the entire amount of Rs. 19,974/- to capital gains tax. The decision was upheld in appeal by the Appellate Assistant Commissioner. But in further appeal before the Tribunal it was ruled that there was no 'capital gains' liable to be taxed. The question is whether the view taken by the Tribunal is right in law.
3. The decision of the Tribunal is fully supported by two decisions of this Court. The first one, setting the principle, dealing with 'goodwill', has also considered the question of 'capital gains' on the sale or transfer of good will. The decision in Commr. of Income-tax v. Rathnam Nadar, (1969) 71 ITR 433 (Mad). The identical that is before us relating to 'import entitlement' was considered by this Court in Commr. of Income-tax v. Kuppusami Pillai & Co. 106 ITR 954: (1977 Tax LR 1186) (Mad) and following the earlier decision of this Court it was held that unless the asset had cost something in terms of money for its acquisition, it was not possible to conceive of capital gains as envisaged by the statute, that though an asset of a capital nature has been transferred, capital gains as visualised by the statute had not resulted and that no tax on that basis was, therefore, leviable. The view taken by this court has been accepted and followed by a number of other decisions. A Full Bench of the Kerala High Court considered this question in some detail in Commr. of Income-tax v. E. C. Jacob, 89 ITR 88: (1972 Tax LR 1213) (Ker) (FB) and followed the view taken by this Court. The Delhi High Court has also accepted the view taken by this Court, in Jagdev Singh Mumick v. Commr. of I.-T., (1971) 81 ITR 500. The Karnataka High Court did the same thing in the decision reported in Commr. of Income-tax v. Srinivasa Setti, 96 ITR 667: (1975 Tax LR 481).
4. Both the decisions of the Kerala High Court and the Karnataka High Court have also adverted to the possibility of another view that can be taken in the matter and came to the conclusion, for the reasons stated in the judgments, which we will be referring to presently, that there is no need to take a different view from that which had been taken by the Madras High Court, followed by a number of other High Courts in India.
5. The Calcutta High Court, recently, though it had taken a different view earlier, and the Gujarat High Court, have taken a different view from that taken by this Court. The recent decision of the Calcutta High Court is reported in K. N. Daftary v. Commr. of Income-tax, 106 ITR 998: (1975 Tax LR 897) and that of the Gujarat High Court is reported in Commr. of Income-tax v. Mohanbhai Pamabhai (1973) 91 ITR 393.
6. Before we proceed to consider these conflicting views, one taken by a large majority of Courts, which has stood the test of time in that it had remained without being overruled or without being not accepted by the Supreme Court for nearly ten years, and the other taken by the Calcutta High Court and the Gujarat High Court in the decisions referred to above, we would like to refer to the sections of the statute with which we are concerned. 'Capital gains' is dealt with in S. 45 of the Income-tax Act, 1961, which we shall refer to as the Act hereinafter, and is more or less the definition of the term, and the section reads thus-
"45. Capital gains.-Any profits or gains arising from the transfer of a capital asset effected in the previous year shall, save as otherwise provided in Sections 53, 54, 54-B, 54-C and 54-D, be chargeable to income-tax under the head 'capital gains' and shall be deemed to be the income of the previous year in which the transfer took place."
We are not concerned with either S. 46 or S. 47 as the former deals with 'capital gains on distribution of assets by companies in liquidation" and the latter with 'transactions not regarded as transfer'. It is admitted before us that there is a transfer and that the transfer is of a 'capital asset'. But what is urged is that there is no 'capital gains' if the scheme of the Act and Ss. 45, 48, 49 and 55 are taken into account. Turning now to S. 48, we find the mode of computation and deductions. The section states-
"The income chargeable under the head 'capital gains' shall be computed by deducting from the full value of the consideration received or accruing as a result of the transfer of the capital asset the following amounts, namely-
(i) expenditure incurred wholly and exclusively in connection with such transfer;
(ii) the cost of acquisition of the capital asset and the cost of any improvement thereto."
7. Section 49 deals with cases mentioned therein, wherein the capital asset became the property of the assessee for the various reasons and in the circumstances mentioned in cls. (i) to (iv) of that section. To refer to one or two of those clauses, now, we would like to advert to a case where the capital asset became the property of the assessee under a gift or Will or by succession or inheritance. ((ii) and (iii) (a)). In all these cases, it is provided by a legal fiction that the cost of acquisition of the asset may be taken to be the cost for which the previous owner of the property acquired it, as increased by the cost of any improvement of the assets incurred or borne by the previous owner or the assessee, as the case may be. Section 55 deals with 'cost of acquisition' for purposes of Sections 48, 49 and 50. The section as such is not necessary for the purpose of the case before us, except to notice that an option has been given to the assessee for the purpose of Ss. 48 and 49, in relation to a capital asset either to adopt the cost of acquisition of the asset if it had been acquired before the 1st of January 1954 or to adopt the market value of the assets as on the 1st of January 1954, and also to notice that the method of determining the 'cost of any improvement' is also specifically provided in the section, besides providing for what is meant by 'adjustment'.
8. On a reading of these provisions in Ss. 45, 48, 49 and 55, the view has been taken by this Court that there is the concept of 'profit' or 'gains' running through the various sections on the basis of which the charge, the computation of the quantum of the capital gains and the determination of the tax would have to be made. This Court has been able in such circumstances to discern a need for a cost of acquisition to envisage a resulting 'capital gains' on transfer. To be more explicit, the Court took the view that in order that there might be 'capital gains' as envisaged by the statute there must be a cost of acquisition in terms of money. The cost of acquisition must be in terms of money is not disputed before us at all. The view has been taken that there should be a cost of acquisition in terms of money, because specific provision had been made in cases of gifts by importing the concept of cost of acquisition of the owner of the property (the person who gifted the property), thus reducing the incidence of tax by reducing the quantum of the 'capital gains'. In once case, where the cost of acquisition of the done was nill, the statute has specifically provided that the cost of acquisition of the donor will be taken into consideration, thus reducing the quantum of the capital gains. Other provisions have also been made as in the case of succession and inheritance or when properties are bequeathed, by providing for the value of the property being determined, though there has really been no cost to the assessee in terms of money in the matter of acquisition of the capital asset. Specific provisions in this regard and the absence of any provision in cases of capital assets in the nature of what may be termed 'import entitlement' or for that matter 'goodwill' seem to indicate an inconsistency in the scheme of the Act which is irreconcilable. It is not possible to find out the intent and the rationale in the apparent discrepancy of treating capital assets acquired under gifts in a manner entirely different from capital assets in the form of import entitlements, which also are acquired without the investment of any money. The view, therefore, has been taken that it is not only the charging section that should be taken into account but the whole scheme of the Act must be looked into and when the Act is viewed in that manner, it has to be taken that the Legislature did not intend to impose any capital gains on goodwill or on import entitlement merely by reason of the fact that the assessee had received moneys when the capital asset or goodwill or import entitlement had been transferred. This was so said also for the apparent reason that the imposition in those circumstances will not be really on the profits and gains but on the entire capital asset itself, and one of the learned Judges, who dealt with this matter has said that the tax which is said to be on profits and gains will then be converted into a tax on capital asset. An intention to impose a tax on 'capital amount' as distinguished from capital gains could not be attributed to the statute and, therefore, the other view was taken, namely, that the statute did not intend to tax such capital assets as 'goodwill' and import entitlement, transfers. It is, of course, impossible to hold that this is an impossible view of the interpretation of the statute. No doubt, the Calcutta High Court in the decision reported in K. N. Daftary v. Commr. of Income-tax, 106 ITR 998: (1975 Tax LR 897), as well as the Gujarat High Court in the decision reported in Commr. of Income-tax v. Mohanbhai Pamabhai, (1973) 91 ITR 393, have taken a different view by giving importance to the charging section, S. 45, and by applying the well-known principle that the scope, effect and ambit of the charging section cannot be toned down or whillted down by the machinery sections which have to be taken into account only for actually calculating the quantum of the capital gains and for imposing a tax on the capital gains and for imposing a tax on the capital gains which had already resulted from the transfer. This again is not a view which is impossible on the wording of the statute and by applying the well-known principle, that the machinery section should not quality the charge upon by the charging section. In these circumstances, we consider that the best policy to adopt would be to follow what has been stated by the Chief Justice of Karnataka High Court, Govinda Bhat in Commr. of Income-tax v. Srinivasa Setty, 96 ITR 667: (1975 tax LR 481). Before extracting that passage, we would like to say that one among us was inclined to adopt the view that had been taken by the Calcutta High Court and by the Gujarat High Court and that was the reason for the case being placed before the Full Bench for consideration, notwithstanding the clear pronouncement of this court in the decision reported in Commr. of Income-tax v. Ratnam Nadar, (1969) 71 ITR 433 (Mad), and in the later decision reported in Commr. of Income-tax v. Kuppusami Pillai & Co., 106 ITR 954: (1977 Tax LR 1186) (Mad). That Judge also is now of the view that in the circumstances which the Karnataka Chief Justice has mentioned in the passage we are now going to read, it is better to leave things where they are, particularly in view of the fact that the department had not questioned many of those decisions in appeal and when they did appeal, they chose to withdraw the appeal from Ratnam Nadar's case, (1969) 71 ITR 433 (Mad) and what is more important, the Legislature has not moved, realising that the statute had been interpreted in a particular way, not by one Court but by several courts to amend the statute to being out clearly the intention of the statute if that intention was different from what the courts has attributed to the statute.
9. Now we shall turn to the passage, from the judgment of the Karnataka High Court reported in Commr. of Income-tax v. Srinivasa Setty, 96 ITR 667: (1975 Tax 481) (at pp. 483, 484).
"There is more than one reason for us to follow the ratio of the decision in Ratnam Nadar's case (1969) 71 ITR 433 (Mad). No doubt, two views are possible on the question: when two views are possible on a question concerning the interpretation of a tax law, the one which is fair both to the assessee and the department should be followed. The view that capital gains tax is not attracted to transfer of goodwill is a fair and just interpretation. If the view of the Gujarat High Court in Mohanbhai Pamabhai's case (1973) 91 ITR 393 is correct, the cost of acquisition of a goodwill being nil, the full value of the consideration for its transfer has to be brought to charge to capital gains tax. Such a levy will not be a tax on profits or gains but, in substance, a tax on the capital value of the asset. The capital value of goodwill is charged to tax under the Wealth Tax Act, 1957. Wealth tax is an annual recurring tax. When there is an annual recurring tax on the capital value of goodwill, it will be unfair to levy another tax calling it as capital gains on the same value of the goodwill in the same assessment year, merely because the goodwill has been transferred for consideration. When the appeal by the department against the decision of the Madras High Court in Ratnam Nadar's case (1969) 71 ITR 433 came up for hearing before the Supreme Court, the department could not have been unaware of the decision of the Gujarat High Court in Mohanbhai Pamabhai's case (1973) 91 ITR 393, which was decided on 24/28th Sept. 1971. The department could have pressed that decision for acceptance by the Supreme Court as correctly interpreting the law. When the department did not press its appeal when the question raised concerned the interpretation or law in a taxing statute governing the whole of India, it should be deemed that the department had made up its mind to accept the decision in Ratnam Nadar's case (1969) 71 ITR 433 (Mad), as laying down the correct law. The Income-tax Act is an all India statute. Uniformity of construction of all India tax laws by the various High Courts is eminently desirable. If any High Court gives a decision against the department on a substantial question of law of general importance which the department does not accept, it is highly desirable that the department at the earliest opportunity available should take up the matter in appeal before the Supreme Court and obtain its decision so that the law is settled by the highest Court of the land and no uncertainty is left in the administration of the tax law. The decision in Ratnam Nadar's case (1969) 71 ITR 433 (Mad) was rendered in the year 1969. We asked Sri Rajasekharamurthi as to whether the department has preferred appeals against the judgment of the High Courts of Calcutta, Delhi and Kerala. He took time for making his submissions after contacting the departmental authorities. He stated that no appeals were preferred by the department against the judgment of the High Courts of Calcutta and Kerala and that he has no information whether an appeal has been filed against the judgment of High Court of Delhi. Sri Rajasekharamurthi submitted that though the appeal against the judgment in Ratnam Nadar's case (1969) 71 ITR 433 (Mad) was dismissed as pressed, the department has not accepted the correctness of the decisions in the said case and that he has been instructed to urge before us that the ratio of the Gujarat High Court ((1973) 91 ITR 393) should be followed as laying down the correct law. In the circumstances set out above, we can safely draw the inference from the conduct of the department in not preferring appeals against the judgments of the High Courts of Calcutta and Kerala, and further, in not pressing the appeal before the Supreme Court against the judgment in Ratnam Nadar's case (1969) 71 ITR 433 (Mad), that the department has accepted the ratio of the decision in Ratnam Nadar's case (1969) 71 ITR 433 (Mad) as laying down the correct law. For the above reasons we are of the opinion that the Tribunal was right in holding that the value of consideration received by the assessee firm for transfer of its goodwill is not liable to capital gains tax under S. 45 of the Act. Accordingly, we answer the question as reframed by us in the affirmative and against the department."
10. In the light of the above, we answer the question referred to us in the affirmative, that is, in favour of the assessee and against the department. The assessee will have his costs from the department. Counsel's fee Rs. 500/-.
11. Answer in affirmative.