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Commissioner of Income-tax Vs. Clive Mills Co. Ltd. (In Liquidation) - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtKolkata High Court
Decided On
Case NumberIncome-tax Reference No. 103 of 1977
Judge
Reported in[1984]148ITR14(Cal)
ActsIncome Tax Act, 1961 - Section 45
AppellantCommissioner of Income-tax
RespondentClive Mills Co. Ltd. (In Liquidation)
Appellant AdvocateB.K. Bagchi and ;M.L. Bhattacharjee, Advs.
Respondent AdvocateRama Pal, Adv.
Excerpt:
- .....gains' as the assessee had not incurred any cost in terms of money in the acquisition of the loom hours '2. this reference relates to the assessment year 1961-62 for which therelevant accounting year is the financial year ending march 31, 1961. theassessee-company, which is in liquidation, had income from property andincome from business during the year under consideration. it also sold loom hours and the ito treated the sale proceeds of rs. 1,18,526 as short-term capital gains. the matter went up to the tribunal. the tribunal in its order disposed of the matter, relying on its earlier order dated march 21, 1975. therefore, it would be appropriate to refer to that order of march 21, 1975, which begins at p. 33 of the paper book wherein the tribunal after considering the rival.....
Judgment:

Sabyasacht Mukharji, J.

1. In this reference under Section 256(1) of the I.T. Act, 1961, the Tribunal has referred the following question :

' Whether, on the facts and in the circumstances of the case, the Tribunal misdirected itself in law in holding that the profits or gains arising from the sale of loom hours were not chargeable to tax under the head 'Capital gains' as the assessee had not incurred any cost in terms of money in the acquisition of the loom hours '

2. This reference relates to the assessment year 1961-62 for which therelevant accounting year is the financial year ending March 31, 1961. Theassessee-company, which is in liquidation, had income from property andincome from business during the year under consideration. It also sold loom hours and the ITO treated the sale proceeds of Rs. 1,18,526 as short-term capital gains. The matter went up to the Tribunal. The Tribunal in its order disposed of the matter, relying on its earlier order dated March 21, 1975. Therefore, it would be appropriate to refer to that order of March 21, 1975, which begins at p. 33 of the paper book wherein the Tribunal after considering the rival contentions observed as follows :

' We have considered the rival submissions. The assessee was allotted loom hours in both the years on account of its owning looms and the allotment of the loom hours did not cost anything to the assessee. Even the ITO has taken the cost of loom hours at nil and has held that the loom hours sold were out of the current allotment. The facts of the case reported in : [1970]76ITR566(Cal) (CIT v. Chunilal Prabhudas & Co.) were that the assessee was a registered firm of six partners deriving income from import and export business. Its head office was in Calcutta and it had branches in Bombay. On the last day of the accounting year the assessee transferred its assets and liabilities and also the goodwill of its Calcutta business to a private limited company, C. P. & Co., Calcutta (P.) Ltd. and the assets and liabilities and the goodwill of its Bombay business to another company under the name, C. P. & Co. Bombay (P.) Ltd. These transfers were made by two registered deeds of the same date. The assessee valued its goodwill of the Calcutta business and the Bombay business at Rs. 60,000 each and received the total amount of Rs. 1,20,000 in respect of transfer of such goodwill. The consideration for the goodwill of the firm was not paid to each partner but each shareholder got as many shares of the company as his share in the partnership justified. The ITO included the entire amount of the sum of Rs. 1,20,000 allocated towards the goodwill of the firm as the firm's capital gains under Section 12B of the (Indian) Income-tax Act, 1922, rejecting the assessee's contention that the goodwill being an intangible asset did not come within the definition of capital asset and Section 2(4)(a) of the (Indian) Income-tax Act, 1922, and this decision was upheld by the Tribunal. It was held by the High Court that goodwill was not a capital asset within the meaning of section 12B of the (Indian) Income-tax Act, 1922, as it produced no profit or gain in the case of transfer to the companies. In this case their Lordships quoted with approval the decision of the Madras High Court in the case, CIT v. K. Rathnam Nadar : [1969]71ITR433(Mad) . It has been observed in this decision that section 12B(2)(ii) of the (Indian) Income-tax Act, 1922, suggests that capital gain arises only on the transfer of a capital asset which has actually cost to the assessee something. Such cost in the context of the Income-tax Act being cost in terms of money cannot apply to transfer of capital asset which did not cost anything to the assessee in terms of moneyin its creation or acquisition. In the present case also the acquisition of the loom hours did not cost anything to the assessee. The sale of loom hours, therefore, does not attract the provision of Section 45 of the Income-tax Act, 1961. The additions on account of sale proceeds of loom hours in both the years are accordingly deleted.'

3. The Tribunal in those circumstances, following the aforesaid decision, deleted the additions on account of sale proceeds of loom hours. In the premises, the question indicated before has been referred to this court. On behalf of the Revenue our attention was drawn to the fact that the previous decision of the Tribunal to which reference had been made by the Tribunal in disposing of the present appeal had come up before this court in Income-tax Reference No. 108 of 1976, and on 24 February, 1981, that matter was disposed of. The judgment does not indicate that the matter was gone into in detail, but its observation is that in the case of Empire Jute Co. Ltd, v. CIT : [1980]124ITR1(SC) , the Supreme Court has held that the receipt from sale of 'loom hours' is receipt in the nature of revenue receipts. In that view of the matter, the Tribunal could dispose of the appeal before it taking into consideration the decision of the Supreme court. On behalf of the Revenue it was stressed that the Supreme Court in the case of CIT v. Maheshwari Devi Jute Mills Ltd. : [1965]57ITR36(SC) , has held that loom hours were capital assets. Therefore, in view of that decision, it was argued that the decision has not been varied and it* there were capital assets then the sale of such capital asset would be attributed to capital gains. This question directly fell for consideration before the Supreme Court in the case of Empire Jute Co. Ltd. v. CIT : [1980]124ITR1(SC) . There, the Supreme Court held that the payment of Rs. 2,03,255 made by the assessee for purchase of loom hours represented revenue expenditure. Learned advocate for the Revenue tried to emphasise that the Supreme Court did not deal with the acquisition of loom hours and whether such acquisition was a capital asset or not. Now, it is true that at p. 7 of the said report, the Supreme Court referred to the previous decision of Maheshwari Devi Jute Mitts Ltd.'s case : [1965]57ITR36(SC) , and the basis upon which it was referred has been explained at pp. 8 and 9 of the report of the Supreme Court. In view of the contentions raised, it would be instructive to set out the observations of the Supreme Court in : [1980]124ITR1(SC) , which are as follows (at p. 8):

' But, more importantly, it may be pointed out that Maheshwari Devi Jute Mills' case, proceeded on the basis that loom hours were a capital asset and the case was decided on that basis. It was common ground between the parties throughout the proceedings, right from the stage of the ITO up to the High Court, that the right to work the looms for the allotted hours of work was an asset capable of being transferred and this court, therefore, did not allow counsel on behalf of the revenue to raise a contention that loom hours were in the nature of a privilege and were not an asset at all. Since it was a commonly accepted basis that loom hours were an asset of the assessee, the only argument which could be advanced on behalf of the revenue was that when the assessee transferred a part of its hours of work per week to another member, the transaction did not amount to sale of an asset belonging to the assessee, but it was merely the turning of an asset to account by permitting the transferee to use that asset and hence the amount received by the assessee was income from business. The revenue submitted that 'where it is a part of the normal activity of the assessee's business to earn profit by making use of its asset by either employing it in its own manufacturing concern or by letting it out to others, consideration received for allowing the transferee to use that asset is income received from business and chargeable to income-tax'. The principle invoked by the revenue was that 'receipt by the exploitation of a commercial asset is the profit of the business irrespective of the manner in which the asset is exploited by the owner in the business, for the owner is entitled to exploit it to his best advantage either by using it himself personally or by letting it out to somebody else.' This principle supported as it was by numerous decisions, was accepted by the court as a valid principle, but it was pointed out that it had no application in the case before the court, because though loom hours were an asset, they could not from their very nature be let out while retaining property in them and there could be no grant of temporary right to use them. The Court, therefore, concluded that this was really a case of sale of loom hours and not of exploitation of loom hours by permitting user, while retaining ownership and, in the circumstances, the amount received by the assessee from sale of loom hours was liable to be regarded as capital receipt and not income. It will thus be seen that the entire case proceeded on the commonly accepted basis that loom hours were an asset and the only issue debated was whether the transaction in question constituted sale of this asset or it represented merely exploitation of the asset by permitting its user by another while retaining ownership. No question was raised before the court as to whether loom hours were an asset at all nor was any argument advanced as to what was the true nature of the transaction. It is quite possible that if the question had been examined fully on principle, unhampered by any predetermined hypothesis, the court might have come to a different conclusion. This decision cannot, therefore, be regarded as an authority compelling us to take the view that the amount paid for purchase of loom hours was capital and not revenue expenditure. Thequestion is res integra and we must proceed to examine it on first principles. '

4. Therefore, it appears to us that in that view of the matter the Tribunal was right. The Supreme Court has also held in the case of CIT v. B.C. Srinivasa Setty : [1981]128ITR294(SC) , that goodwill generated in a newly commenced business cannot be described as an ' asset' within the terms of Section 45 of the I.T. Act, 1961, or of Section 12B of the Indian I.T. Act, 1922, and the transfer of a goodwill initially generated in a business does not give rise to a capital gain for the purpose of income-tax. It is true that the Supreme Court therein considered the case of goodwill but the Supreme Court at p. 299 dealt with and analysed the question whether sale of an asset which did not cost anything to the assessee could at all attract the provisions of Section 45 and the Supreme Court has observed at P. 299 of the said report, inter alia, as follows :

' Section 45 charges the profits or gains arising from the transfer of a capital asset to income-tax. The asset must be one which falls within the contemplation of the section. It must bear that quality which brings Section 45 into play. To determine whether the goodwill of a new business is such an asset, it is permissible, as we shall presently show, to refer to certain other sections of the head 'Capital gains'. Section 45 is a charging section. For the purpose of imposing the charge, Parliament has enacted detailed provisions in order to compute the profits or gains under that head. No existing principle or provision at variance with them can be applied for determining the chargeable profits and gains. All transactions encompassed by Section 45 must fall under the governance of its computation provisions. A transaction to which those provisions cannot be applied must be regarded as never intended by Section 45 to be the subject of the charge. This reference flows from the general arrangement of the provisions in the I.T. Act, where under each head of income the charging provision is accompanied by a set of provisions for computing the income subject to that charge. The character of the computation provisions in each case bears a relationship to the nature of the charge. Thus, the charging section and the computation provisions together constitute an integrated code. When there is a case to which the computation provisions cannot apply at all, it is evident that such a case was not intended to fall within the charging section. Otherwise, one would be driven to conclude that while a certain income seems to fall within the charging section there is no scheme of computation for quantifying it. The legislative pattern discernible in the Act is against such a conclusion. It must be borne in mind that the legislative intent is presumed to run uniformly through the entire conspectus of provisions pertaining to each head of income. No doubt there is a qualitative difference between the charging provision and a computation provision. And ordinarily the operation of the charging provision cannot be affected by the construction of a particular computation provision. But the question here is whether it is possible to apply the computation provision at all if a certain interpretation is pressed on the charging provision. That pertains to the fundamental integrality of the statutory scheme provided for each head.

The point to consider then is whether if the expression ' asset' in Section 45 is construed as including the goodwill of a new business, it is possible to apply the computation sections for quantifying the profits and gains on its transfer.

The mode of computation and deductions set forth in Section 48 provide the principal basis for quantifying the income chargeable under the head ' Capital gains '. The section provides that the income chargeable under that head 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 :

(ii) the cost of acquisition of the capital asset...' What is contemplated is an asset in the acquisition of which it is possible to envisage a cost. The intent goes to the nature and character of the asset, that it is an asset which possesses the inherent quality of being available on the expenditure of money to a person seeking to acquire it. It is immaterial that although the asset belongs to such a class, it may, on the facts of a certain case, be acquired without the payment of money. That kind of case is covered by Section 49 and its cost, for the purpose of Section 48, is determined in accordance with those provisions. There are other provisions which indicate that Section 48 is concerned with an asset capable of acquisition at a cost. Section 50 is one such provision. So also is Sub-section (2) of Section 55. None of the provisions pertaining to the head 'Capital gains' suggests that they include an asset in the acquisition of which no cost at all can be conceived. Yet there are assets which are acquired by way of production in which no cost element can be identified or envisaged. From what has gone before, it is apparent that the goodwill generated in a new business has been so regarded. The elements which create it have already been detailed. In such a case, when the asset is sold and the consideration is brought to tax, what is charged is the capital value of the asset and not any profit or gain.

In the case of goodwill generated in a new business there is the further circumstance that it is not possible to determine the date when it comes into existence. The date of acquisition of the asset is a material factor in applying the computation provisions pertaining to capital gains.It is possible to say that the 'cost of acquisition' mentioned in Section 48 implies a date of acquisition, and that inference is strengthened by the provisions of Sections 49 and 50 as well as Sub-section (2) of Section 55.

It may also be noted that if the goodwill generated in a new business is regarded as acquired at a cost and subsequently passes to an assessee in any of the modes specified in Sub-section (1) of Section 49, it will become necessary to determine the cost of acquisition to the previous owner. Having regard to the nature of the asset, it will be impossible to determine such cost of acquisition. Nor can Sub-section (3) of Section 55 be invoked, because the date of acquisition by the previous owner will remain unknown.

We are of opinion that the goodwill generated in a newly commenced business cannot be described as an ' asset' within the terms of Section 45 and, therefore, its transfer is not subject to income-tax under the head ' Capital gains '. '

5. This view also corresponds with the view expressed by this court in the case of CIT v. Anglo-India Jute Mills Co. Ltd. : [1981]129ITR352(Cal) . We must, however, observe that this decision was rendered on June 9, 1980, while the Supreme Court decision in the case of CIT v. B.C. Srinivasa Setty : [1981]128ITR294(SC) , was rendered on February 19, 1981. But the Supreme Court decision rendered on February 19, 1981, was reported on March 23, 1981. Therefore, we did not have the advantage of the Supreme Court decision when we rendered our decision on June 9, 1980, though it was reported much later on May 25, 1981.

6. Therefore, in the light of the decisions of the Supreme Court in the case of Empire Jute Co. v. CIT : [1980]124ITR1(SC) , and also in the case of CIT v. B.C. Srinivasa Setty : [1981]128ITR294(SC) , the Tribunal had arrived at a correct conclusion. Incidentally, we must point out that the Tribunal has held as a fact that the loom hours in this case did not cost anything to the assessee. That finding of fact has not been challenged by any separate question.

7. In the premises, the question referred to this court must, therefore, be answered in the negative and in favour of the assessee. The parties will pay and bear their own costs.

C.K. Banerji, J.

8. I agree.


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