SABYASACHI MUKHARJI J. -In this reference under s. 256 (1) of the I. T. Act, 1961, for the assessment year 1969-70 for which the relevant previous year ended on 31st March, 1969, the following questions have been referred to this court :
'1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the assessees right to acquire foreign exchange by entering into forward contracts with the State Bank of India was not a capital asset within the meaning of section 2 (14) of the Income-tax Act, 1961 ?
2. If the answer to question No. 1 is in the negative, then whether on the facts and in the circumstances of the case, the Tribunal was right in holding that though there was a relinquishment or extinguishment of the said right amounting to a transfer within the meaning of section 2 (47) of the Income-tax Act, 1961, no capital gains arose therefrom which was chargeable under section 45 of the said Act
The assessee is engaged in the manufacture of jute goods. It wanted to import certain machinery for the production of carpet backing. An import licence was also granted to it on the 8th October, 1964, which was valid for a period of two years from the date of its issue. The import was to be made from M/s James Mackie & Sons Ltd. of U. K. On the 27th January, 1966, the assessee also placed orders with the above U. K. exporter for supply of machinery. In order to safeguard the financial deal, the assessee entered into a forward contract with the State Bank of India, Calcutta, for the purchase of 64,585-16-3 and 7,201-7-3, being roughly equivalent to the cost of the machinery for which the assessee was required to make the payment in sterling. The Indian rupee was devalued on 6th June, 1966, and as a result of this devaluation the cost of the import of machinery increased by about 57 per cent. After the devaluation the bank informed the assessee that the Reserve Bank of India had raised certain objections regarding the booking of the foreign exchange. The Reserve Bank of India finally approved the foreign exchange contract in May, 1967, but by that time the import licence granted to the assessee by the Government had expired on the 7th October, 1966. The assessee requested the State Bank of India to permit it to utilise the foreign exchange contracted for the import of another machinery for which the licence was expected to be issued in the near future. It appears that nothing tangible materialised and the State Bank of India on the 16th December, 1968, cancelled the outstanding balances of the contracts and credited the assessees account with a sum of Rs. 3,13,651, being the difference in exchange rate, viz., contract rate and current TT buying rate less charges on the periodical extension of the contracts arranged by its foreign department. It should be clarified here that the assessee did not advance any sum to the bank against the above contracts. The assessee showed the aforesaid amount in Part IV of its return submitted to the income-tax department but claimed that it did not constitute the assessees income. It was contended before the ITO that the transaction arose in respect of a capital item and, therefore, the amount should not be treated as a revenue receipt. The ITO rejected the contention. He was of the opinion that the profit had arisen to the assessee during the course of its business and, therefore, it was taxable. He accordingly taxed the entire amount of Rs. 3,13,651. He treated it as a revenue receipt arising out of the transaction of the assessee in carrying on its business.
The assessee appealed to the AAC. The AAC held that the surplus received at the post devaluation rate did not arise out of the trading activities of the assessee-company and the surplus was not on account of the business carried on by the assessee-company or an excess realised by the company from the stock-in-trade. Accordingly, the AAC held that it was not a business profit. The AAC, however, examined the question from another point of view. He was of the opinion that the assessee by virtue of the sanction of the import licence on 8th October, 1966, had assumed a right which was further strengthened by entering into a forward contract with the State Bank to finance funds towards the purchase of the machinery and it was a valuable right and could be characterised as a intangible asset or an actionable claim. He, therefore, held that such a right was a capital asset within the definition of the term laid down under s. 2 (14) of the I. T. Act, 1961. The AAC, however, held that the assessee in cancelling the forward contract and surrendering the import licence had relinquished an asset and had also extinguished its right contained therein which amounted to transfer within the meaning of s. 2 (47) of the Act. He, therefore, confirmed the addition of the amount in question in the assessment of the assessee as capital gains. He also discussed certain authorities relating to the taxability of the various amount as also dealing with casual and non-recurring nature of a receipt and held that the amount which the assessee was to receive on account of devaluation was foreseen and anticipated and hence was not casual in nature.
From the aforesaid order of the AAC both the revenue and the assessee went up in appeal before the Tribunal. On behalf of the revenue, it was contended before the Tribunal that the AAC was wrong in deleting the sum of Rs. 3,13,651 from the business income and treating the same as capital gains. The contention of the assessee, on the other hand, was that the AAC had exceeded his jurisdiction in directing the ITO to tax the amount as capital gains and in any case it could not be so taxed.
The Tribunal, in dealing with the revenues appeal as to whether this amount could at all be brought to tax as business income of the assessee, following the decisions of the Supreme Court in the case of CIT v. Tata Locomotive and Engineering Co. Ltd. : 60ITR405(SC) and Swadeshi Cotton Mills Co. Ltd. v. CIT : 63ITR65(SC) , held that the receipt of the surplus in the hands of the assessee was a capital receipt not liable to be taxed as business income and confirmed the order of the AAC on this aspect of the matter. The Tribunal, further, held that even the principle laid down by this court in the case of Sutlej Cotton Mills Ltd. v. CIT : 81ITR641(Cal) , that to bring the loss arising out of devaluation could not be allowed in the computation of the assessees income as the act of devaluation was an act of the State and an act of sovereign power extrinsic to the business was applied to the assessees case. The Tribunal, therefore, observed that in the light of that principle it could be held that the devaluation profits having not arisen from the carrying on of the business could not be brought to tax as business income. It accordingly dismissed the revenues appeal. The revenue sought to raise the following questions from the said rejection order :
'1. Whether, on the facts and in circumstances of the case, the finding of the Tribunal that the profit due to devaluation arising form the forward contract of the assessee with the State Bank of India for the purchase of sterling exchange for import of machinery for its business did not arise from the carrying on of the business of the assessee was unreasonable or perverse ?
2. Whether, on the facts and in the circumstances of the case, the Tribunal, was right in holding that the sum of Rs. 3,13,651 received by the assessee from the State Bank of India on account of the difference in exchange rate was not liable to be taxed as business income ?'
The Tribunal by its order dated 23rd July, 1974, rejected the said application. We are told, at the time of hearing of this of hearing of this reference, that a separate application under s. 256 (2) had been made to this court. We were not, however, informed as to the actual position whether any reference had been made or not and if so at what stage that reference was. Therefore, we should refrain from expressing any opinion on the question posed by the said rejection of the revenues contention before the Tribunal.
So far as the appeal preferred by the assessee before the Tribunal was concerned, the first contention was that the amount of Rs. 3,13,651 was brought to tax as business income of the assessee by the ITO and the AAC could either uphold his order or delete the addition and that he had no power to hold that the said amount could be brought to tax as capital gains in the hands of the assessee. The assessee relied on the decision of the Supreme Court in the case of CIT v. Rai Bahadur Hardutroy Motilal Chamaria : 66ITR443(SC) , in support of its contention. The Tribunal, however, was unable to accept this contention. The Tribunal found that the ITO in his order had stated that the amount had not been offered as capital gains as as there was no transfer involved in the transaction as envisaged under s. 2 (47) of the Act. In the opinion of the Tribunal, the facts of the case went to say that the AAC had not traveled outside the record with a view to finding out the new sources of revenue and that he had confined himself to the sources of income which had been submitted for consideration by the ITO form the point of view of taxability. This contention of the assessee was, therefore, rejected. It was not argued that the assessee had not acquired any capital asset as per its definition under s. 2 (14) of the Act. It was argued that the assessee had no doubt assumed certain rights, viz., the right of importing machinery by virtue of the grant of import licence on the 8th October, 1964, but that right had lapsed and was not surrendered or relinquished in favour of the bank so as to give rise to any capital gains to the assessee. As a corollary it was also argued that the capital asset, if at all there was one, had cost nothing to the asssessee and there was also no transfer of any such asset within the definition of s. 2 (47) of the I. T. Act, 1961. It was urged that the 'relinquishment of the asset' postulated the continued existence of the asset over which the rights of its holder were relinquished or surrendered. It was urged that in the instant case no such asset continued to exist as the assessees rights vanished the moment its licence expired. Reliance in this connection was placed on certain decisions, mainly, the decision of this court in the case of CIT v. Chunilal Prabhudas & Co. : 76ITR566(Cal) . On the other hand, reliance was placed on a decision of the Gujarat High Court in the case of CIT v. Mohanbhai Pamabhai  91 ITR 393. The Tribunal after considering the rival contentions of the parties was of the opinion that the instant case was governed by the principles laid down by this court in the case of CIT v. Chunilal Prabhudas & Co. : 76ITR566(Cal) , which followed the decision of the Madras High Court in the case of CIT v. K. Rathnam Nadar : 71ITR433(Mad) . The Delhi High Court has also followed the same principle. The Tribunal observed that the Gujarat High Court had taken a different view. But in view of the decision of this court, the Tribunal was of the view that the instant case was similar to the case before the Calcutta High Court. In the premises, the Tribunal came to the conclusion that no capital gains arose in this case.
On these findings, at the instance of the revenue, the questions as indicated before have been referred to this court. In our opinion, the true controversy on this aspect of the matter before the Tribunal was, whether the amount of Rs. 3,13,651 was taxable as capital gains under s. 45 of the I. T. Act, 1961. In view of the several decisions of this court and all other courts and in view of the other references at the instance of the revenue, in our opinion, it would be advisable to reframe the two questions as follows :
'Whether, on the facts and in the circumstances of the case, the receipt of the sum of Rs. 3,13,651, is taxable under section 45 of the Income-tax Act, 1961 ?'
We reframe the question in the manner indicated above to bring about the true controversy and in order to avoid making any comments or observations on the question whether by the contract with the State Bank the rights acquired by the assessee-company was of a capital nature or whether any profits or gains in respect of the same could be, in certain circumstances, treated as capital receipts or revenue receipts. Furthermore, in our opinion, even though the contract with the State Bank of India may be a capital asset, the manner in which the contract was adjusted or the receipt of the sum of Rs. 3,13,651 might not be a transfer or exchange or relinquishment of an asset or extinguishment of a right therein as contemplated under s. 2 (47) of the I. T. Act, 1961. This is material for the purpose of computing the capital gains under s. 45 of the I. T. Act, 1961.
It is, therefore, necessary in our opinion, to analyse the true nature of the receipt of the sum of Rs. 3,13,651 on or about 16th December, 1961, by the assessee-company. As we have narrated the facts before, the assessee wanted to purchase certain machinery from abroad. For this purpose, the assessee had done all that was necessary for obtaining the permission or having the import licence. The assessee, in order to protect itself from the fluctuations of the exchange rate, had entered into, as is common practice now, a forward contract with the State Bank entitling it to obtain the requisite amount of sterling at the time when the contract comes to an end of is required to be performed. It is that right which the assessee had acquired. Whether that right was a capital asset or whether a contractual right, in certain circumstances, could give rise to a capital asset as contemplated under s. 2 (14) of the I. T. Act, 1961, may be a relevant factor, but is not decisive or the conclusive factor in considering whether any gain or any profit in respect of such an asset can be described as capital gains under s. 45 of the I. T. Act, 1961. The question, in other words is, is the realisation of dues which have accrued under a contract, assuming that contract to be a capital asset and as a result of such realisation of the dues if some money accrues to the assessee, can such an accrual or such a realisation be treated as a transfer under s. 2 (47) of the I. T. Act, 1961, or such a transaction can result in having capital gains under s. 45 of the I. T. Act, 1961 In order to appreciate this, we must bear in mind three important aspects of the question. One is, what was happening on the 16th March, 1968 Second, is such kind of an asset, an asset which is contemplated as an asset which comes under the scheme of s. 45 of the I. T. Act, 1961 The third question which is material to be borne in mind is, even if that right be a right of a capital nature and nothing has been spent by the asssessee, as in this case, a fact which has been so found by the Tribunal, then can a capital gains arise out of such a transaction In order to consider this, as we have said, we must first determine the nature of the contract with the State Bank of India. The contract was to get, on the relevant date, the required dollars. Now, the assessee had placed an order with the U. K. exporter. The assessee could not get this machinery because the licence expired on the 7th October, 1965, and, as the licence lapsed, the question for enforcing payment in dollars did not arise. Therefore, the State Bank, pursuant to their commitment, credited the assessee on the 16th December, 1968, minus the necessary costs, charges and expenses, with the difference between the exchange rate and the assessee got a credit balance of Rs. 3,13,651 as we have mentioned before. Therefore, the mount was obtained not because the assessee surrendered any licence and not because the assessee gave up its own right under a contract but because the assessee realised its dues or, in other words, the assessee transformed its rights under the contract in money form which it always had. The assessee had not the money but the right which it had under the contract. It was the result of the right of he assessee that had accrued. Bearing this character in mind, it would be relevant to refer to the relevant statutory provisions.
First, we must refer to s. 2 (14) of the I. T. Act, 1961, which defines 'Capital asset'. The said section reads as follows :
'2. (14) Capital asset means property of any kind held by an assessee, whether or not connected with his business or profession, but does not include -
(i) any stock-in-trade, consumable stores or raw materials held for the purposes of his business or profession;
(ii) personal effects, that is to say, movable property (including wearing apparel and furniture, but excluding jewellery) held for personal use by the assessee or any member of his family dependent on him.....'
We have set out the relevant portions omitting other portions which are not material for our purpose. Next, we refer to s. 2 (47) of the Act which says that 'transfer, in relation to a capital asset, includes the sale, exchange or relinquishment of the asset or the extinguishment of any rights therein or the compulsory acquisition thereof under any law'. Section 45 of the Act with which we are directly concerned in this controversy states that any profits or gains arising from the transfer of a capital asset effected in the previous year, leaving aside the exceptions with which we are not concerned, be chargeable to income-tax under the head 'Capital gains', and shall be deemed to be the income of the previous year. Section 46 deals with the capital gains on distribution of assets by companies in liquidation. We are not concerned with this. Section 47 deals with certain transactions which are not considered to be transfer and s. 48 provides for the mode of computation and deductions and is in the following terms :
'48. Mode of computation and deductions. -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.'
Bearing the aforesaid scheme of the provisions, in our opinion, the essential thing to find out form this provisions is, in order to be capital gains under s. 45 there must be profit and gain arising from the transfer of a capital asset. The expression 'profit or gain' indicates that there must be some gains arising from the transfer, that is to say, something more than what one has spent or what one has laid out in order to get the asset one has obtained. All receipts by the sale of capital goods or a capital asset are not capital gains. In order to be a capital gain it must be a profit or a gain arising from a transfer. This is important and must be read in conjunction and in co-relation with the mode of computation and deduction. It is important to bear in mind that even though it is true, that a charging section cannot be limited or circumscribed by the machinery section being the view of the Gujarat High Court, which we shall presently note, but it is also important to bear in mind that in construing the charging section the expressions used in that charging section must be borne in mind. This s. 45 in the instant case must be given its full natural meaning and in that respect if any assistance can be drawn from the machinery section such assistance can be drawn or relied upon. Viewed in that light, in our opinion, it appears to us that in view of the manner in which Rs. 3.13,651 was obtained by the assessee, in the instant case, it could not be said that there was any profit or gain as contemplated under s. 45 because there was no profit or gain. The assessee did not spend anything. The assessee got its right under the contract. The assessee transformed that contractual right into a monetary right. Therefore, neither was there any transfer nor was there any profit arising. In that background of facts there was no cost of acquisition. Therefore, the cost of acquisition is also a relevant factor to be taken into consideration. We shall discuss the authorities and we shall also analyse the true ratio of the decisions of the Madras High Court, Calcutta High Court, Bombay High Court, Delhi High Court and the High Court of Karnataka on this point. Before we do so, we shall have to deal with several decisions cited from the Bar which we shall presently notice.
Learned advocate for the revenue drew out attention to certain observations appearing in Cheshire and Fifoots Law of Contract, 9th Edn., p. 66, where dealing with the consideration price of a promise, the learned editors of that book quoted at p. 65, Frederick Pollock when he summarised the position from the decision of the House of Lords as follows :
'An act or forbearance of one party, or the promise thereof, is the price for which the promise of the other is bought, and the promise thus given for value is enforceable.'
The House of Lords had occasion to discuss this aspect of the matter in the case of Van den Berghs Ltd. v. Clark (H. M. Inspector of Taxes)  19 TC 390;  3 ITR 17. There, what happened was that the assessee-company which had carried on business, inter alia, of manufacturing and dealing in margarine and similar products entered into an agreement with a competing Dutch company by which the two companies bound themselves for the future to work in friendly alliance and agreed, inter alia, (a) to share the profits of their respective margarine businesses in specified proportions, (b) to bring within the operation of the agreement, if required, any interest in other margarine concerns acquired by companies under their control (c) not to enter any pooling or price arrangements with third parties inimical to the interests of the two companies, (d) to set up a joint committee to make arrangement with outside firms as to prices and limitation of areas of supply of margarine, and (e) to promote generally the interest of the two companies in the margarine business. Supplemental agreements made in 1913 and 1920 provided that with certain modifications the provisions of the 1908 agreement were to continue in force until 1940. In the period from 1908 to 1913 payments were made under the agreements by and to the assessee-company and were treated for income-tax purposes as trading expenses and receipts, respectively, of the years in which they were made. From 1914 to 1919 the two companies were unable to compute their profits owing to the difficulties caused by the war. In 1922, the assessee-company arrived at the sum of 449,042 as being the amount due to it by the Dutch company under the agreements. This liability was not admitted by the Dutch company, which claimed that under the agreements there was, on balance, a sum due to it by the assessee-company. The matter was referred to arbitration, which, however, proved so lengthy and costly that in 1927 the companies, in contemplation of a merger inter se, entered into negotiations with a view to a settlement of the dispute. The dutch company desired to cancel the agreements but the assessee-company, which considered that such a course would be to the disadvantage, refused to consent to cancellation unless the Dutch company paid to it, at least, 449,042. A settlement was finally reached in 1927, whereby, inter alia , (a) all claims and counters under the agreements for the period from 1914 to 1927 were withdrawn, and
(b) in consideration f the payment by the dutch company of 450,000 to the assessee-company as damages, the agreements were determined as at 31st December, 1927, and each party released the other party from all claim made thereunder. That sum was paid in 1927, and credited in the assessee-companys books of account for that year. The assessee- company was assessed to income-tax under Sch. D for the year 1928-29, in an amount which included the sum of 450,000. On appeal, the General commissioners decided that the sum was paid in respect of the pooling agreements and must be brought in for the purpose of arriving at the balance of profits and gains of the assessee-company for the year to 31st December, 1927. It was held that the payment was for the cancellation of the assessee-companys future fights under the agreements which constituted a capital asset of the company and that it was a capital receipt. There, Lord Macmillan had observed as follows (19 TC 431; 3 ITR 25) :
'What were the appellants giving u They gave up their whole rights under the agreements for thirteen years ahead. these agreements are called in the Stated Case pooling agreements, but that is a very inadequate description of them, for they did much more than merely embody a system of pooling and sharing profits. If the appellants were merely receiving in one sum down the aggregate of profits which they would otherwise have received over a series of years, the lump sum might be regarded as of the same mature as the ingredients of which it was composed. But even if a payment is measured by annual receipts, it is not necessarily in itself an item of income. As Lord Buckmaster pointed out (1922) S. C. (H. L.) 115 in the case of Glenboig Union Fireclay Co. Ltd. v. Inland Revenue Commissioners  12 TC 427 (HL), there is no relation between the measure that is used for the purpose of calculating a particular result and the quality of the figure that is arrived at by means of that test.
The three agreements which the appellants consented to cancel were not ordinary commercial contracts made in the course of carrying on their trade; they were not contracts for the disposal of their products or for the engagement of agents or other employees necessary for the conduct of their business; nor were they merely agreements as to how their trading profits when earned should be distributed as between the contracting parties. On the contrary, the cancelled agreements related to the whole structure of the appellants profit-making apparatus. They regulated the appellants activities, defined what they might and what they might not do, and affected the whole conduct of their business. I have difficulty in seeing how money laid out to secure or money received for the cancellation of, so fundamental an organisation of a traders activities can be regarded as an income disbursement or an income receipt. Mr. Hills (counsel for the crown) very properly warned your Lordships against being misled as to the legal character of the payment by its magnitude, for, magnitude is a relative term and we are dealing with companies which think in millions. But the magnitude of a transaction is not an entirely irrelevant consideration. The legal distinction between a repair and a renewal may be influenced by the expense involved. In the present case, however, it, is not the largeness of the sum that is important but the nature of asset that was surrendered. In my opinion, that asset, the congeries of rights which the appellants enjoyed under the agreements and which for a price they surrendered, was a capital asset.'
But, as we have mentioned before, this was only a question of whether the pooling agreements was a capital asset and the same relates to, as a result of the pooling agreements, the capital asset or not. It depends on whether a particular agreement gives right to a capital asset or not. On whether a particular agreement gives right to a capital asset or not. On the nature, as the pooling agreements were to affect the structure and the running of the company, it was held to be capital assets. The same view was reiterated by the decision of the Madras High court in the case of V. Rangaswami Naidu v. CIT : 31ITR711(Mad) . There, it was held that the share of a partner in the partnership concern was property and, therefore, a capital asset within the meaning of s. 2 (4A) of the Indian I. T. Act, 1922. There, what had happened was, the assessee and one V. G. N. were partners in three partnership concern, A & Co., B & Co. and C & Co. A & Co. were the managing agents of Coimbatore Spinning Co., B & Co. were agents of Radhakrishna Mills. The partnership deed of A & Co. provided that the partners should have an individual right to sell or mortgage his share or interest in the partnership subject to an option in favour of the other partners. The partnership deed of B & Co. provided that each of the partners could sell his right in the partnership. The deed of C & Co. also recited that the agreement should be binding on the heirs and assigns of the partners. The managing agency agreement of the Coimbatore Spinning Co. provided that it should be lawful for the said firm, A & Co., to assign this agreement and also than it should be lawful for any member of the said firm to assign the whole or a part of the interest in the said firm. The assessees share in A & Co. was transferred to V. G. N. in exchange for the latters share in B & Co. and C & Co. and an additional sum of Rs. 1,00,000. The Madras High Court held that (1) the congeries of rights which the assessee enjoyed under the partnership agreement of A & Co. and which he conveyed for a price to V. G. N. was a capital asset within the meaning of s. 2 (4A) of the Indian I. T. Act, 1922; (2) what was payable under the managing agency agreement between A & Co. and the Coimbatore Spinning Co. has not mere remuneration for services rendered by each of the partners but the managing agency itself was a transferable asset of A & Co. ; (3) the transaction involved both an exchange and transfer of capital assets and had all the elements of a sale, and the sum of Rs. 1,00,000 received by the assessee was, therefore, assessable to income-tax as capital gains under s. 12B of the I. T. Act. There, at p. 719 of the report, the observations of Lord Macmillan in Van den Berghs case  19 ITR 390; 3 ITR 17, quoted above, were quoted which stated that the congeries of rights which the assessee enjoyed under the agreements and which for a price they surrendered was capital asset. In the case of CIT v Provident Investment Co. Ltd. : 32ITR190(SC) , the Supreme Court was considering the question of capital gains of sale of shares and the resignation of managing agency. This question was considered under s. 2 (12) of the Indian I. T. Act, 1922, before the amendment in 1956. It was held that the agreement was modified before the insertion of s. 12B of the Indian I. T. Act, 1922, and no question of deliberate of fraudulent evasion arose and the letters dated 14the September and 30the September, with which the Supreme Court was concerned, did not by themselves amount to sale of shares or the managing agencies. It was held that the letter of 7th October had substituted a new contract and did not merely change the mode of performance under the contract concluded earlier. The entire assessment proceedings, according to the Supreme Court, proceeded on the basis that the sum of Rs. 1,00,000 was a consideration for the sale or relinquishment of the managing agency and the only dispute between the parties was whether a transaction with regard to the managing agency was a sale or a transfer or a relinquishment. It was not open to the department to contend that there was only one indivisible consideration for the whole transaction including the sale of the shares and the sale of the managing agency. The transaction of relinquishment of managing agency, according to the Supreme Court, was neither a sale nor a transfer and therefore, s. 12B did not apply. We are not concerned directly with the facts in the instant case and the ratio of that decision was arrived at entirely in a different context. In the case of Kettlewell Bullen and Co. Ltd. v. CIT : 53ITR261(SC) , it was held that the receipts that gave the managing agency were capital receipts and must be treated as such. The Supreme Court there was concerned with whether a particular receipt was a capital or revenue receipt and laid down the tests to be applied in such cases. Therefore, the principles enunciated in the said decision will not also be of any assistance in deciding the issue involved in the facts and circumstances of the case.
The most significant decision and which is relevant for our purpose is the decision of the Madras High Court.
In the case of CIT v. K. Rathnam Nadar : 71ITR433(Mad) , the Madras High Court had to consider this question in the context of goodwill under s. 12B of the Indian I. T. Act, 1922. There, the Madras High Court expressed the view that the goodwill was created by the trading activities of the assessee and probably by the name he had earned and the goodwill he had created amongst his customers. Goodwill of a firm was an intangible asset and could be compared to seed which was planted on the date the firm began its business and sprouted and grew as the firm grew in its dealings, in its state and in its reputation. It was difficult to say that it cost anything in terms of money for its coming into existence. Though goodwill was a capital asset, in the case of a goodwill of a business it could not be said that it became the capital asset f the firm at any particular point of time. It was something which went on slowly growing and perhaps waxing also. What exactly was the valued of the goodwill of a business at any point of time might have to be worked on a proper basis by cost accountants.
Section 12B (2) (ii) of the Indian I. T. Act, 1922, suggested that capital gains arose only on the transferee of a capital asset which had actually cost to the assessee something. Such actual cost, in the context of the I. T. Act, being cost in terms of money, it could not apply to transfer of capital assets which did not cost anything to the assessee in terms of money in its creation of acquisition.
Though the British and American taxation laws proceeded on the footing that capital gains are assessable in the case of transfer of goodwill, the Indian Act did not have in contemplation when enacting s. 12B that self-created assets like copyright, patents and goodwill should be subjected to capital gains arising on their transfer and hence capital gains on the transfer of a goodwill were not liable to be taxed under s. 12B. There the Division Bench of the Madras High Court observed at pp. 449 to 450 of the report as follows :
'We have, therefore, to proceed on the basis that, while the British and the American taxation laws proceed on the footing that capital gains are assessable in the case of transfer of goodwill, the Indian Act did not have in contemplation, when enacting section 12b, that self-created assets like copyright, patents and goodwill should be subjected to capital gains arising on their transfer. It is enough to say that, complex and difficult as this question is, we are not satisfied that either the legislature intended to include property of the kind now in question for the purpose of taxation of capital gains, or that the wording of section 12b supports such a contention. We, therefore, hold, though not without hesitation, that capital gains on the transfer of a goodwill are not liable to be taxed under section 12B.'
For or present purpose it is not necessary to examine the question whether goodwill in a capital asset or any capital gains would really arise on the transfer of a goodwill. We are not, as we have mentioned before, concerned with really the goodwill or the nature of the goodwill. Whether the creation of goodwill costs anything to the assessee or not is another question with which we are not concerned directly in this reference. The only principle which may be relevant for our present purpose is the question whether in asset, even if it is a capital asset which has not cost anything to the assessee for its acquisition, could be said to be liable to capital gains if on the transfer of the said asset a certain amount is realised by the assessee. The madras High Court was of the view that did not. The same view has been echoed by several other decisions which we shall presently note. It is important to bear in mind that, in view of the expression 'Profits and gains' used in s. 45 , an asset which has cost nothing, can it be said that such an asset would result in profits and gains on its transfer even if there was a transfer in a particular cas This decision was considered and the ingredients of s. 12B were examined by the Division Bench of this court to which I myself was a party, being the decision in the case of CIT v. Chunilal Prabhudas & Co. : 76ITR566(Cal) . As the some observations have been made in the subsequent decision in respect of the said decision, it is important to bear in mind that the said decision was not concerned with the question whether goodwill is such is a capital asset or not. The said decision was concerned only with, in the words of the learned judge, who delivered the judgment at p. 571 of the report :
'......... the question then finally boils down to this, whether goodwill is a capital asset within the meaning of section 12b of the Indian Income-tax Act, 1922, read with section 2 (4A) of the Act.'
The court was not concerned whether the goodwill was a capital asset as such under s. 2 (4A) similar to s. 2 (14) of the present Act. The learned judge, therefore, went on to analyse that in order to be a taxable gain within the meaning of s. 12B of the I. T. Act, 1922, there has to be four primary tests, namely, (1) profit or gain, (2) capital asset, (3) arising out of, and (4) sale, exchange, relinquishment or transfer. These are the four ingredients which are indicated in the said judgment and the learned judge observed that in the case of transfer of goodwill this test could not be satisfied. For our present purpose, that is material, because this decision has in several subsequent decisions been indicated as if it held that goodwill was not a capital asset at all. We are not concerned whether goodwill is a capital asset as such in some circumstances. In the case of Khushal Khemgar Shah v. Mrs.Khorshed Banu Dabiba Boatwalla, : 3SCR689 , it has been observed that goodwill can be transferred either as a whole or in part. But for an asset which has not cost anything to the assessee there cannot be any capital gains in respect of such assets. This proposition has been relied on by the Division Bench of this court on the observations of the Madras High Court.
The case of CIT v. Tata Locomotive and Engineering Co. Ltd. : 60ITR405(SC) , was a case where foreign exchange was earned abroad and retained for purchase of capital goods. On devaluation, the Supreme Court was concerned with the question whether it was capital receipt or not. The Supreme Court held that it was capital receipt because it was purchased for the machinery. We are not concerned with the same controversy. But it is material for our present purpose to refer to the Division Bench decision of the Gujarat High Court in the case of CIT v. Mohanbhai Pamabhai  91 ITR 393. There, the Division Bench of the Gujarat High Court was concerned with the question of transfer of goodwill, whether it could result in capital gains. Chief Justice, P. N. Bhagwati, speaking for the Gujarat High Court, had observed that the charging provision in s. 45 was not confirmed to those cases where the capital asset had cost something to the assessee in terms of money in acquiring it. There was nothing in any of the sections relating to capital gains which indicated that the charging provision should be construed in a narrow manner by excluding self-created capital assets or capital assets which had cost nothing to the assessee in terms of money in acquiring it. Section 48 provided for deduction from the value of the capital asset of 'the cost of acquisition of the capital asset'. The word 'acquire', according to its plain natural meaning, according to the learned Chief Justice, was a word of very wide import. It was not confined to the obtaining of a thing from a third party. Creation or production of a capital asset was not foreign to the concept of acquisition. Thereafter, the learned Chief Justice dealt with s. 2 (47) and observed that the interest of a partner in a partnership was not interest in any specific item of the partnership property. The transfer of a capital asset in order to attract capital gains tax must be on as a result of which consideration was received by the assessee or accrued to the assessee. With respect, it may, however, be pointed out that though it is true that the charging section should not be construed in the ordinary cases with reference to the machinery section, yet the expression used in s. 45 does not make all capital receipts capital gains. There must be a profit or gain in the commercial sense and a profit or gain in the commercial sense would only accrue if one has got money more than one had paid for or spent. That charging section is clarified in the machinery section. The mode of computation is provided in s. 48. This aspect of the matter was highlighted by the Bombay High Court decision in the case of CIT v. Home Industries and Co. : 107ITR609(Bom) . The Division Bench of the Bombay High Court had occasion to consider this and, there, Actg. Chief Justice, Tulzapurkar, as his Lordship then was, of the Bombay High Court, analysed the scheme of s. 45 and observed at pp. 633 to 634 of the report as follows :
'It will appear clear on a reading of both the charging provisions that the incidence of tax is on profits or gains arising from the transfer or sale of a capital asset. In other words, the charging provision in both the Acts makes it very clear that there must be profit or gains which must arise from the transfer or sale of capital asset and it is such profit or gains that is chargeable to tax. The concept of profit or gain arising from transfer or sale necessarily implies that there is something received in excess of the cost of the capital asset which is transferred or sold. Profit or gain arising from sale has a necessary reference to the difference between the cost price of the asset and the sale price of the asset. In other words, it is not necessary to have any recourse to the machinery provision contained in sub-section (2) of section 12B of the 1922 Act or section 48 of the 1961 Act, in order to come to the conclusion that the incidence of tax contemplated by the charging provision necessarily refers to the difference between the cost price and the selling price of a particular capital asset, the profit or gain arising from transfer of which is the subject-matter of the charge. The charging provision in both the Acts, therefore, itself brings in the concept of actual cost to the assessee of the capital asset and what is done by the machinery provision which is contained in sub-section (2) of section 12B of the 1922 Act, and section 48 of the 1961 Act, is to elaborate that concept and lay down the mode or method by which such profit or gain is to be computed; the machinery provision reiterates what is contained in the charging provision and goes on to indicate that capital gain is to be arrived at after deducting the actual cost from the full value of the consideration for which the transfer of the capital asset is made. If the capital asset is such that it has cost nothing in terms of money to the assessee, the charging provision must be interpreted as being not referable to such capital asset, and self-created or self-generated goodwill being such asset will be outside the purview of the charging provision. Mr. Joshis contention that the machinery provision should not be allowed to control or affect the charging provision becomes irrelevant and inapplicable. Moreover, the argument that if the self-created or self-generated goodwill has cost nothing to the assessee, then the actual cost to the assessee should be treated as zero and the entire consideration received for the goodwill should be regarded as capital gain made upon transfer of that asset, would run counter to the scheme of section 12B, for, the scheme of that section does not imply taxation or gross receipt but implies a asset. Therefore, on a proper interpretation of the charging provision itself, it seems to us clear that the concept of actual cost expressed in terms of money to the assessee of the capital asset at some particular point of time would be a necessary ingredient before the transfer of that capital asset can give rise to chargeable capital gain. Since we have come to the conclusion that self-created or self-generated goodwill is not capital asset which could be said to have been acquired by the assessee-firm at any particular point of time and is not a capital asset which could be said to have cost something in terms of money to the assessee, such goodwill will not be a capital asset the transfer of which will give rise to chargeable capital gain under either section 12B(1) of the 1922 Act or section 45 of the 1961 Act.'
His Lordship was unable to accept the view of the Gujarat High Court referred to above and preferred to adhere the view of the Madras High Court and the Division Bench of this court which we have mentioned before. As we have mentioned before we are not concerned here with this controversy. We are not concerned with the situation where money is realised in the enforcement of the right. Though in a different context the Supreme Court had expressed its view in the case of liquidation of a company in the decision of CIT v. R. M. Amin : 106ITR368(SC) , long before this, however, the Division Bench of this court in the case of CIT v. Associated Industrial development Co. P. Ltd. : 73ITR50(Cal) had expressed a similar view.
We must, however, refer to the decision of this court, namely, the decision in the case of K. N. Daftari v. CIT : 106ITR998(Cal) . There, the Division Bench was concerned with the import entitlements and whether transfer of import entitlements could generate capital gains. Reliance was placed on the decision in the case of CIT v. K. Rathnam Nadar : 71ITR433(Mad) as well as the decision of the Division Bench of this court in the case of CIT v. Chunilal Prabhudas & Co. (Cal), referred to hereinbefore. Mr.Justice Deb, delivering the judgme nt, observed at p. 1002 of the report : 'It was wholly unnecessary for Mukharji j. to rely on the above observations of their Lordships of the Madras High Court.' Whether in the context of the question of import entitlements it was necessary for Mr. Justice Deb to make the aforesaid observation, with due deference to the learned judge, we refrain from making any observation. Mr. Justice Dipak Kumar Sen, in a concurring judgment, observed at p. 1003 as follows :
'It appears to me it was not necessary in the facts of Chunilals case : 76ITR566(Cal) , to come to any general conclusion regarding the actual cost, if any, incurred in acquiring a capital asset. It it be contended that in quoting the said judgment of the Madras High Court this court intended to lay down generally that in all case where there was no actual cost to acquire a capital asset then there would be no capital gain in any subsequent dealing a capital asset, then I would hold that this proposition, if so laid down, is obiter.'
As we have mentioned, the Division Bench of the Calcutta High Court in the case of Chunilalscase : 76ITR566(Cal) was not concerned with the question whether the goodwill is a capital asset as such. Furthermore, whether in the context of import entitlements it was necessary for their Lordships to make the aforesaid observations, we also refrain from making any observation.
Speaking for myself, like Lord Devlin under the discipline of law, I have never felt the tyranny of precedent, it is a tie certainly, but so is the rope which the mountaineers use so that each gives strength and support to the others. The proper handling of precedent is part of judicial craftsmanship; a judge must learn how to use it and in particular how to identify the rare occasions when it is necessary to say that what others have put together they can put asunder. It is after all sometimes better to be humble and remember the warning of Justice Holmes that time has upset many fighting faiths and we must always wager our salvation upon some prophecy based upon in perfect knowledge. Our knowledge changes; our perception of truth changes. This is, however, a matter of personal opinion and all may not agree.
Reliance was placed on the decision in the case of CIt v. Bird and Co. (P.) Ltd. : 108ITR253(Cal) . There the court was concerned with the question of fixed asset of company and whether the goodwill can be taken into account in determining the reasonableness of the dividend declared. In discussing the controversy at p. 259 of the report, Mr. Justice Dipak Kumar Sen discussed the effect of Chunilals case : 76ITR566(Cal) and observed that the said decision did not consider whether goodwill should be considered to be a capital asset in the context of other section apart from s. 12B of the Indian I. T. Act. We respectfully agree. In the case of V. R. Sonti v. CIT : 117ITR838(Cal) , the court was concerned with this problem. There the court expressed the view that if there was a divergence of judicial opinion on a question of law or two conceivable views are possible on it, proceedings for rectification under s. 154 or under s. 254 (2) of the I. T. Act, 1961, could not be taken at all. The ITO or the appellate authorities under the I. T. Act when dealing with a rectification application, should not took only at the decisions of the particular High Court under whose advisory jurisdiction it acted in order to find out whether than High Court had taken different views on the question of law involved before it. They must consider the decision of all the High Courts and if there was a divergence of judicial opinion on the question of law or two conceivable opinions were possible on it, they must hold that the mistake was not apparent from the records. The court further observed that as the Supreme Court had decided that goodwill was a capital asset of a business it could not be contended that there was any longer a divergence of judicial opinion on this question.
It was well settled, according to that decision, that the goodwill of a business was a capital asset and, therefore, even if no cost was incurred in building up the goodwill of a business, it was still a capital asset for the purposes of capital gains and the cost of acquisition being nil the entire amount of sale proceeds relating to goodwill should be brought to tax under the head 'Capital gains'. It considered the case of Devidas Vithaldas & Co. v. CIT : 84ITR277(SC) and observed that it was held by the Supreme Court that the goodwill was a capital asset. Mr. Justice Deb observed at p. 848 of the report : 'Therefore, the case of CIT v. Chunilal Prabhudas & Co. : 76ITR566(Cal) can no longer be regarded as good law.' Whether that is a correct observation or not it does not fall for our decision in the context of the controversy between us and we refrain from making any observation. I for myself would remain content with what I have already said on this aspect. We may, however, point out that the Supreme Court in the case of Devidas Vithaldas & Co. v. CIT : 84ITR277(SC) was not concerned with the question whether sale of goodwill would attract either s. 12B of the 1922 Act or 45 of the 1961 Act. We have mentioned before that we are not concerned with goodwill in the instant case.
In order to complete the citations we may observe that the Delhi High Court in the case of Jagdev Singh Mumick v. CIT : 81ITR500(Delhi) , Kerala High Court in the case of CIT v. E. C. Jacob : 89ITR88(Ker) , Karnataka High Court in the case of CIT v. B. C. Srinivasa Setty : 96ITR667(KAR) , have held that the goodwill was not such a capital as to come within the purview of the capital gains. So far as import entitlement was concerned, the Division Bench of the Madras High Court in the case of CIT v. T. Kuppuswamy Pillai & Co. : 106ITR954(Mad) and the Full Bench of the Madras High Court in the case of Addl. CIT v. K. S. Sheik Mohideen : 115ITR243(Mad) have held that the sale of import entitlement cannot attract capital gains. Similar view has been expressed by the Andhra Pradesh High Court in the case of Addl. CIT v. Ganapathi Raju Jegi, Sanyasi Raju : 119ITR715(AP) .
Learned advocate for the revenue, however, drew our attention that the theory, right to get dollars if it was settled by getting money then it might result in capital gains and reliance was placed on the case of Imperial Tobacco Co. Ltd. v. IRC  25 TC 292 (CA), and the observation of Lord Greene M. R. at p. 300 at the report. But in the view we have taken of the nature of the transactions we are of the opinion that the said decision cannot be of much assistance to us. Reliance was also placed on the decision of the Supreme Court in the case of CIT v. Tata Locomotive and Engineering Co. Ltd. : 60ITR405(SC) . In the view we have taken of the nature of the rights in the instant case we do not think the said decision can also help us much.
We, therefore, answer the question as reframed by saying that the receipt of such money cannot be considered to be capital gains in terms of s. 45 of the Act. The question as reframed is answered in favour of the assessee.
In the facts and circumstances of the case, there will be no order as to costs.
SUDHINDRA MOHAN GUHA J. - I agree.