TMI Blog1995 (11) TMI 34X X X X Extracts X X X X X X X X Extracts X X X X ..... 4E of the Act on investment made in rural development bonds out of the income of the preceding year ?" In I. T. R. C. No. 117 of 1993 the Tribunal has referred the following two questions relevant to the assessment year 1984-85: "(1) Whether, on the facts and in the circumstances of this case the Tribunal was right in holding that the sale of shade trees gave rise to capital gains ? (2) Whether, on the facts and in the circumstances of this case, the Tribunal was correct in holding that the assessee had incurred cost for acquiring the shade trees ? " Since common questions of law and fact arise in both these references, the same are being disposed of by this common judgment. The assessee-company purchased in March, 1970, a coffee estate together with shade trees standing thereon for a total consideration of Rs. 31,51,456. It is common ground that the sale deed in favour of the assessee did not indicate the price paid by it for different assets comprising the estate like land, shade trees, buildings, etc., The assessee has, however, in the books of account maintained by it shown a sum of Rs. 29,39,456 as having been paid towards the price of the coffee garden and balance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rs. 89,449 made during the assessment year 1981-82. The Tribunal held that the investment in question had been made out of the sale proceeds of shade trees sold during the assessment year 1981-82 and the same had nothing to do with the sale of shade trees which had given rise to capital gains during the assessment year 1982-83. In so far as the second reference, i.e., I. T. R. C. No. 117 of 1993 is concerned, there is no material difference in the factual background in which the controversy has arisen except that the assessee had sold the shade trees during the period relevant to the assessment year 1984-85 for a sum of Rs. 58,693. The Tribunal while following its earlier judgment dismissed the appeal filed by the assessee holding that there was no error either in bringing the sale proceeds to tax or in the computation of the capital gains arising out of the same. We have heard Mr. Sarangan, learned senior counsel appearing for the assessee, and Mr. Sheshachala, learned standing counsel for the Revenue. The expression "capital gains" implied any profits or gains arising from the transfer of a capital asset. Any such profits or gains are by reason of section 45 of the Income-t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the above proposition. Reference may be made only to some of the cases on the point. In State of Kerala v. Karimtharuvi Tea Estates Ltd. [1964] 51 ITR 129, the High Court of Kerala held that gravilea trees grown and maintained for the sole purpose of providing shade to the tea bushes in the tea estates of the assessee were essential for the proper cultivation of tea and that the same had to be considered to be as much a part of the capital asset of the company as the tea bushes themselves or the equipment in its factory. Some of the gravilea trees when the same became old and useless by efflux of the time were cut down and sold. The sale proceeds of such trees were held by the court to be capital and not revenue receipts in the hands of the assessee. In State of Kerala v. Karimtharuvi Tea Estates Ltd. [1966] 60 ITR 275 (SC), the view taken by the High Court of Kerala in the above case was upheld by the Supreme Court. The following passage from the judgment of their Lordships states the legal position thus : "There is no controversy about the fact that the owners of tea estates plant grevelia trees not for the purpose of deriving any income therefrom but solely for the purpose ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pose of decision on the question whether the receipts are capital assets or not. In view of the common ground that the trees were maintained as shade trees for the coffee bushes, the shade trees, in our opinion, are capital assets as much as the coffee bushes and the proceeds of sale of timber of the shade trees is a capital receipt in the hands of the assessee and not taxable as income.'" In CIT v. Van Ingen (H. B.) [1964] 53 ITR 681 (Mys). The assessee had purchased a coffee estate, in which as on the date of the purchase, a portion of the estate was covered by coffee plants while the rest was a jungle. Year after year the assessee cleared the portions of the jungle for the purpose of planting coffee. The question that arose before this court was whether the price realised by the assessee by the sale of the trees was income. This court held that the assessee had sold the very same trees which he had purchased as part of the estate hence the price realised by the sale of such trees was a capital and not a revenue receipt. In Travancore Tea Estates Co. Ltd. v. CIT [1974] 93 ITR 314 (Ker), the assessee had during the relevant assessment year sold old shade trees growing in his a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fee estate, it should be presumed that the assessee had incurred no cost of acquisition on the trees in question. Determination of the cost of acquisition of a capital asset, argued Mr. Sarangan, was a sine qua non for bringing to tax any capital gain arising out of the transfer of any such asset. Since, however, the assessee had not specifically paid any price as cost of acquisition of shade trees sold to him, it must be presumed that the shade trees had not cost the assessee anything or that the determination of the cost of acquisition was not possible thereby making section 48 unworkable and, therefore, inapplicable to the assessee's case. Alternatively, he submitted that from the date the trees were purchased till the date they were sold the same had improved in the sense that they had grown no matter by a natural process of growth. The cost of this improvement contended Mr. Sarangan could not be determined thereby making the computation of the capital gain in terms of section 48 impossible. This argued learned counsel rendered the entire machinery provided by sections 45 and 48 inapplicable to a case of this nature. Reliance, in this connection, was placed by Mr. Sarangan up ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ggests 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 indentified or envisaged. From what has gone before, it is apparent that the goodwill generated in a new business has been so regarded... 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... section 48, the value of the capital asset transferred if brought to tax would amount to taxing the capital value of the asset and not any profit or gain as contemplated by section 45 of the Act. All the three cases referred to above and relied upon by Mr. Sarangan, pertain to intangible capital assets like goodwill and tenancy rights, in regard where to the cost of acquisition, the date of acquisition and the cost of improvement, if any, was considered to be incapable of computation, and since sections 45 and 48 of the Act were held to be providing an integrated code the failure of the process of computation under section 48 was held to be sufficient to take the gains arising from the transfer of the said assets out of the purview of section 45. In the instant case, the capital asset sold is neither goodwill nor tenancy rights, so as to attract the principles settled in the above cases straightaway. Here, the controversy arises qua a tangible asset acquired and sold by the assessee on dates that are known. The question then is whether the assessee had incurred any cost on the acquisition of the said asset the sale whereof has resulted in the capital gain in question. It is tru ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not, in the circumstances, one of those cases where it may not be possible to envisage or even conceive of the cost of acquisition. The position in law as applicable to an asset like goodwill, therefore, will have no application to shade trees about which not only can a cost be conceived but can be legitimately envisaged in a sale transaction. It was next contended on behalf of the assessee that the cost of acquisition could not be calculated by the authorities below by a process of bifurcation of the total consideration paid and received for the estate in question. Reliance, in this connection, was placed upon the judgment of this court in Syndicate Bank Ltd. v. Addl. CIT [1985] 155 ITR 681 (Kar) and in CIT v. Alanickal Co. Ltd. [1986] 158 ITR 630 (Ker). In Syndicate Bank's case [1985] 155 ITR 681 (Kar), the facts were entirely different. That was a case in which the banking business of the company was compulsorily acquired by the Government under the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970, as a whole. A lump sum compensation of Rs. 3.6 crores was granted for the acquisition. The business taken over had several assets in respect of some of whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... applicable to the case of improvement to a goodwill of a concern must be held to be fully applicable to the case of improvement of shade trees, as well. The argument no doubt appears enticing on its face value, but does not survive a closer scrutiny. The analogy drawn by Mr. Sarangan, between the growth and improvement of goodwill of a running business concern on the one hand and the growth and improvement of a tree drawing sustenance from the soil on the other does not appear to be befitting. There are certain striking features which distinguish one from the other. To enumerate a few, while goodwill is an intangible asset, shade trees growing in an estate are tangible in nature. In the case of goodwill since the growth of the asset is imperceptible and depends upon a variety of factors it is difficult to conceive of a price or the cost incurred by the assessee in acquiring the same. This is not true about the shade trees in respect of which a cost of acquisition can fairly and reasonably be worked out. In the case of goodwill, it is impossible to predicate the moment of its birth. It comes silently into the world and its impact may not be visibly felt for an undefined period. It ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is important is that the assessee must have incurred an expenditure of a capital nature with a view to making additions or alterations to the asset. This is so because, the legislative intent behind the imposition of a tax on capital gains is to tax what can be said to be a gain in the hands of the assessee after accounting for the expenditure incurred by the assessee either on the acquisition of the asset or on the improvement thereof as also the expenditure incurred wholly and exclusively in connection with any such transfer. The provisions of sections 48 and 50 of the Act make it clear that the capital gain in the hands of the assessee can be correctly worked out only if what the assessee has himself spent on the acquisition, or the improvement of the asset is deducted from the full value of the consideration received by him. Seen in that light, therefore, it is necessary that before the provisions of section 48 can be called in aid for purposes of deduction of any costs incurred by the assessee on the improvement of the asset, the assessee must not only claim that he has made any such capital expenditure but also demonstrate that any such expenditure could possibly have been i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der clause (ii), so long as the cost and time of acquisition are known components. With great respect, we do not agree with the observation of the Bombay High Court to the contrary in Evans Fraser and Co. Ltd. v. CIT [1982] 137 ITR 493. Mr. Sarangan then argued that the assessee had been incurring expenditure on spraying, manuring, deweeding the coffee bushes and that since the shade trees were also a part of the estate the benefit of all such expenditure was going even to the shade trees no matter only in part. There is no merit in this submission either which must be rejected for more than one reason. Firstly, the assessee has not set up any such case before the authorities below. The argument is thus unsupported by any finding from the Tribunal which is the last court on facts. Secondly, any expenditure allegedly incurred by the assessee on the coffee bushes and their upkeep cannot be said to be an expenditure of capital nature incurred for the improvement of the shade trees. Any such expenditure is actually in connection with the cultivation of the coffee crop and incidental thereto and cannot, therefore, be termed as cost incurred on the improvement of the shade trees. Tha ..... X X X X Extracts X X X X X X X X Extracts X X X X
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