TMI Blog1980 (6) TMI 8X X X X Extracts X X X X X X X X Extracts X X X X ..... ich 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 if 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 pounds 64,585-16-3 and pounds 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 exchang ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... efinition 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 gai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ence was. Therefore, we should refrain from expressing any opinion on the question posed by the said rejection of the revenue's 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 [1967] 66 ITR 443, 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 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 travelled outside the record with a view to finding out the new sources of revenue and that he had confined himself to the sou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 amount 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 the 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 def ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ne 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 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 constructing 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , 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 pounds 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r 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 trader's 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 relative term and we are dealing with companies which think in millions. Bat the magnitude of a transaction is not an entirely irrelevant consideraion the legal distinction between a repair and a renewal may be influenced by the expense involved. In the present case, however, it, is not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , 1922 ; (2) what was payable under the managing agency agreement between A Co. and the Coimbatore Spinning Co. was 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 Bergh's case [1935] 19 ITR 390; 3 ITR (Eng. Cas) 17 (HL), 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 a capital asset. In the case of CIT v. Provident Investment Co. Ltd. [1957] 32 ITR 190, 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 its amendment in 1956. It was held that the agreement was modified before the insertion of s. 12B of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss and sprouted and grew as the firm grew in its dealings, in its stature 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 of the firm at any particular point of time. It was something which went on slowly growing and perhaps waxing and waning also. What exactly was the value of the goodwill of a business at any point of time might have to be worked on proper basis by cost accountants. Section 12B(2)(ii) of the Indian I.T. Act, 1922, suggested that capital gains arose only on the transfer 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 or 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ision Bench of this court to which I myself was a party, being the decision in the case of CIT v. Chunilal Prabhudas Co. [1970] 76 ITR 566 (Cal). As some observations have been made in the subsequent decisions 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 as 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m 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 one 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. [1977] 107 ITR 609. The Division Bench of the Bombay High Court ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 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 on gross receipt but implies a charge only on the profit or gain arising from the transfer of that 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ual cost to acquire a capital asset then there would be no capital gain in any subsequent dealing with the said 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 Chunilal's case [1970] 76 ITR 566 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, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ital gains It considered the case of Devidas Vithaldas Co. v. CIT [1972] 84 ITR 277 (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. [1970] 76 ITR 566 (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 [1972] 84 ITR 277 was not concerned with the question whether sale of goodwill would attract either s. 12B of, the 1922 Act or s. 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 [1971] 81 ITR 500, Kerala High Court in the case of CIT v. E. C. Jacob [1973] 89 ITR 88 [FB] at pages 94-95, Karnataka High Court in the case of CI ..... X X X X Extracts X X X X X X X X Extracts X X X X
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