B.J. Divan, J.
1. In this case, at the instance of the revenue, the following question has been referred to us for our opinion :
' Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is justified in holding that the transfer of route permits is not liable to capital gains tax '
2. The facts leading to this reference are as follows : The assessment year under consideration is 1964-65. The assessee is a Hindu undivided family. It plied two buses for a portion of the previous year ending on March 31, 1964, relevant to the assessment year 1964-65, and, thereafter, sold the two buses for Rs. 96,000 inclusive of their route permits. No accounts were maintained by the family. In respect of the plying of the said buses for a period of 8 months and 8 days, the assessee filed a return showing a loss of Rs. 28,337. The ITO assessed the net income from bus service at Rs. 15,000. He did not allow any depreciation since the buses were sold in the relevant previous year. He also determined the profit under Section 41(2) of the I.T. Act, 1961, taking into view the following facts. Out of the two buses, the bus bearing No. APV 2673 was purchased on September 1, 1960, for Rs. 45,285, whereas the other bus bearing No. APV 1832 was purchased on March 16, 1959, for Rs. 47,061. The aggregate value of the two buses came to Rs. 92,347. The written down value of the bus APV 2673 as on April 1, 1963, was Rs. 19,636 and that of the bus APV 1832 was Rs. 16,132. Thus, the aggregate written down value of the two buses was Rs. 35,768. Since the two buses were sold for Rs. 96.000, the ITO worked out the profit under Section 41(2) at Rs. 56,579, i.e., Rs. 92,347 minus Rs. 35,768. The balance amount of Rs. 3,653, being the difference between the original capital value of Rs. 92,347 and the sale price of Rs. 96,000, was, according to the ITO, capital gains. However, since this amount of capital gains was below Rs. 5,000, he ignored it for the purpose of assessing the income to tax.
3. On appeal to the AAC by the assessee, the following contentions were urged : firstly, regarding the estimate of the income from the bus service.secondly, regarding the determination of the profit under Section 41(2) and thirdly, regarding the capital gains. The AAC confirmed the estimate of the income from bus service. As regards the determination of the profit under Section 41(2), after perusing the agreement of sale produced before him, the AAC was of the view that the estimated value of the route permits had to be excluded from the sale price of Rs. 96,000 before determining the profit under Section 41(2). He held that it would be reasonable to determine 1/4th of the sale value of the two buses of Rs. 96,000, i.e., Rs 24,000 as the consideration received for the transfer of the route permits and that the balance of Rs. 72,000 would be the consideration received for the transfer of the buses. He, therefore, computed the profit under Section 41(2) at Rs. 36,232, i.e., Rs. 72,000 minus Rs. 35,768 (the aggregate written down value of the two buses). As regards the capital gains, the AAC held that the amount of Rs. 24,000, which was estimated by him as the consideration for the transfer of the route permits, must be deemed to be capital asset in the hands of the assessee and, therefore, the capital gains included in the assessment was Rs. 24,000. He, therefore, directed the ITO to work out the tax on the basis of his conclusions.
4. The assessee took the matter in further appeal to the Income-tax Appellate Tribunal. The Tribunal confirmed the estimate of the income from bus service of Rs. 15,000. The Tribunal held that the route permits did not come strictly within the meaning of ' capital asset' and that the transfer of the route permits did not produce any profit or gain exigible to capital gains tax. The Tribunal further held that, out of the aggregate amount of Rs. 96,000, Rs. 36,000 represented the value of the route permits and Rs. 60,000 represented the value of the buses as such. The Tribunal, therefore, determined the profit under Section 41(2) at Rs. 23,768 as against Rs. 36,232 fixed by the AAC. Thereafter, at the instance of the revenue, the question hereinabove set out has been referred to us for our opinion.
5. In our opinion, in order to bring out the real controversy between the parties regarding the question of capital gains tax, it is better to reformulate the question referred to us by framing two questions instead of one and reformulate the questions as follows :
' (1) Whether, on the facts and in the circumstances of the case, route permits are capital assets
(2) If answer to question No 1 is in the affirmative, whether the value of the route permits can be taken into account for computation of capital gains ?'
6. In order to arrive at our conclusions, it is necessary to refer to some of the provisions of the I.T. Act as well as the Motor Vehicles Act. ' Capital asset' has been defined in Section 2(14) to mean property of any kind held by an assessee, whether or not connected with his business or profession. The emphasis for the purpose of this judgment is on the words 'property of any kind '. The rest of the definition is not necessary for the purpose of this judgment. Section 2(47) defines ' transfer ', in relation to a capital asset, to include the sale, exchange or relinquishment of the asset or the extinguishment of any rights therein or the compulsory acquisition thereof under any law. Section 41(2) provides :
' Where any building, machinery, plant or furniture which is owned by the assessee and which was or has been used for the purposes of business or profession is sold, discarded, demolished or destroyed and the moneys payable in respect of such building, machinery, plant or furniture, as the case may be, together with the amount of scrap value, if any, exceed the written down value, so much of the excess as does not exceed the difference between the actual cost and the written down value shall be chargeable to income-tax as income of the business or profession of the previous year in which the moneys payable for the building, machinery, plant or furniture became due...... '
7. The rest of the provisions of Section 41(2) are not material for the purpose of this judgment. To illustrate the concept of the deemed profit or balancing charge under Section 41(2), a simple illustration can be given. If the original cost of acquisition of a particular asset is Rs. 100 and the written down value at the time of the sale is Rs. 40, but that capital asset is sold for Rs. 120 then Rs. 60, being the difference between the written down value and the cost of acquisition, represents the deemed profit under Section 41(2) and Rs. 20, being the difference between the cost of acquisition and the purchase price, would represent capital gains.
8. Section 45 provides for capital gains and it says that any profits or gains arising from the transfer of a capital asset effected in the previous year shall, save as otherwise provided in Sections 53, 54, 54B and 54D, be chargeable to income-tax under the head ' Capital gains ', and shall be deemed to be the income of the previous year in which the transfer took place. Section 48 provides for the mode of computation and deductions and it states that 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 or exclusively in connection with such transfer; and (ii) the cost of acquisition of the capital asset and the cost of any improvement thereto. Under Section 55(2), the meaning of cost of acquisition has been explained ; but, on the facts of this particular case, it is not necessary to refer to that definition, because the two buses were acquired after January 1, 1954.
9. Under the Motor Vehicles Act, provisions are laid down regarding general conditions attaching to all permits.
10. Sub-section (1) of Section 59 provides :
'Save as provided in Section 61, a permit shall not be transferable from one person to another except with the permission of the transport authority which granted the permit and shall not without such permission operate to confer on any person to whom a vehicle covered by the permit is transferred any right to use that vehicle in the manner authorised by the permit.'
11. Under Rule 247 of the Motor Vehicles Rules, when the holder of a permit desires to transfer the permit to some other person under Section 59(1), he shall, together with the person to whom he desires to make the transfer, make joint application in writing to the transport authority by which the permit was issued, setting forth the reasons for the proposed transfer. Such joint application shall be accompanied by a treasury receipt for one hundred rupees. Under Rule 248 on receipt of an application under Rule 247, the transport authority may require the holder and the other party to state in writing whether any premium, payment or other consideration arising out of the transfer, is to pass or has passed between them and the nature and amount of any such premium, payment or other consideration. It may be pointed out that, under Section 68G of the Motor Vehicles Act, provision has been made for the principles and method of determining compensation where any existing permit is cancelled or the terms thereof are modified. It is, therefore, clear that, in view of the provisions of art. 31 of the Constitution, provision for payment of compensation has been made and to that extent, a route permit is treated as property for which compensation becomes payable by the State transport undertaking to the holder of the permit when the route permit is granted to the State transport undertaking.
12. In Ahmed G.H. Ariff v. CWT : [1970]76ITR471(SC) , the Supreme Court considered the meaning of the words ' assets ' and ' property ' for the purpose of the W.T. Act. At page 476 of the report, Grover J., delivering the judgment of the Supreme Court, observed
' Now ' property' is a term of the widest import and, subject to any limitation which the context may require, it signifies every possible interest which a person can clearly hold or enjoy. The meaning of the word ' property ' has come up for examination before this court in a number of cases. Reference may be made to one of them in which the question arose whether mahantship or shebaitship which combines elements of office and property would fall within the ambit of the word ' property' as used in Article 19(1)(f) of the Constitution. It was observed in Commissioner, Hindu Religious Endowments v. Shri Leikshmindra Thirtha Swamiar of Sri Shirur Mutt : [1954]1SCR1005 that there was no reason why that word should not be given a liberal and wide connotation and should not be extended to those well-recognised types of interests which had the insignia or characteristic of proprietary right. Although mahantship was not heritable like ordinary property, it was still held that the mahant was entitled to claim protection of Article 19(1)(f) of the Constitution. It is stated in Halsbury's Laws of England, volume 32, third edition, page 534, that an annuity (which is a certain sum of money payable yearly either as a personal obligation of the grantor or out of property not consisting exclusively of land) can be an item of property separate and distinct from the beneficial interests therein and from the funds and other property producing it. It is property capable of passing on a death and can be separately valued for the purpose of estate duty.'
13. In Saghir Ahmed v. State of U.P., : [1955]1SCR707 , one of the grounds on which the U.P. State Road Transport Act was held to be unconstitutional was that it violated the fundamental rights guaranteed under Article 19(1)(g) of the Constitution and that it was an invalid piece of legislation as it purported to acquire the interest of the appellant before the Supreme Court in a commercial undertaking without making any provision for compensation as is required under Article 31(2) of the Constitution. In para. 24, at page 739, B.K. Mukherjea J. (as he then was), speaking for the Supreme Court, observed
' We now come to the second point which is in a manner connected with the first and the question is I If the effect of prohibition of the trade or business of the appellants by the impugned legislation amounts to deprivation of their property or interest in a commercial undertaking within the meaning of Article 31(2) of the Constitution, does not the legislation offend against the provision of that clause inasmuch as no provision for compensation has been made in the Act It is not seriously disputed on behalf of the respondents that the appellants' right to ply motor vehicles for gain is, in any event, an interest in a commercial undertaking. There is no doubt also that the appellants have been deprived of this interest.'
14. In para. 25, at page 740 of the report, B.K. Mukherjea J. further observed :
'The fact that the buses belonging to the appellants have not been acquired by the Government is also not material. The property of a business may be both tangible and intangible. Under the statute, the Government may not deprive the appellants of their buses or any other tangible property but they are depriving them of the business of running buses on hire on public roads. We think therefore that in these circumstances the legislation does conflict with the provision of Article 31(2) of the Constitution and as the requirements of that clause have not been complied with, it should be held to be invalid on that ground.'
15. In view of these two pronouncements of the Supreme Court, it must be held that the route permits are property and if this property is to be taken away by any piece of legislation, in order to meet the challenge of Article 31(2) of the Constitution, the legislation, providing for such deprivation of the right of route permit, must provide for compensation and, in fact, under Section 68G of the Motor Vehicles Act, such provision for compensation is to be found. Therefore, if, for the purpose of Article 31(2) of the Constitution, route permits are property, the fact that they could be transferred subject to certain conditions does not mean that they cease to be property. Therefore, it must be held that the route permits are property and if the sale price realised at the time of transfer of route permits exceeded the cost of acquisition, the difference between the sale price and the cost of acquisition would represent capital gains for the purpose of Section 45. The first question, therefore, must be decided against the assessee.
16. It is the second question that we have formulated in the instant case that represents the real controversy in this case.
17. It is obvious that, at the time when a route permit is granted, no amount is paid by the operator for the purpose of, acquiring it and it is only over a number of years that, because of various factors, viz., the development of the roads, the passenger traffic on the road, the frequency of the buses plying on the road, etc., that the route permit acquires some value. This case, therefore, is similar to the case of a transfer of goodwill where goodwill as such has no cost of acquisition, but at the time when the goodwill is transferred, it has come to acquire some value, particularly in the case of a business which has been started by the transferor himself.
18. In Seshasayce Brothers Ltd. v. CIT : [1961]42ITR568(Mad) the question before the Madras High Court was whether, when the licence obtained to start manufacture of Vanaspathi products was surrendered for consideration and there was excess of realisation over expenses, the excess could be taxed as capital gains and whether it could be said to be a casual receipt. At page 575, it was observed
' That the licence which the partnership, of which the assessee company was a member, was a valuable asset and a capital assent in its hands could admit of no doubt. That capital asset was sold for a sum of rupees one lakh. Rs. 41,000, which the assessee received, represented its share of that receipt. It was a capital receipt in its hands, and, in our opinion, the Assistant Commissioner was right in the view he took, that being a capital receipt it fell within the scope of Section 12B of the Act. It was not assessable to tax as a trading receipt.
Before the Tribunal, an attempt was made by the assessee to establish that Section 12B could not apply, because the profits had accrued prior to 1st April, 1946, after which date alone there was a statutory liability to pay the tax on capital gains. We have pointed out earlier that there was no evidence to show when precisely the licence was sold. Nor was there anything to show when the assessee's share of the profits accrued, independent of the actual receipt of Rs. 41.000. All what we know is that Rs. 41,000 was received after 1st April, 1946, and the assessee failed to show that it had accrued to it at any point of time anterior to 1st April, 1946...... It was in connection with the business activities of the assesseethat the assessee received this sum of Rs. 41,000. That it was a capital receipt in its hands did not make it any the less income from business and it certainly could not be treated as something of a casual receipt or windfall. We answer question 2(a) in the negative and against the assessee. Our answer to question 2(b) is that Rs. 41,000 was assessable to tax as capital gains under Section 12B of the Income-tax Act.'
19. In Rajendra Mining Syndicate v. CIT : [1961]43ITR460(AP) this High Court considered the question of capital gains in the context of a transfer of leasehold rights in mines. It was held that the leasehold rights in the mines fell within the scope of ' capital asset' as defined in and contemplated by Sections 2(4A) and 12B of the Indian I.T. Act, 1922, and that the excess realised by the assessee over the original cost was taxable under Section 12B. For the second question we have to consider, this decision is not of much assistance to us.
20. The main question, as pointed out by this court in Rajendra Mining Syndicate v. CIT : [1961]43ITR460(AP) of the report, was whether the capital gains tax could come into play in regard to the transaction in question and that depended upon whether the transfer was effected after March 31, 1946. But the question whether capital gains tax could be levied on the difference between the sale price and the cost of acquisition was not considered by the Division Bench of this court in this case.
21. In Dtvidas Vithaldas & Co. v. CIT : [1972]84ITR277(SC) , the question before the Supreme Court was whether the amount paid to a retiring partner of a firm of chartered accountants could be considered to be sale of goodwill and could be considered to be allowable as revenue expenditure. The facts were that ' P ', a chartered accountant, who carried on his profession in the name of D. V. & Co., by a deed dated November 30, 1948, took ' A' as a partner reserving to himself the goodwill. The partnership was dissolved with effect from December 31, 1950. Clause 2 of the deed of dissolution provided that the business shall be carried on that name by ' A' alone, that the goodwill belonged to ' P' alone and that he had agreed to sell the same to ' A' and as consideration for and in full satisfaction of the purchase price of the goodwill, 'A' shall pay to ' P', his wife and his son, successively during their respective lives, 8 annas in the rupee of the net profits of the business to be carried on in the name of ' D. V. & Co.'. It was held by the majority of the learned judges that the transaction under the deed of dissolution was a licence and not a sale of the goodwill and the payments were in the nature of royalty and had to be treated as admissible deductions. It was further held that the acquisition of the goodwill of a business is, without doubt, acquisition of a capital asset, and, therefore, its purchase price would be capital expenditure. It would not make any difference whether it is paid in a lump sum at one time or in instalments distributed over a definite period. Where, however, the transaction is not one for acquisition of the goodwill, but for the right to use it, the expenditure would be revenue expenditure. , Though this decision of the Supreme Court indicates that goodwill is a capital asset, it does not help us in deciding the question whether, on the sale of goodwill, any capital gains can be said to accrue.
22. In CIT v. E.C. Jacob : [1973]89ITR88(Ker) , a Full Bench of the Kerala High Court held that when a firm of chartered accountants sells its goodwill, the amount realised by the sale of the goodwill cannot be subjected to tax as capital gains. The Full Bench further held (head note):
' What is charged under Section 45 of the Income-tax Act, 1961, is the 'profits or gains arising from the transfer of a capital asset'. In computing the ' profit or gain' in accordance with the provisions of Section 48 of the Act, the cost of the acquisition of the capital asset and the cost of any improvement thereto have to be deducted from the full value of the consideration for the transfer of the capital asset. In the context of the Income-tax Act, the expression 'cost of acquisition' signifies some expenditure or outlay in terms of money by the assessee in the creation or acquisition of the concerned capital asset. It was by his personal effort spread over a number of years that the assessee built up the goodwill in dispute. It is impossible to estimate even roughly the money he could have spent in building up his professional reputation. The cost of acquisition was thus incapable of determination.'
23. It was further held by the Full Bench (head note) :
' Under Section 55(1)(b) of the Act, ' cost of any improvement' means ' all expenditure of a capital nature incurred by making any addition or alteration to the capital asset'. The expenditure contemplated is expenditure in terms of money. 'Goodwill' is an asset that gains in value by lapse of time ; and in the case of the goodwill of a profession, such augmentation is essentially attributable to the personal efforts, skill or sacrifice of the owner. It is not possible in such cases to evaluate the increase in value in terms of money. Thus, in the case of certain categories of transfers of ' goodwill', it is not possible to determine the ' cost of acquisition ' and the ' cost of improvement' referred to in section 48(ii) for the purpose of computation of ' capital gains' under Section 48. Without computation of ' profits or gains' no tax can be levied under Section 45 of the Act. Therefore, the amount received by the assessee towards the value of goodwill was not assessable to tax under Section 48 of the Income-tax Act, 1961.'
24. N. D. P. Namboodripad J., delivering the judgment of the Full Bench, pointed out that the Madras High Court in CIT v. Rathnam Nadar : [1969]71ITR433(Mad) had taken the same view as was being taken by the Full Bench of the Kerala High Court. The Calcutta High Court in CIT v. Chunilal Prdbhudas & Co. : [1970]76ITR566(Cal) had proceeded upon the footing that goodwill was not a capital asset. But it was pointed out by the Full Bench of the Kerala High Court that in the light of the decision of the Supreme Court in Devidas Vithaldas & Co. v. CIT : [1972]84ITR277(SC) , it was not possible to say that goodwill was not a capital asset. The Full Bench of the Kerala High Court also pointed out that the same view, as was taken by the Madras High Court, was also taken by the Delhi High Court in Jagdev Singh Mumick v. CIT : [1971]81ITR500(Delhi) . In the light of the decision of the Supreme Court in Devidas Vithaldas & Co. v. CIT : [1972]84ITR277(SC) , the Full Bench of the Kerala High Court held that it is well settled that goodwill is a capital asset and that the consideration paid for its transfer could attract certain provisions like Section 10(2) of the Act of 1922. The Full Bench further held (page 93) :
' It is possible to envisage a case where a person purchases the goodwill of a business or profession for a definite amount and without any further addition to its value by his own efforts later on sells it for a higher price and thereby secures a determinate profit or gain. In such a case, goodwill is hardly distinguishable from any other capital asset and there is nothing in Section 45 or other relevant provisions of the Income-tax Act that excludes such profits or gains from liability to assessment.'
25. We are not dealing with a case of the kind which was dealt with by the Kerala High Court.
26. In CIT v. Mohanbhai Pamabhai [1973] 91 ITR 393 a Division Bench of the Gujarat High, Court consisting of P.N. Bhagwati C.J. and P.D. Desai J. has taken the view that even if the cost of acquisition of the goodwill is zero and goodwill is entirely a creation of the vendor arising purely out of his own efforts, the entire price realised by the sale of the goodwill would be liable to capital gains, because the cost of acquisition being nil, nothing is required to be deducted from the consideration received at the time of transfer of the goodwill. It was held that creation or production of a capital asset is not foreign to the concept of acquisition. This view of theGujarat High Court is the solitary view on the question of capital gains on the sale of goodwill when it is created by the efforts of the vendor and when there is no cost of acquisition, the entire amount of consideration for the sale of goodwill being brought to tax as capital gains. We find that in CIT v. B.C. Srinivasa Sctly : [1974]96ITR667(KAR) , the Karnataka High Court has considered the decision of the Calcutta High Court in CIT v. Chunilal Prabhudas & Co, : [1970]76ITR566(Cal) , the decision of the Full Bench of the Kerala High Court in CIT v. E. C. Jacob : [1973]89ITR88(Ker) , the decision of the Gujarat High Court in CIT v. Mohanbhai Pamabhai [1973] 91 ITR 393 the decision of the Madras High Court in C1T v. Rathnam Nadar : [1969]71ITR433(Mad) and the decision of the Delhi High Court in fagdev Singh Mumick v. CIT : [1971]81ITR500(Delhi) . At page 670 of the report, Govinda Bhat C.J., delivering the judgment of the Division Bench, observed that :
' The decision of the Madras High Court in CIT v. Rathnam Nadar : [1969]71ITR433(Mad) raised a substantial question of law of general importance. Against the said judgment the department preferred an appeal to the Supreme Court in C.A. No. 1504/70. It was submitted by Sri Ramamani, learned counsel for the assessee, that the said appeal was heard before a Tax Bench of the Supreme Court on March 5, 1973, and March 6, 1973, and was dismissed as not pressed. The correctness of that statement was not disputed by Sri Rajasekharamurthy, learned counsel for the department. Long before the date of hearing of C.A. No. 1504/70, before the Supreme Court the High Court of Gujarat in CIT v. Mohanbhai Pamabhai [1973] 91 ITR 393 dissenting from the view of the High Courts of Madras and Calcutta, had taken a contrary view. In the said decision, it was held that the charging provision in Section 45 is not confined to those cases where the capital asset has cost something to the assessee in terms of money in acquiring it and that there is nothing in any of the sections relating to capital gains that the charging provision should be construed in a narrow manner by excluding self-created capital assets or capital assets which have cost nothing to the assessee in terms of money in acquiring it. '
27. At page 670 of the report, Govinda Bhat C.J. further observed : ' There is more than one reason, for us to follow the ratio of the decision in Rathnam Nadar's case : [1969]71ITR433(Mad) . No doubt, two views are possible on, the question. When two views are possible on a question concerning the interpretation of a tax law, the one which is fair both to the assessee and the department should be followed. The view that capital gains tax is not attracted to transfer of goodwill is a fair and just interpretation. If the view of the .Gujarat High Court in Mohanbhai Pamabhai's case [1973] 91 ITR 393 is correct, the cost of acquisition of a goodwill being nil, the full value of the consideration for its transfer has to be brought 'to charge to capital gains tax. Such a levy will not be a tax on profits or gains but, in substance, a tax on the capital value of the asset. The capital value of goodwill is charged to tax under the Wealth-tax Act, 1957. Wealth-tax is an annual recurring tax. When there is an annual recurring tax on the capital value of goodwill, it will be unfair to levy another tax calling it as capital gains on the same value of the goodwill in the same assessment year, merely because the goodwill has been transferred for consideration. '
28. The Karnataka High Court followed the view taken by the Madras High Court in CIT v. Rathnam Nadar : [1969]71ITR433(Mad) which, in turn, was followed by the Calcutta High Court in CIT v. Chunilal Prabhudas & Co. : [1970]76ITR566(Cal) and by the Delhi High Court in Jagdev Singh Mumick v. CIT : [1971]81ITR500(Delhi) and by the Kerala High Court in CIT v. E.C. Jacob : [1973]89ITR88(Ker) . The Karnataka High Court speciacally dissented from the view of the Gujarat High Court in CIT v. Mohanbhai Pamabhai [1973] 91 ITR 393.
29. In Navinchandra Mafatlal v. CIT : [1954]26ITR758(SC) the Supreme Court considered the constitutional validity of the amendments made by Act XXII of 1947. The Supreme Court in that case held that the word ' income ' in entry 54 in List I of the Seventh Schedule to the Government of India Act, 1935, shall be given its widest connotation in view of the fact that it occurred in a legislative head conferring legislative power and it included a capital gain. It would be wrong to interpret the word in the light of any supposed English legislative practice.
30. It must be borne in mind that the Indian I.T. Act is an Act providing for tax on incomes and the relevant entry in the First List, i.e., Union List in the Seventh Schedule to the Constitution of India, is entry No. 82, which deals with taxes on income other than agricultural income. It is undoubtedly true that, under entry No. 86, taxes on the capital value of the assets can be levied by Parliament. Entry No. 86 is in these terms : ' Taxes on the capital value of the assets, exclusive of agricultural land, of individuals and companies ; taxes on the capital of companies. '
31. Since Parliament came to enact the I.T. Act of 1961, after the Constitution came into force, it was open to it, in an Act, dealing with tax on the capital value, to provide for tax on such capital value.
32. For the reasons stated by the Madras High Court in CIT v. RathnamNadar [1969] 71 ITR 433 which reasoning has appealed to the Calcutta HighCourt, Kerala High Court, Delhi High Court and Karnataka High Court,but not to the Gujarat High Court, we hold that, when the cost of acquisition of a particular capital asset is nil, especially when the capital asset isthe creation of the assessee by his own efforts, the consideration, in termsof money realised on the transfer of the said capital asset cannot be broughtto tax.
33. So far as the sale of transport permit is concerned, there is no prohibition in law against consideration paid on such transfer. In A. Vimalan v. CGT : [1974]94ITR21(Mad) the Madras High Court at page 25 of the report, quoting from its own earlier decision in G. Vijayaranga Mudaliar v. CIT : [1963]47ITR853(Mad) pointed out :
' Neither the provisions of the statute nor the rules framed thereunder actually prohibit the receipt of consideration for a transfer of permit. It may be that the competent authorities, under the Motor Vehicles Act, may not allow a permit to be transferred for value lest it should encourage trafficking in permits. Buses have little value shorn of their permits to ply on particular routes. It is an open secret that when buses are transferred, the consideration paid by the purchaser of the vehicles is only commensurate with their earning capacity which is intimately connected with the routes on which they operate. But nevertheless no transferor admits having received any consideration for transfer of the permits and the transferee also never acknowledges that he paid any amount for annexing the routes along with the buses. We must observe that this pretence of non-payment of consideration for transfer of permits is nothing short of sheer hypocrisy. We can almost take judicial notice of the fact that whenever a bus with a permit is transferred a fair portion of the consideration would represent the value attributable to the pecuniary gain derived by operating on the routes. '
34. It is well known that, in the case of business, goodwill attaches to the business because of the location where the business is carried on. In the case of route permits also, the consideration paid on the transfer of route permits represents goodwill of this type which depends more on the location of the routes than on any other factor. But again there is no cost of acquisition so far as the value of route permits is concerned. The value of route permits is tantamount to the value of goodwill which depends upon the location of the business. But if the cost of acquisition of the goodwill of the business is nil, in the view we have taken following the decision of the Madras High Court in CIT v. Rathnam Nadar : [1969]71ITR433(Mad) the consideration received on the transfer of such goodwill cannot be brought to tax as capital gains.
35. In view of these conclusions, we answer the two questions, as reframed by us, as follows :
Question No. 1 : In the affirmative, i.e., against the assessee and in favour of the department.
Question No. 2 : In the negative, i.e., in favour of the assessee and against the revenue.
36. The Commissioner will pay the costs of this reference to the assessee. Advocate's fee Rs. 250.