1. This appeal by the department relates to the assessment year 1977-78 for which the relevant accounting year ended on 31-3-1977. The assessee was an engineer and in the relevant accounting year he derived income by way of salary from 'Trition Valves Ltd.' of which he was managing director. In that year he received Rs. 43,000 from the said company for supplying project report for manufacture of a mechanical item with rubberised base having application in automobile industry. That report was prepared by him in the year 1971 when he was serving with some other company and had been submitted by him to financial institutions, who did not initially consider the project financially viable. However, in 1975 the financial institutions considered the said project to be financially viable, with the result that Trition Valves Ltd., of which the assessee was managing director, adopted the said project report and paid Rs. 43,000 as price for the same to the assessee. The said company treated the said expenditure as capital outlay.
2. In part III of the return of income the assessee made a mention about the receipt of the said amount of Rs. 43,000 and in the explanatory note he claimed exemption under Section 10(3) of the Income-tax Act, 1961 ('the Act') on the ground that the receipt in question was casual and nonrecurring. However, by letter dated 19-2-1980, the assessee expressly gave up the plea that the said receipt was exempt from inclusion in the total income under Section 10(3). He raised another ground in the said letter. That ground was to the effect that the amount in question was a capital receipt. He explained his plea in the following words : The remuneration received by me from the company as salary from 1-4-1976 has nothing to do with the sum of Rs. 43,000 received in respect of the project report which is an asset brought into existence in 1972 by me... The minutes of the company's Board Meeting dated 27-11-1976 clearly refer to... payment of a compensation to me... for parting with the project report... Thus it is clear that what has happened here is that an asset has been transferred by me to the company for a consideration. This is also borne out by the marginal notes made by the company's officers... to the effect 'No CLB permission necessary since it is purchase of property'... From the foregoing it is abundantly clear that the payment of Rs. 43,000 was for the purchase of a capital asset by the company and the consequent receipt in my hands also takes the character of a capital receipt.
3. The ITO considered the above submissions of the assessee. He agreed with the assessee that the amount received by the assessee was on account of sale of capital asset, the capital asset being the project report. He then went into the question whether the said capital asset, viz., the project report had any cost of acquisition. He observed that the project report could not have come out from nowhere and that the assessee must have spent his time and he must have incurred expenditure in the preparation of the said report. He, therefore, came to the conclusion that the said capital asset had cost of acquisition.
However, since the assessee did not give details of cost of acquisition, he treated the cost as nil, only for the purpose of computation of the capital gain. He, accordingly, treated the amount of Rs. 43,000 as capital gains and after giving deduction of Rs. 20,200 under Section 80T of the Act brought the balance of Rs. 25,590 to tax.
4. The learned AAC before whom the assessee had filed appeal against the assessment order accepted the contention of the assessee to the effect that the capital as set in question, viz., project report had no date of acquisition or cost of acquisition and, as such, provisions relating to capital gains tax would not be attracted. Before him the assessee had relied on the decision of the Supreme Court in CIT v. B.C.Srinivasa Shetty [1981] 128 ITR 294 and the decision of the Bombay High Court in CIT v. Home Industries & Co. [1977] 107 ITR 609. He, accordingly, allowed the appeal. The department has now come in appeal before us and the ground raised in the memo of appeal is that the learned AAC had erred in holding that the amount of Rs. 43,000 received by the assessee is a capital receipt not liable to tax as capital gains and was exempt and in accordingly, directing the ITO to modify the assessment.
5. We have heard the rival submissions. It was common ground between the department and the assessee at the assessment stage that the project report was a capital asset in the hands of the assessee and that the said capital asset had been transferred to Trition Valves Ltd. and that as a result of the said transfer, the assessee raceived Rs. 43,000. We shall, therefore, assume for the purpose of this appeal that the said project report was a capital asset and that the assessee received Rs. 43,000 for parting of the said capital asset in favour of the said company. On these facts, which formed common ground in the proceedings before the authorities below the only question that would survive for decision is whether the provisions relating to capital gains would be attracted. On these facts, we have no doubt that the said capital asset had been transferred by the assessee in favour of the said company and the amount in question had been received by the assessee as consideration for the said transfer. The submission before us on behalf of the assessee was that the said capital asset had no date of acquisition or cost of acquisition and as such, provisions regarding computation of capital gains would not be applicable, with the reasult that capital gains could not be charged. We are unable to accept the above submissions. In the explanatory statement submitted along with the return the assessee himself asserted that the project report had been prepared in the year 1970-71. In the letter to the ITO dated 19-2-1980, he had stated that the said project report was perpared in the year 1971. When the project report containing information regarding the project was finalised, the assessee obviously acquired the capital asset in question. As already stated the fact that the said project report was a capital asset is not disputed by the assessee at any stage. It is, thus, obvious that there was a date of acquisition of the said capital asset. From the nature of things the project report could not have been prepared without incurring expenditure in collecting relevant materials and doing all other incidental things. The project report cannot be equated with goodwill which was the subject-matter of the decision in the case of B. C.Srinivasa Shetty (supra) because the goodwill was a self-generated asset of no definite date of acquisition or cost of acquisition could be conceived. On the other hand, project report, which, according to the assessee, was a capital asset had, in our opinion, a definite date of acquisition and also cost of acquisition. It was not a self-generated asset like goodwill. Consequently, the principle laid down in the decision in the cases of B.C.Srinivasa Shetty (supra) and Home Industries & Co. (supra) are not applicable. We, accordingly, disagree with the finding of the learned AAC on this point. We hold that the capital asset involved in the present case had a definite date of acquisition and also cost of acquisition. Consequently, there was no difficulty in computing the capital gains and surplus arising out of transfer of the said capital asset was taxable to capaitl gains tax.
6. The assessee did not file details of expenses in acquiring the said capital asset before the ITO because the assessee took the stand that the provisions of capital gains tax were not attracted. Since there were no details on record, the ITO treated the cost of acquisition as nil. We are of the opinion that the ITO had erred in treating the cost of acquisition as nil for the purpose of computing the capital gains.
He should have gone into the project report. From the perusal of the project report, he could have come to know as to what efforts had been made by the assessee in acquiring that capital asset and he could have then made a fair and reasonable estimate of the expenses. Considering the circumstances, we restore the matter to the ITO with direction to give an opportunity to the assessee to produce material for recording a finding about the cost of acquisition. The ITO shall consider all the relevant circumstances and determine the cost of acquisition and recompute the taxable capital gains after giving deduction under Section 80T.7, Before parting with this matter, we may mention that it was argued in the alternative by the departmental representative that the amount in question should be treated as gains of profession. The assessee was not carrying on any profession in the relevant accounting year and as such, the amount could not be treated as gains of profession. It could possibly be treated as income from other sources if it is held that the project report was not a capital asset. However, in the present case, both the assessee as well as the department have treated the project report as capital asset and as such, we have to decide this appeal on the basis that the said project report was a capital asset. The alternate submission does not arise out of the order of the AAC and there is no specific ground in the memo of appeal.