Commissioner of Income-tax Vs. H.H. Lokendra Singh - Court Judgment

A.R. Tiwari, J.

1. In compliance with the directions issued by this court on August 2, 1988, in Miscellaneous Civil Case No. 131 of 1987, presented by the applicant-Department under Section 256(2) of the Income-tax Act (for short the 'Act'), the Tribunal stated the case and referred the undernoted question of law for our opinion :

' Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in deleting from the total income of the assessee the capital gains amounting to Rs. 1,03,609 ?'

2. The facts lie in a narrow compass.

3. The non-applicant-assessee was assessed in the status of an individual in the year 1976-77. The previous year ended on March 31, 1976. The assessee was the sole owner of 'Lokendra Bhawan'. The assessee sold the land appurtenant to this Bhawan into plots for a total consideration of Rs. 1,42,836. After deduction of the brokerage fee, cost of acquisition and cost of development, the Income-tax Officer computed the total gain arising from the sale of plots at Rs. 1,21,850. Durgajyoti Palace, Indore, originally belonged to the assessee. His wife, Her Highness Prabha Rajyalaxmi, acquired 50 per cent. in the said palace--25 per cent. by purchase and 25 per cent. by gift from the assessee. Certain plots of land appurtenant to this palace were sold during the previous year for Rs. 56,880. After deduction of the cost of acquisition, the Income-tax Officer computed the capital gain arising from the sale at Rs. 42,660. He, thus, held that 50 per cent. of this amount accrued as capital gain to the assessee. The capital gain was, thus, computed at Rs. 1,43,145. After allowing basic exemption and deduction under Section 80T of the Act, the capital gain was computed at Rs. 1,03,609. This amount was taxed by the Income-tax Officer in the hands of the assessee, vide order dated April 17, 1979 (annexure 'A'). The assessee filed an appeal before the Commissioner of Income-tax (Appeals). The Commissioner of Income-tax (Appeals) deleted the capital gain (annexure 'B'). The Department then filed an appeal before the Tribunal. The Tribunal sustained the deletion of capital gain (annexure 'C-1')-Aggrieved, the Department filed an application under Section 256(1) of the Act which was rejected. The Department then filed an application under Section 256(2) of the Act which was registered in this court as Miscellaneous Civil Case No. 131 of 1987. This court directed the Tribunal on August 2, 1988, to state the case and refer the aforesaid question for our opinion. This is how the Tribunal stated the case and referred the question.

4. We have heard Shri D. D. Vyas, learned counsel for the applicant-Department. None appeared for the non-applicant-assessee.

5. It is seen that the Commissioner of Income-tax (Appeals), in passing the order, had followed the earlier order of the Tribunal passed in I.T.A. Nos. 93 and 236/Ind. of 1981 relating to the assessment year 1977-78, dated March 1, 1982. The Tribunal had upheld the order of the Commissioner of Income-tax (Appeals) and maintained the order of deletion of the sum of Rs. 1,03,609. The Tribunal had concluded as under :

' The assessee did not disclose its capital gain on the ground that the capital gain was not chargeable at all because the property was acquired by the founder of the State the late Shri Ratansinghji without any cost and the same was inherited by the assessee, H. H. Lokendrasinghji. The Income-tax Officer did not accept the assessee's contention and assessed the capital gain. On appeal, the Commissioner of Income-tax (Appeals) following the decision of the Income-tax Appellate Tribunal in the case of the assessee for the assessment year 1977-78 in I.T.A. Nos. 93 of 1981 and 236 of 1981 dated March 1, 1982, deleted the assessment of capital gain holding that since the cost of acquisition of the property to the assessee was nil, there was no question of charging any capital gain at all. On appeal by the Department to Income-tax Appellate Tribunal, the Tribunal following its order stated above, dismissed the appeal.'

6. The Tribunal was of the view that the original owner had not spent anything towards acquisition and, as such, there is no question of computing any capital gain. It was held that the receipts from the sale of these properties did not attract Section 45 of the Act. Section 45 of the Act charges the profit or gain arising from a transfer of a capital asset to income-tax. The asset must be one which falls within the contemplation of the section.

7. In the case of goodwill, the apex court in CIT v. B. C. Srinivasa Setty : [1981]128ITR294(SC) , held as under (page 301) :

' The question which has been raised before us has been considered by some High Courts, and it appears that there is a conflict of opinion. The Madras High Court in CIT v. K. Rathnam Nadar : [1969]71ITR433(Mad) , the Calcutta High Court in CIT v. Chunilal Prabhudas and Co. : [1970]76ITR566(Cal) , the Delhi High Court in Jagdev Singh Mumick v. CIT : [1971]81ITR500(Delhi) , the Kerala High Court in CIT v. E. C. Jacob : [1973]89ITR88(Ker) , the Bombay High Court in CIT v. Home Industries and Co. : [1977]107ITR609(Bom) and CIT v. Michel Postel : [1978]112ITR315(Bom) and the Madhya Pradesh High Court in CIT v. Jaswantlal Dayabhai : [1978]114ITR798(MP) , have taken the view that the receipt on the transfer of goodwill generated in a business is not subject to income-tax as a capital gain. On the other side lies the view taken by the Gujarat High Court in CIT v. Mohanbhai Pamabhai [1973] 91 ITR 393 and the Calcutta High Court in K. N. Daftary v. CIT : [1977]106ITR998(Cal) , that even if no cost is incurred in building up the goodwill of the business, it is nevertheless a capital asset for the purpose of capital gains, and the cost of acquisition being nil the entire amount of sale proceeds relating to the goodwill must bebrought to tax under the head 'Capital gains'. It is apparent that the preponderance of judicial opinion favours the view that the transfer of goodwill initially generated in a business does not give rise to a capital gain for the purposes of income-tax.'

8. The Tribunal placed reliance upon the decision of the Bombay High Court in CIT v. Home Industries and Co. : [1977]107ITR609(Bom) and upon the decision of the Supreme Court in CIT v. B. C. Srinivasa Setty : [1981]128ITR294(SC) .

9. Section 45(1) of the Act inserted by the Finance Act, 1964, with effect from April 1, 1964, envisages that :

' 45. (1) 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, [...] 54D, 54E, 54F and 54G, 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.'

10. The Tribunal came to the conclusion that in the aforesaid transfer, there was no element of profit or gain. When no profit or gain arose from the transfer of a capital asset, there was nothing to charge to income-tax under the head 'Capital gains'. The Commissioner of Income-tax (Appeals) thus correctly ordered the deletion of Rs. 1,03,609 and the Tribunal rightly upheld the order of the first appellate forum. In this view of the matter, we answer the question in the affirmative, i.e., in favour of the assessee and against the Department.

11. This reference application is decided in terms indicated above, but without any orders as to costs.

12. Counsel fee for each side is, however, fixed at Rs. 750, if certified.

13. A copy of this order be transmitted to the Tribunal in accordance with law.