2003 (3) TMI 65 - HC - Income Tax

Capital gains - The assessee, admittedly, was carrying on business in respect of some items other than white cement. It obtained a licence for setting up manufacturing business of white cement. Instead of setting up a business, the assessee had transferred the licence to some other concern. However, the assessee had some interest by way of shares held in the said concern and some of the directors were common. On account of transfer of the said licence, the assessee received a sum of Rs. 10 lakhs. In the return for the year 1986-87, this amount was shown but exemption was claimed by the assessee on the ground that this is not taxable either as income from business or as capital gains. Held that - What was received on transfer of the licence, a capital asset within the meaning of section 2(14), was not an income from business under section 28 more particularly under clause (iv) and though chargeable, under the head Capital gains under section 45 but since incomputable by reason of sections 48 and 49, read with section 55(2) in assessment year 1986-87 the same could not be assessed to capital gains.

Summary

Issues Involved:
1. Taxability of the receipt of Rs. 10 lakhs as business profit under section 28(iv) of the Income-tax Act, 1961.
2. Assessability of the receipt of Rs. 10 lakhs under the head 'Capital gains'.

Detailed Analysis:

1. Taxability as Business Profit:
The primary issue was whether the receipt of Rs. 10 lakhs from the transfer of a licence could be taxed as business profit. The Tribunal had held that it was not business income since the assessee was not engaged in the business of dealing with licences. The court supported this view, stating that the licence was not connected with the business carried on by the assessee. The licence was obtained for setting up a new business, not related to the existing business. Thus, the benefit arising from the licence could not be considered as income from the business under section 28(iv). The court emphasized that the benefit under section 28(iv) must be related to the business carried on by the assessee, which was not the case here.

2. Assessability under 'Capital Gains':
The second issue was whether the receipt could be assessed under 'Capital gains'. The court noted that the licence was a capital asset as defined under section 2(14) of the Income-tax Act. However, for it to be chargeable under section 45, it had to be computed under section 48, which requires the determination of the cost of acquisition. In this case, the cost of acquisition of the licence could not be determined as per section 55(2) as it stood during the assessment year 1986-87. The court referred to the Supreme Court decision in B.C. Srinivasa Setty's case, which held that if the cost of acquisition cannot be computed, the receipt cannot be charged under 'Capital gains'. Therefore, the receipt of Rs. 10 lakhs could not be assessed under 'Capital gains' due to the inability to compute the cost of acquisition.

Conclusion:
The court concluded that the receipt of Rs. 10 lakhs from the transfer of the licence, a capital asset, could not be taxed as business income under section 28(iv) nor as capital gains under section 45 due to the computation issues under sections 48 and 55(2). The Tribunal was directed to dispose of the appeal in light of these observations.

Separate Judgments:
R.N. Sinha J. agreed with the judgment delivered by D.K. Seth J.