1989 (6) TMI 46 - HC - Income Tax

Summary

Issues:
Whether capital gains tax can be levied on the transfer of route permits acquired by the assessee for the first time?

Analysis:
The case involved a private limited company operating as a transport operator, with the assessment year being 1974-75. The company sold 12 buses along with pucca route permits during the relevant period. The dispute arose regarding the treatment of the route permits for tax purposes. The Income-tax Officer initially held that the entire sale proceeds represented the value of buses, with no separate value for route permits. The Commissioner of Income-tax (Appeals) estimated the value of route permits per bus and directed the assessment of a specific amount. The Appellate Tribunal, following the decision of the Andhra Pradesh High Court, held that no capital gains tax can be levied on the transfer of route permits acquired by the assessee for the first time, as there was no cost of acquisition associated with such permits. The matter was remitted to the Income-tax Officer for further consideration.

The main contention of the Revenue was that the route permits should not be considered analogous to goodwill, and capital gains tax should be applicable on the transfer of such permits. The assessee argued that the route permits were self-generated assets, similar to goodwill, and no capital gains tax should be imposed on their transfer. The Tribunal found that a portion of the consideration received for the buses related to the route permits and concluded that the transfer of permits acquired for the first time is akin to a transfer of goodwill, governed by specific principles.

The High Court, considering various precedents, held that in cases where a person obtains route permits for the first time and transfers them, it is similar to transferring goodwill, a self-generated asset. As there is no cost of acquisition associated with such permits, capital gains tax cannot be levied on their transfer. The court emphasized that for capital gains tax to apply, the asset must have a cost of acquisition, which was not the case with route permits acquired for the first time. Therefore, the court ruled in favor of the assessee, stating that no tax on capital gains can be levied in respect of the transfer of such route permits.

In conclusion, the High Court answered the question in the affirmative, against the Revenue and in favor of the assessee. The judgment was to be forwarded to the Income-tax Appellate Tribunal for further action.