1980 (4) TMI 40 - HC - Income Tax

Summary

Issues:
1. Assessment of capital gains on the sale of import entitlement.
2. Applicability of the principle laid down in CIT v. K. Rathnam Nadar [1969] 71 ITR 433 (Mad) to the case of import entitlement.
3. Determination of cost of acquisition in terms of money for import entitlement.

Analysis:
The High Court of Madras addressed the issue of assessing capital gains on the sale of import entitlement in the case of a public limited company for the assessment year 1967-68. The company sold foreign securities and import entitlement, leading to a dispute with the Income Tax Officer (ITO) regarding the calculation of capital gains. The ITO deducted the capital loss from the sale of foreign securities to determine the capital gains, which was contested by the assessee. The Appellate Assistant Commissioner (AAC) and the Tribunal upheld the ITO's decision. The Tribunal remanded the matter to the ITO to determine the cost of acquisition for the import entitlement. The main question referred was whether the surplus on the sale of import entitlement should be assessed as capital gains.

The court referred to the case law of CIT v. K. Rathnam Nadar [1969] 71 ITR 433 (Mad) and Addl. CIT v. K. S. Sheik Mohideen [1978] 115 ITR 243. The Full Bench decision in Sheik Mohideen's case established that the principle of Rathnam Nadar's case applied to cases where the cost of acquisition was nil. The court held that the import entitlement, being a tangible asset, could not be taxed as capital gains if the cost of acquisition was nil. However, the revenue contended that there were costs incurred in obtaining the import entitlement, necessitating a determination of the cost of acquisition. The court disagreed with the revenue's contention and upheld the applicability of Rathnam Nadar's case to the present scenario.

Therefore, the court sustained the order of remand to the ITO to ascertain the value or cost of acquisition in monetary terms for the import entitlement. The ITO was directed to make a fresh assessment considering the principles laid down in Rathnam Nadar's case and subsequent decisions. The court concluded that the import entitlement could not be taxed as capital gains if the cost of acquisition was nil, in line with the established legal principles. The assessee was awarded costs, including counsel fees.