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Issues Involved:
1. Whether route permits are capital assets. 2. Whether the value of route permits can be taken into account for the computation of capital gains. Issue-Wise Detailed Analysis: 1. Whether route permits are capital assets: The court examined the definition of "capital asset" under Section 2(14) of the Income Tax Act, which includes "property of any kind held by an assessee." The court emphasized the term "property of any kind." The Motor Vehicles Act was also considered, particularly Section 59(1), which states that a permit is not transferable without the permission of the transport authority. Despite this restriction, the court noted that the route permits are treated as property for which compensation is payable under Section 68G of the Motor Vehicles Act if they are canceled or modified. Citing the Supreme Court's decision in Ahmed G. H. Ariff v. CWT [1970] 76 ITR 471, the court reiterated that "property" signifies every possible interest which a person can hold or enjoy. The court concluded that route permits are indeed property and thus fall under the definition of "capital asset." Consequently, the first question was decided against the assessee, affirming that route permits are capital assets. 2. Whether the value of route permits can be taken into account for the computation of capital gains: The court acknowledged that no amount is paid by the operator at the time of acquiring a route permit, and its value accrues over time due to various factors like road development and passenger traffic. This situation was likened to the transfer of goodwill, which also has no initial cost of acquisition but gains value over time. The court referred to several precedents, including Seshasayee Brothers Ltd. v. CIT [1961] 42 ITR 568 and CIT v. E. C. Jacob [1973] 89 ITR 88, which held that when the cost of acquisition of an asset is nil, the consideration received on its transfer cannot be subjected to capital gains tax. The court also discussed the Gujarat High Court's contrary view in CIT v. Mohanbhai Pamabhai [1973] 91 ITR 393, which held that even if the cost of acquisition is zero, the entire sale consideration should be taxed as capital gains. However, the court preferred the view taken by the Madras High Court in CIT v. Rathnam Nadar [1969] 71 ITR 433, which was also followed by the Calcutta, Kerala, Delhi, and Karnataka High Courts. This view held that when the cost of acquisition is nil, the consideration received on transfer cannot be taxed as capital gains because it would, in effect, be a tax on the capital value of the asset, which is already subject to wealth tax. The court concluded that the value of route permits, akin to goodwill, has no cost of acquisition. Therefore, the consideration received on their transfer cannot be taxed as capital gains. The second question was thus decided in favor of the assessee and against the revenue. Conclusion: - Question No. 1: Route permits are capital assets (decided against the assessee). - Question No. 2: The value of route permits cannot be taken into account for the computation of capital gains (decided in favor of the assessee). The Commissioner was directed to pay the costs of the reference to the assessee, with an advocate's fee of Rs. 250.
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