1978 (2) TMI 66 - HC - Income Tax

Summary

Issues Involved:
1. Liability to capital gains tax on the sale of import entitlement certificates.

Summary:

Issue 1: Liability to capital gains tax on the sale of import entitlement certificates

The primary question referred to the court was whether there would be any liability to capital gains tax on the sale of import entitlement certificates in the assessee's case for the assessment year 1967-68. The assessee had made remittances under the National Defence Remittance Scheme, earning import entitlements which were sold, resulting in a profit of Rs. 19,974. The Income-tax Officer assessed this amount to capital gains tax, a decision upheld by the Appellate Assistant Commissioner. However, the Tribunal ruled that there was no capital gains tax liability.

The Tribunal's decision was supported by two decisions of the Madras High Court. In Commissioner of Income-tax v. K. Rathnam Nadar [1969] 71 ITR 433 (Mad), it was held that unless the asset had a cost in terms of money for its acquisition, capital gains as envisaged by the statute could not be conceived. This principle was applied to "import entitlement" in Commissioner of Income-tax v. T. Kuppuswamy Pillai & Co. [1977] 106 ITR 954 (Mad), where it was ruled that no tax was leviable as no capital gains resulted.

The Kerala High Court in Commissioner of Income-tax v. E. C. Jacob [1973] 89 ITR 88 (Ker) [FB] and the Delhi High Court in Jagdev Singh Mumick v. Commissioner of Income-tax [1971] 81 ITR 500 (Delhi) followed this view. The Karnataka High Court in Commissioner of Income-tax v. B. C. Srinivasa Setty [1974] 96 ITR 667 also supported this interpretation.

Conversely, the Calcutta High Court in K. N. Daftary v. Commissioner of Income-tax [1977] 106 ITR 998 and the Gujarat High Court in Commissioner of Income-tax v. Mohanbhai Pamabhai [1973] 91 ITR 393 took a different view, emphasizing the charging section, section 45 of the Income-tax Act, 1961, which defines "capital gains."

The court examined sections 45, 48, 49, and 55 of the Act, noting that the concept of "profit" or gains runs through these sections. It was concluded that there must be a cost of acquisition in terms of money for capital gains to be envisaged by the statute. The absence of specific provisions for assets like "import entitlement" or "goodwill" indicated an inconsistency in the Act's scheme, leading to the view that the legislature did not intend to impose capital gains tax on such assets.

The court decided to follow the view that capital gains tax is not attracted to the transfer of goodwill or import entitlement, as this interpretation is fair and just. The Karnataka High Court's reasoning in Commissioner of Income-tax v. B. C. Srinivasa Setty [1974] 96 ITR 667 was particularly persuasive, emphasizing the need for uniformity in the interpretation of tax laws and the department's acceptance of the Madras High Court's decision in Rathnam Nadar's case.

In conclusion, the court answered the question in the affirmative, in favor of the assessee and against the department, ruling that there would be no liability to capital gains tax on the sale of import entitlement certificates. The assessee was awarded costs from the department, with counsel's fee set at Rs. 500.