1985 (12) TMI 83 - AT - Income Tax

Summary

Issues:
1. Whether the amount received by the assessee for supplying a project report constitutes capital gains or a capital receipt.
2. Whether the project report can be considered a capital asset and if the provisions of capital gains tax are applicable.
3. Whether the cost of acquisition of the project report should be considered for computing capital gains.
4. Whether the ITO erred in treating the cost of acquisition as nil and how the computation of capital gains should be revised.

Detailed Analysis:
1. The appeal related to the assessment year 1977-78 where the assessee, an engineer and managing director of a company, received Rs. 43,000 for supplying a project report. Initially, the assessee claimed exemption under section 10(3) of the Income-tax Act but later contended that the amount was a capital receipt due to the transfer of a capital asset, the project report. The ITO treated the amount as capital gains, while the AAC accepted the assessee's argument that the project report had no cost of acquisition, hence not attracting capital gains tax. The department appealed, arguing that the amount should be taxed as capital gains.

2. The tribunal noted that both parties agreed that the project report was a capital asset transferred by the assessee, and the amount received was consideration for the transfer. The tribunal disagreed with the AAC's finding that the project report had no cost of acquisition, stating that the report was prepared by the assessee in 1970-71, establishing a date of acquisition and cost. The tribunal held that the capital asset had a definite date and cost of acquisition, making it taxable under capital gains.

3. The tribunal criticized the ITO for not considering the cost of acquisition and treating it as nil due to lack of details provided by the assessee. The tribunal directed the ITO to allow the assessee to produce material for determining the cost of acquisition, emphasizing the importance of estimating expenses reasonably for computing capital gains accurately.

4. The tribunal rejected the alternative argument by the department to treat the amount as gains of profession, clarifying that since both parties treated the project report as a capital asset, the appeal must be decided on that basis. The tribunal allowed the appeal, emphasizing the need to consider the cost of acquisition in computing taxable capital gains accurately.