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TMI Blog1985 (6) TMI 81X X X X Extracts X X X X X X X X Extracts X X X X ..... iness name which is stated as the goodwill of the company since its registration from the year 1946. The ITO in the assessment made for the relevant year determined the capital gains of Rs. 3,98,000 by holding that the sum of Rs. 4 lakhs was received for the transfer of route permits only, though in the agreement it is mentioned that Rs. 2,50,000 is for sale of buses and also for permits. He estimated the cost of the route permit to the assessee at Rs. 2,000 and deducting this amount of Rs. 2,000 from the amount of Rs. 4 lakhs determined the capital gains as Rs. 3,98,000. 2. In the appeal against the assessment, the Commissioner (Appeals) held that no capital gains resulted from the transfer. Aggrieved by his order, the department is in appeal. 3. The department's contention in the grounds of appeal is that the Commissioner (Appeals) had wrongly applied the ratio of the Supreme Court decision in CIT v. B.C. Srinivasa Setty [1981] 128 ITR 294 to the facts of this case because that case related to the goodwill which is a self-generating asset whereas route permit is not such an asset. Reliance was placed also on the decisions of the Madras High Court in S. Vaidyanathaswami v. CIT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st of acquisition to the assessee and thirdly, if it has, what was the amount of the cost. The departmental authorities are undoubtedly entitled to pierce the veil of any transaction embodied in any formal document and to look into the reality of the transactions. But that can be done only when the material and circumstances support that action. For this it was incumbent on the department to establish that the sum of Rs. 2,50,000 would not and did not represent the value of the buses along with route permits and secondly, that Rs. 4 lakhs was the reasonable price for obtaining route permits, Beyond mere suspicion based on no evidence the ITO has held that the sum of Rs. 4 lakhs is for the transfer of route permits. He has further held, again without any basis or material, that there is no goodwill for the transfer of business and his reasons are totally devoid of any substance. The agreement clearly shows that the business was in existence since 1946 and it is incorrect to say that in the competitive field passenger transport business of a transport company which is in existence for about three decades has no goodwill. In a transport business the goodwill is acquired by the prompt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transferred along with route permits, At the time of transfer the route permits were in force. Some of the transferees, viz., Shri V. Jagadeesan, V. Selvadurai and Shri K. Veerappan, were connected with Jagadeesan Transports, 297, Trichy Main Road, Namakkal, Salem District. Thus, the transferor and the transferees were persons interested in transport business and they are well-acquainted with the value of route permits. The central issue in this case is whether the sale consideration paid by transferees includes any payment for route permits or whether it relates to only goodwill. The case of the assessee was that the amount of Rs. 4 lakhs was entirely for the transfer of goodwill of the business and trade name, namely, 'City Transport', while the amount of Rs. 2,50,000 was for the transfer of 3 buses along with route permits. The case of the ITO was that there was no goodwill of the business and the sum of Rs. 4 lakhs was for the transfer of route permits only. Although the stand taken by the ITO is extreme, I consider the stand taken by the assessee also is on the other extreme. The truth of the matter lies in-between the opposite views says the maxim. I agree with my learned bro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rial fact found by the ITO which has vital bearing on deciding the issue before us. The recital part of the agreement (paragraph No. I at p. 5) shows that the company has agreed to transfer 3 buses TNB 5079, TNB 5277 and TNB 1479 on 'as is where is basis' with their respective route permits for a consideration of Rs. 60,000, Rs. 65,000 and Rs. 1,25,000, respectively, totalling to Rs. 2,50,000. The order of the ITO shows at page 2 thereof the particulars of purchase price of the buses and the respective sale price. A perusal of the same shows that the buses were transferred at depreciated value although the written down values of the buses were not shown. Thus, although the recital shows that the buses were transferred along with route permits and the transferees have offered to take over the routes also, no specific amount is either earmarked or assigned for the route permits taken over. Thus, no consideration has been mentioned for the route permits offered to be taken over by the transferee along with the buses. The omission cannot be countenanced as oversight or accidental. The matter assumes very great significance. In paragraph No. 2 of the recital part (paragraph No. 2 at p. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ITO cannot be blamed for not bringing on record any evidence in this regard. In this connection, I would like to emphasise the fact that the parties to the agreement have only paid lip sympathy to the route permits by making casual and uncommittal reference to the route permits in the preamble and the recital of the agreement whereas they have taken every care to see that they apply for transfer of route permits in the names of the transferees and the assessee was also obliged to see to it that the transferees obtain the route permits. Thus, the real intention was to acquire the valuable route permits along with the depreciated buses although the payment of Rs. 4 lakhs is designated as payment for goodwill. I agree that there is also goodwill which is also transferred inasmuch as the goodwill goes with the business and the trade name. There is no magic talisman in the trade name, at any rate to the transferees unless the routes are commercially viable or profitable. Therefore, I cannot subscribe to the view of my learned brother that the entire consideration of Rs. 4 lakhs was towards the transfer of goodwill of the business as such so as to make the resultant capital gains not lia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ri T.D. Sugla, President -- On a difference of opinion between the learned Members, who heard the appeal originally, the following points of difference were stated : "1. Whether the consideration of Rs. 4 lakhs agreed to between the assessee and the transferees in this case for transfer of business name 'City Transport' should be held to be entirely for transfer of goodwill and, consequently, not liable to capital gains on the facts of this case or it should be held to be in part for transfer of route permit also ? 2. If in part the consideration is to be held for transfer of route permit, whether any capital gain is chargeable in respect of the same ? 3. If capital gain is so chargeable in respect of part of the consideration of Rs. 4 lakhs as relatable to transfer of route permit, whether cost of acquisition is to be held to be Rs. 2,000 only ?" The case having been assigned by the President to himself under section 255(4), it has come up for hearing before me. 2. The assessee is a private limited company running a passenger bus service. The proceedings relate to its assessment for the assessment year 1981-82 for which the previous year consists of 15 months, i.e., from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecision in the case of B.C. Srinivasa Setty held that no capital gains were chargeable in the case of the assessee. The learned Accountant Member has, on the other hand, dealt with the controversy in paragraph Nos. 2 to 4 of his order. He has taken the view that the primary consideration of acquiring the transport business was not merely to purchase the depreciated buses but also the valuable rights over the route permits on which the transferees might ply the buses acquired by them, According to him, the real intention of the parties was to camouflage the payment so as to bring the entire amount of Rs. 4 lakhs to the goodwill of business which is a self-generated asset and thereby avoiding tax on the surplus arising on sale thereof. Observing that at best the sum of Rs. 4 lakhs might represent the value of the goodwill as well as the route permits, he directed the ITO to compute the value of the goodwill and treat the balance as the price of the route permits for the purpose of taxing the same under the head 'Capital gains'. 5. The parties have been heard at length. The departmental representative has strongly relied on the order of the learned Accountant Member. The counsel for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is true that on the face of it the value of the goodwill at Rs. 4 lakhs seems to be a little excessive. However, having regard to the fact that the assessee-company has been running the passenger transport services for about 30 years and that the transferees have taken over certain liabilities also, it cannot be accepted without anything more on record that the sum of Rs. 4 lakhs could not represent the value of the goodwill. I am also in agreement with the learned Judicial Member that the expenditure on making application for route permit does not represent the cost of route permit. For these and other reasons given by the learned Judicial Member, with which I agree, I hold that the assessee is not liable to capital gains on the sale of its business as a going concern. 7. Moreover, goodwill is something which is easy to describe but very difficult to define. The Supreme Court has made an attempt to define it in its decision in the case of S.C. Cambatta Co. (P.) Ltd. v. CEPT [1961] 41 ITR 500 in the following words : ". . . the goodwill of a business depends upon a variety of circumstances or a combination of them. The location, the service, the standing of the business, the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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