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TMI Blog1986 (1) TMI 37X X X X Extracts X X X X X X X X Extracts X X X X ..... epresentation of the sun and the moon on fans), and mahimaratib (insignia of the fish) in the 17th century. During the accounting year for the period ending March 31, 1977 the present Maharaja of Ratlam, on June 22, 1976, by a registered sale deed sold land within the compound of Shri Ranjit Vilas Palace, Ratlam, for Rs.6,12,958.The Income-tax Officer got the property valued by the Valuation Officer and ultimately accepted the sale price at this figure, besides the land at Lokendra Bhawan Palace at Rs. 48,000. The Income-tax Officer took the cost of acquisition of the palace as on January 1, 1954, at Rs. 1,51,200 and the market value of the said land at Rs. 3,000. So the total cost of acquisition was taken at Rs. 1,54,220 allowing brokerage of Rs. 24,488 and the exemption and other allowances, the Income-tax Officer assessed the assessee to tax a sum of Rs. 3,57,953 on account of capital gains on this sale, though the assessee had shown a loss of Rs. 94,471 in the matter of capital gains. The assessee took up the matter in appeal and the Commissioner (Appeals) after hearing, estimated the fair market value of the land in question as on January 1, 1954, at Rs. 2,58,207 against Rs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... personal effects, that is to say, movable property (including wearing apparel and furniture, but excluding jewellery) held for personal use by the assessee or any member of his family dependent on him." Section 2(47) of the Income-tax Act, 1961, is as follows : " transfer ", in relation to a capital asset, includes the sale, exchange or relinquishment of the asset or the extinguishment of any rights therein or the compulsory acquisition thereof under any law. " Section 45 of the said Act, with which we are directly concerned is as follows : "45. Capital gains.-(1) Any profits or gains arising from the transfer of a capital asset effected in the previous year shall, save as otherwise provided in sections 53, 54, 54B, 54D, 54E and 54F be chargeable to income-tax under the head 'Capital gains' and shall be deemed to be the income of the previous year in which the transfer took place. " The learned counsel for the Revenue also placed reliance on section 49 and section 55, which are as under: "49. Cost with reference to certain modes of acquisition.-(1) Where the capital asset became the property of the assessee (i) on any distribution of assets on the total or partial ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee before the 1st day of January, 1964, and the fair market value of the asset on that day is taken as the cost of acquisition at the option of the assessee, means all expenditure of a capital nature incurred in making any additions or alterations to the capital asset on or after the said date by the previous owner or the assessee, and (ii) in any other case, means all expenditure of a capital nature incurred in making any addition, or alterations to the capital asset by the assessee after it became his property, and where the capital asset became the property of the assessee by any of the modes specified in sub-section (1) of section 49, by the previous owner, but does not include any expenditure which is deductible in computing the income chargeable under the head 'Interest on securities', 'Income from house property', 'Profits and gains of business or profession' or 'Income from other sources', and the expression 'improvement' shall be construed accordingly. (2) For the purposes of sections 48 and 49, 'cost of acquisition', in relation to a capital asset, (i) where the capital asset became the property of the assessee before the 1 st day of January, 1964, means the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... age 1763, which is as follows: " Cost of acquisition when the cost to the Previous owner cannot be ascertained-section 55(3).-In cases where the cost to the previous owner is to be taken as the basis of determination of the cost of the asset to the assessee and the assessee does not produce evidence by which such cost to the previous owner can be ascertained, the Income-tax Officer is to take such cost at a figure which, in his opinion, was the fair market value [defined in section 2(22A)] of the asset on the date the capital asset became the property of the previous owner. The provisions of section 55(3) cannot be applied to case where the cost for which the previous owner acquired the property can be ascertained." In this connection, the learned counsel for the Revenue also placed reliance on Circular No. 31 dated September 21, 1962, issued by the Board which is as follows: " 2. Under clause (ii) of sub-section (2) of section 55, where the capital asset became the property of the assessee by any of the modes specified in section 49, including inheritance, and the capital asset became the property of the previous owner before January 1, 1954, 'cost of acquisition' means the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,471 by showing his net income at Rs. 19,223, he cannot claim the said loss in his returns as the stand taken by the assessee regarding the said loss is not proper and that amount has to be included in his income. In support of his contentions, the learned counsel for the assessee placed reliance on a number of decisions. In CIT v. Home Industries and Co. [1977] 107 ITR 609, a Division Bench of the Bombay High Court has held as under (headnote at pp. 610 611) : " The goodwill in the instant case was a self-created and self-generated asset of the assessee created or generated by the activities of the assessee-firm and probably by the name which the firm had earned and the goodwill it had created among its customers. It grew along with the business which was carried on by the assessee-firm right up to April 9, 1959, on which day the business together with the goodwill was transferred by the firm to the company. The goodwill of the assessee-firm, though a capital asset of the firm, could not be said to have been acquired by it at any particular point of time or for any cost in terms of money and the question arises whether this type of capital asset of the assessee firm is one w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Bench of this court has held as under (headnote); " Section 45 of the Income-tax Act, 1961, which is the charging section for levy of tax on capital gains, shows that the charge is on 'any profits and gains arising from the transfer of a capital asset' and not on the capital asset itself. The concept of 'profits and gains' made chargeable under section 45 itself implies that there is something received in excess of the cost of the capital asset which is transferred. In the case of a self-created or self-generated goodwill, the assessee incurs no cost in terms of money. On the transfer of such goodwill, the assessee makes no profits or gains chargeable under section 45. If the whole of the consideration received on such a transfer is taken to be 'profits or gains' of the assessee within the meaning of section 45, it would amount to taxing the capital asset itself and not 'profits or gains' arising from its transfer. This construction of section 45 is supported by the scheme of section 48 which provides that the income chargeable under section 45 is to be computed by deducting from the full value of the consideration 'the cost of acquisition of the capital asset and the cost of any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was not intended to fall within the charging section. All transactions encompassed by section 45 must fall under the governance of its computation provisions. A transaction to which those provisions cannot be applied must be regarded as never intended by section 45 to be the subject of the charge. What is contemplated by section 48(ii) is an asset in the acquisition of which it is possible to envisage a cost: it must be an asset which possesses the inherent quality of being available on the expenditure of money to a person seeking to acquire it. None of the provisions pertaining to the head 'capital gains' suggests that they include an asset in the acquisition of which no cost at all can be conceived. When goodwill generated in a new business is sold and the consideration brought to tax, what is charged is the capital value of the asset and not any profit or gain. Further, the date of acquisition of the asset is a material factor in applying the computation provisions pertaining to capital gain ; but in the case of goodwill generated in a new business, it is not possible to determine the date when it comes into existence". In Bawa Shiv Charan Singh v. CIT [1984] 149 ITR 29 (De ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n and in part to several other unpredictable factors like whims and eccentricities of persons wanting to acquire the tenancy rights. The value might fluctuate from one day to another day depending upon the uncertain demand and supply of comparable premises. In the year 1947-48, there was no premium. It was not possible to predicate as to the exact moment of its birth and the rate or period of its growth. The process of the growth in value was imperceptible. It was self-created without any contribution by the assessee, monetarily or otherwise. The fact remained that the capital asset had been acquired by the assessee without the payment of any money. It was, therefore, not possible to ascertain, when the assessee did not pay any amount for the acquisition of the tenancy rights, as to what was the 'cost of acquisition' or 'cost of improvement ' for the purpose of computation of capital gains under section 48. If the whole of the value of the capital asset transferred was brought to tax, then what was charged would be the capital value of the asset and not any profits or gains as contemplated by section 45. Therefore, it could not be said that any capital gains had arisen on the recei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as been taken in Vaidhyanathswami v. CIT [1979] 119 ITR 369 (Mad) which related to the sale of a motor permit. Also see CIT v. Upper Doab Sugar Mills [1979] 116 ITR 240 (All). It is no doubt true that none of these cases relate to the sale of immovable property as in the present case. But the gist of all these decisions has been the same that if there is no cost of acquisition, then the sale price would not attract the provisions of capital gains. Thus, it would be clear that the liability for capital gains tax would arise in respect of only those capital assets in the acquisition of which the element of cost is either actually present or is capable of being reckoned and not in respect of those assets in the acquisition of which the element of cost is altogether inconceivable, as in the present case. The circular of the Board referred to above on which learned counsel for the Revenue placed reliance though not binding on this court-only indicates that the section does not relate to only the immediate past owner but to past owners in succession. Thus, we are not persuaded to agree with the submission made by learned counsel for the Revenue that in such a case as the present one, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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