The cost of acquisition of a capital asset is not a necessary condition for the applicability of Section 45 of the Income-tax Act, 1961, and profits or gains arising from the sale of such an asset are capital gains in the commercial sense.

( 1 ) IN this reference under Section 256 (1) of the Income-tax Act, 1961, we are concerned with the following question of law :"whether, on the facts and in the circumstances of the case, the sum of Rs. 5,045 received by the assessee for transfer of the 'import entitlements' was assessable to tax and, if so, as short-term capital gains ?"

( 2 ) THE assessment year is 1964-65. The assessee carried on business in engineering goods. Under the export promotion scheme, he could get what are called "import entitlements" which would enable him to import raw materials to the extent of 75 per cent. of the f. o. b. value of the goods exported. Under this scheme, he could utilise the "import entitlements" for his own manufacture or could part with it to other manufacturers covered by the scheme. In the assessment year, the assessee received and transferred the "import entitlements" to two concerns for a total sum of Rs. 5,045. This amount was credited to the profit and loss account of the assessee and it was brought to tax by the Income-tax Officer.

( 3 ) IT has been found by the Appellate Assistant Commissioner, on appeal, that the "import entitlements" were received by the assessee free of cost and as, in his opinion, the profits earned by the assessee on the sale of the "import entitlements" constituted a short-term capital gain, he directed the Income-tax Officer to make the assessment accordingly. The Tribunal, on second appeal, affirmed the said decision of the Appellate Assistant Commissioner.

( 4 ) MR. Banerjee, the learned counsel for the assessee, has not disputed before us that "import entitlements" are "capital assets" within the meaning of Section 2 (14) of the Income-tax Act, 1961. His first submission is that the cost of acquisition of the "import entitlements" cannot be ascertained and, therefore, these receipts are not capital gains, but no such contention was made before the Tribunal nor it arises out of the order of the Tribunal. It is a pure question of fact and, therefore, Mr. Banerjee is not entitled to take this new plea before us.

( 5 ) HIS other submissions are briefly as follows : section 48 overrides Section 45 of the Act and, therefore, these receipts are not capital gains because there was no cost of acquisition of these "import entitlements" ; and the term "capital gains" should be understood in the sense a trader would understand it, namely, the excess over the cost of acquisition and the sale proceeds, and, therefore, this case is outside the scope and purview of Section 45 of the Act.

( 6 ) IN the cases of Commissioner of Income-tax v. K. Rathnam Nadar [1969] 71 ITR 433 (Mad), Commissioner of Income-tax v. Chunilal Prabhudas and Co. , Jagdev Singh Mumick v. Commissioner of Income-tax , Commissioner of Income-tax v. E. C. Jacob and Commissioner of Income-tax v. B. C. Srinivasa Setty [1974] 96 ITR 667 (Kar) cited by Mr. Banerjee, the goodwill of the businesses were sold and the cost of acquisition of the goodwill could not be ascertained at all and, therefore, it was held that those receipts were not taxable, because the profits or gains could not be computed at all.

( 7 ) ABOVE cases were not decided on the basis that there was no cost of acquisition of the goodwill and, therefore, they do not assist Mr. Banerjee in any way. Further, goodwill and the "import entitlements" do not stand on the same footing and, therefore, no reliance can be placed by Mr. Banerjee on these cases. We may add here that in the case of Commissioner of Income-tax v. Mohanbhai Pamabhai [1973] 91 ITR 393 (Guj) the Gujarat High Court has taken a different view from the cases cited by Mr. Banerjee.

( 8 ) WE, however, agree with Mr. Banerjee that the term "capital gains" should be understood in the commercial sense, but we disagree with him that where the cost of acquisition of a capital asset in terms of money is nil the profit or gain arising out of the sale of such asset is not a capital gain in the commercial sense