Loom hours are not capital assets and their sale does not give rise to capital gains.

SABYASACHT MUKHARJI, J.

( 1 ) IN this reference under Section 256 (1) of the I. T. Act, 1961, the Tribunal has referred the following question :" Whether, on the facts and in the circumstances of the case, the Tribunal misdirected itself in law in holding that the profits or gains arising from the sale of loom hours were not chargeable to tax under the head 'capital gains' as the assessee had not incurred any cost in terms of money in the acquisition of the loom hours ? "

( 2 ) THIS reference relates to the assessment year 1961-62 for which the relevant accounting year is the financial year ending March 31, 1961. The assessee-company, which is in liquidation, had income from property and income from business during the year under consideration. It also sold loom hours and the ITO treated the sale proceeds of Rs. 1,18,526 as short-term capital gains. The matter went up to the Tribunal. The Tribunal in its order disposed of the matter, relying on its earlier order dated March 21, 1975. Therefore, it would be appropriate to refer to that order of March 21, 1975, which begins at p. 33 of the paper book wherein the Tribunal after considering the rival contentions observed as follows :" We have considered the rival submissions. The assessee was allotted loom hours in both the years on account of its owning looms and the allotment of the loom hours did not cost anything to the assessee. Even the ITO has taken the cost of loom hours at nil and has held that the loom hours sold were out of the current allotment. The facts of the case reported in 76 ITR 566 (CIT v. Chunilal Prabhudas and Co.) were that the assessee was a registered firm of six partners deriving income from import and export business. Its head office was in Calcutta and it had branches in Bombay. On the last day of the accounting year the assessee transferred its assets and liabilities and also the goodwill of its Calcutta business to a private limited company, C. P. and Co. , Calcutta (P.) Ltd. and the assets and liabilities and the goodwill of its Bombay business to another company under the name, C. P. and Co. Bombay (P.) Ltd. These transfers were made by two registered deeds of the same date. The assessee valued its goodwill of the Calcutta business and the Bombay business at Rs. 60,000 each and received the total amount of Rs. 1,20,000 in respect of transfer of such goodwill. The consideration for the goodwill of the firm was not paid to each partner but each shareholder got as many shares of the company as his share in the partnership justified. The ITO included the entire amount of the sum of Rs. 1,20,000 allocated towards the goodwill of the firm as the firm's capital gains under Section 12b of the (Indian) Income-tax Act, 1922, rejecting the assessee's contention that the goodwill being an intangible asset did not come within the definition of capital asset and Section 2 (4) (a) of the (Indian) Income-tax Act, 1922, and this decision was upheld by the Tribunal. It was held by the High Court that goodwill was not a capital asset within the meaning of section 12b of the (Indian) Income-tax Act, 1922, as it produced no profit or gain in the case of transfer to the companies. In this case their Lordships quoted with approval the decision of the Madras High Court in the case, CIT v. K. Rathnam Nadar [1969] 71 ITR 433. It has been observed in this decision that section 12b (2) (ii) of the (Indian) Income-tax Act, 1922, suggests that capital gain arises only on the transfer of a capital asset which has actually cost to the assessee something. Such cost in the context of the Income-tax Act being cost in terms of money cannot apply to transfer of capital asset which did not cost anything to the assessee in terms of money in its creation or acquisition. In the present case also the acquisition of the loom hours did not cost anything to the assessee. The sale of loom hours, therefore, does not attract the provision of Section 45 of the Income-tax Act, 1961. The additions

Click Here to Read the rest of this document