1981 (9) TMI 5 - HC - Income Tax

Sale of Loom Hours Not Taxable as Capital Gains: Supreme Court ruling clarifies acquisition cost requirement

Commissioner Of Income-Tax, West Bengal-V Versus Clive Mills Company Limited (in Liquidation)

Commissioner Of Income-Tax, West Bengal-V Versus Clive Mills Company Limited (in Liquidation) - [1984] 148 ITR 14, 36 CTR 300, 9 TAXMANN 80 Issues Involved:1. Whether the profits or gains arising from the sale of loom hours were 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.Summary:1. Tribunal's Decision on Loom Hours:The Tribunal held that the sale proceeds of loom hours were not chargeable to tax under the head 'Capital gains' because the assessee had not incurred any cost in terms of money in acquiring the loom hours. The Tribunal relied on its earlier decision and the case of CIT v. Chunilal Prabhudas & Co., where it was established that capital gain arises only on the transfer of a capital asset which has actually cost the assessee something in terms of money.2. Revenue's Argument:The Revenue argued that the Supreme Court in Empire Jute Co. Ltd. v. CIT held that the receipt from the sale of loom hours is in the nature of revenue receipts. They also cited CIT v. Maheshwari Devi Jute Mills Ltd., where loom hours were considered capital assets, implying that their sale should be attributed to capital gains.3. Supreme Court's Observations:The Supreme Court in Empire Jute Co. Ltd. v. CIT clarified that loom hours were considered an asset, and the transaction was seen as a sale of this asset rather than its exploitation. However, the court also noted that this decision was based on the commonly accepted basis that loom hours were an asset, and did not fully explore whether loom hours were an asset in principle.4. Goodwill and Capital Gains:The Supreme Court in CIT v. B. C. Srinivasa Setty ruled that goodwill generated in a newly commenced business cannot be described as an 'asset' within the terms of s. 45 of the I.T. Act, 1961, and its transfer does not give rise to a capital gain. The court emphasized that for an asset to fall under s. 45, it must be capable of acquisition at a cost, which was not the case for loom hours.5. Tribunal's Correct Conclusion:The Tribunal's conclusion that the loom hours did not cost anything to the assessee and thus did not attract the provisions of s. 45 was upheld. The Supreme Court's decisions in Empire Jute Co. Ltd. and B. C. Srinivasa Setty supported this view.Final Judgment:The question referred to the court was answered in the negative and in favor of the assessee. The parties were to pay and bear their own costs.Concurrence:C. K. Banerji J. agreed with the judgment.