Self-created capital asset without ascertainable cost of acquisition cannot be taxed as capital gains

Route permits were treated as capital assets because the Income-tax Act uses a wide definition of "capital asset" and the permits carried transferable proprietary value. However, the value attributable to their transfer could not be charged to capital gains, because the permits had no ascertainable cost of acquisition on the facts and were self-created through use and surrounding circumstances. The charging and computation provisions therefore could not bring that attributable value to tax as capital gains. The result was that the permits were capital assets, but the consideration referable to them was not taxable under the capital gains head.

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Issues: (i) Whether route permits are capital assets. (ii) If route permits are capital assets, whether the value attributable to their transfer can be taken into account for computation of capital gains.

Issue (i): Whether route permits are capital assets.

Analysis: The expression "capital asset" in the Income-tax Act is of wide amplitude and means property of any kind. A route permit is transferable only with statutory permission, yet it carries proprietary value and is treated as property for constitutional purposes because compensation is payable on deprivation. The statutory scheme under the Motor Vehicles law also recognises the existence of consideration on transfer of permits, showing that a permit is not a mere personal privilege devoid of property character.

Conclusion: Yes. Route permits are capital assets, and this issue is decided against the assessee and in favour of the Revenue.

Issue (ii): If route permits are capital assets, whether the value attributable to their transfer can be taken into account for computation of capital gains.

Analysis: Capital gains under the Income-tax Act are computed by deducting the cost of acquisition and related expenditure from the full value of consideration. On the facts, the route permits had no ascertainable cost of acquisition, having been acquired without any separate monetary outlay and having acquired value over time by use and surrounding circumstances. Applying the principle that capital gains taxation requires a determinable cost of acquisition, the consideration attributable to such self-created value could not be brought to charge as capital gains.

Conclusion: No. The value attributable to the route permits could not be included in the computation of capital gains, and this issue is decided in favour of the assessee and against the Revenue.

Final Conclusion: The transfer of route permits was treated as involving a capital asset, but the consideration attributable to that asset was not taxable as capital gains because its cost of acquisition was not capable of computation on the facts.

Ratio Decidendi: A self-created capital asset with no ascertainable cost of acquisition cannot be subjected to capital gains tax under the charging and computation provisions.

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