Commissioner Of Income-Tax v. General Industrial Society Ltd.

The Judgment of the Court was delivered by

D.K Seth, J.:— The assessee, admittedly, was carrying on business in respect of some items other than white cement. It obtained a licence for setting up manufacturing business of white cement. Instead of setting up a business, the assessee had transferred the licence to some other concern. However, the assessee had some interest by way of shares held in the said concern and some of the directors were common. On account of transfer of the said licence, the assessee received a sum of Rs. 10 lakhs. In the return for the year 1986-87, this amount was shown but exemption was claimed by the assessee on the ground that this is not taxable either as income from business or as capital gains. It had treated the same as a capital receipt, which is not chargeable to tax. The Assessing Officer treated the same as capital gains since it was not in dispute that the licence was treated as a capital asset. The assessee preferred an appeal. The Commissioner (Appeals) had held that this amount cannot be treated to be capital gains but it was definitely an income from business and was chargeable to tax. On appeal before the learned Tribunal by the assessee, the learned Tribunal had held that it was not business income since the assessee was not carrying on business in dealing with licences. Since the Revenue did not prefer any appeal against the findings of the Commissioner (Appeals) that it was business income and not capital gains, therefore, the learned Tribunal refrained from going into the question whether it was capital gains or not and had exempted the amount from being taxed.

2. The Revenue had sought for reference on two questions, which are as follows:

“(i) Whether, on the facts and in the circumstances of the case, and on correct interpretation of section 28(iv) of the Income-tax Act, 1961, the Tribunal was justified in law in holding that the receipt of Rs. 10 lakhs cannot be brought to tax as business profit?

(ii) Without prejudice to question No. 1 above, whether, on the facts and in the circumstances of the case and having regard to the fact that the Assessing Officer brought Rs. 10 lakhs to tax as capital gains, being consideration received by the assessee for transfer of the letter of intent, the Tribunal was justified in law in not adjudicating on the assessability of the amount, thus received under the head ‘Capital gains'?”

3. The Tribunal had refused to state the case under section 256(1) of the Income-tax Act, 1961. An application under section 256(2) was preferred before this court. The learned Division Bench of this court had directed the Tribunal to draw up a statement for reference of the second question since been referred as quoted above. In this background, Mr. Jaydeb Saha, learned counsel for the Revenue, had pointed out that though the first question had not been referred yet by reason of the second question, the content of the first question can also be gone into by this court on reference. It is not the question, which is referred to the court to which the jurisdiction of this court is confined on a reference of section 256(1). It has to look into the order of reference and the statement of case and find out the extent and scope of the question referred. Even though no appeal was preferred by the Revenue yet by reason of section 254, sub-section (1), the Tribunal could go into that question and it was open to the Revenue to take all the grounds either to defend or challenge the order as the case may be even without preferring any cross-objection or appeal. The finding of the learned Tribunal is perverse since it had not gone into the said question. In the present facts and circumstances of this case, the consideration received out of the transfer of a capital asset was definitely a capital gain assessable to tax. Once some amount is received on transfer of a capital asset, the same is definitely chargeable to tax. He had sought to distinguish the decision in Cit v. B.C Srinivasa Setty., [1981] 128 ITR 294 (SC). He contended that there was no escape from the charging of the income under the head “Capital gains”. He alternatively contended that if it cannot be charged under the head “Capital gains”, it was definitely a business income since this was a receipt by the assessee in the course of its business. Even if it was a capital asset, a benefit derived therefrom was chargeable to tax under section 28, clause (iv). Therefore, in no way it could be exempted from being taxed under the said head.

4. Mr. J.P Khaitan, learned counsel appearing for the assessee, on the other hand, contended that when the heads of income are specified, a particular income coining under that head has to be assessed under the relevant provisions dealing with such head. If it cannot be charged to tax under the particular head under which it comes, it cannot be charged under another head. Unless the capital gains can be computed under section 48, it cannot be charged under the head “Capital gains” in view of section 55(2), read with section 48(ii) and section 45 of the Act. He contended that the decision in B.C Srinivasa Setty's case, [1981] 128 ITR 294 (SC) had laid down the ratio that the chargeability and computation are integral parts of each other. Unless an income chargeable under a particular head can be computed within the computation method provided therefor the same cannot be charged to tax. In the present case the cost of acquisition as defined in section 55(2), as it stood prior to its amendment (Finance Act, 1987 effective from April 1, 1988), being un-assessable, it could not be computed under section 48 and, therefore, it could not be chargeable as capital gains under section 45 as was held in B.C Srinivasa Setty's case, [1981] 128 ITR 294 (SC). He relied on the decision in B.K Roy (P.) Ltd. v. CIT, [1995] 211 ITR 500 (Cal) in which this court had differed from the view taken by the Allahabad High Court in CIT v. Gulab Chand, [1991] 192 ITR 495 relying on a decision of this court in A. Gasper v. Commissioner Of Income-Tax, West Bengal, [1979] 117 ITR 581 since reversed by the Supreme Court in A. Gasper v. Commissioner Of Income-Tax, West Bengal, [1991] 192 ITR 382. The Division Bench of this court in CIT v. B.K Roy (P.) Ltd., [2001] 248 ITR 245 had followed A. Gasper v. Commissioner Of Income-Tax, West Bengal, [1991] 192 ITR 382 (SC) and disagreed with the view in A. Gasper v. Commissioner Of Income-Tax, West Bengal, [1979] 117 ITR 581 (Cal) and differed with the view taken in CIT v. Gulab Chand, [1991] 192 ITR 495 (All). He further contended that this income even if attempted to be brought under the head “Business income” under section 28 still it did not fit within the scope and ambit of section 28. It could not be treated to be a benefit within the meaning of section 28(iv) inasmuch as, it was a licence obtained by the assessee to set up a new business. But the new business was not set up. Therefore, the benefit arising out of the said licence could not be treated to be an income from the business since no business was carried on under the said licence. This licence was wholly unrelated to the business carried on by the assessee. It was not a benefit arising out of the business the assessee had been carrying on. Therefore, it could not come within the scope of business income. He also contended that the jurisdiction of the court is confined to the reference made and it cannot travel beyond the scope thereof. Here in this case though the question was framed with the opening phrase “without prejudice to question No. 1” question No. 1 was not referred to consciously. It is the order of reference that will determine the issue, not the framing of the question. What was not referred to this court consciously cannot be deemed to have been referred because of the framing of the question referred. When it was not held that question No. 2 includes question No. 1 particularly when questions Nos. 1 and 2 are directly in conflict with each other. On these grounds, he pressed for dismissal of the reference.

5. We have heard the submission of the respective counsel at length. So far as the question with regard to the reference of the question is concerned, admittedly the court under section 256(2) had consciously referred question No. 2 omitting to refer to question No. 1. It is the order of reference that will determine the scope, not the statement of case. The statement of case was stated by the learned Tribunal on the basis of the order passed by this court under section 256(2). It has to be ascertained from the order of the High Court under section 256(2). The question referred should be precise and indicate the grounds on which the question of law is raised (CIT v. Scindia Steam Navigation Co. Ltd., [1961] 42 ITR 589 (SC)). Two or more questions cannot be combined and rolled up in the form of one question. Each question must be stated separately (Gopiram Govindram, In re, [1936] 4 ITR 157 (Cal)). Here in this case reference upon two questions was sought for. But the High Court had refused one. The order under section 256(2) cannot be construed to mean something, which the High Court had expressly excluded from its order. The reference to “without prejudice” phrase within the frame of the question would not mean to include the first question. That apart these two questions cannot be rolled up or combined in one. These two questions are directly opposite to each other, one cannot be conceived to be included within the other nor can they be reconciled together. These are alternatives, either one or the other. Therefore, we do not think that question No. 1 could be covered within the scope and ambit of the reference in respect of question No. 2.

6. Be that as it may, if we treat this question within the scope of the reference, even then, in our view, the receipt could not be treated to be an income from business for two reasons:

First, the licence was not an outcome of the business carried on by the assessee. It was in no way connected with the business carried on by the assessee. On the other hand, this licence was obtained for the purpose of setting up of altogether a new business in respect of an item not covered within the business of the assessee and for which a separate licence was neces-sary. Therefore, the benefit arising out of the said licence could not be said to be a benefit arising out of a business carried on by the assessee, until pursuant to the licence the new business was set up. The benefit conceived under clause (iv) of section 28 has to be related to the business carried on by the assessee, which, in our view, is not possible to be brought within the scope of the said provision.

7. Secondly, once a particular income is chargeable under one head and if it cannot be computed and charged under that head, it cannot be charged under a different head or as income from other sources. A subject cannot be taxed unless the charging provision clearly imposes the obligation. It cannot be so done even by fiction, unless expressly created by the statute. The scope of a charging section cannot be enlarged by importing further fiction by deeming the sum received as income of business. If the words of a statute are precise and unambiguous, they must be accepted as declaring the express intention of the Legislature. It was so held in the decision in B.K Roy P. Ltd. v. CIT, [1995] 211 ITR 500 (Cal), affirmed by the Division Bench in CIT v. B.K Roy P. Ltd., [2001] 248 ITR 245 (Cal); Commissioner Of Income Tax, Madras v. The Ajax Products Limited, [1965] 55 ITR 741 (SC) and in Commissioner Of Income-Tax v. Justice R.M Datta., [1989] 180 ITR 86 (Cal) following the ratio laid down in Nalinikant Ambalal Mody v. S.A.L Narayana Row, CIT, [1966] 61 ITR 428 (SC) respectively. Therefore, the amount received on transfer of the licence, a capital asset, could not be charged under section 28(iv) as income of business.

8. For all these reasons, we are unable to persuade ourselves to agree with the contention of Mr. Saha, who, in reply, relied on the decision in Jeewanlal (1929) Ltd. v. Commissioner Of Income-Tax, West Bengal-Iii., [1983] 139 ITR 865 (Cal). The said decision deals with an income received in the course of business, namely, that the assessee therein was carrying on business in exporting aluminium goods. A scheme was formulated under which the exporters became entitled to import certain goods. Thus, on account of carrying on business of export, the assessee had earned the entitlement to import certain goods. Therefore, it was a result or outcome of the export business carried on by the assessee and thus the income received was a result of the carrying on of the business or outcome of the same business. On the facts, the present case is distinguishable, as we have already discussed the acquisition of the licence was not dependent on the carrying on of the business by the assessee.

9. Now it is to be seen whether it could be brought under the head of capital gains. Admittedly, the licence cannot be described to be something other than a capital asset. Section 2(14) defines “capital asset” as property of any kind held by an assessee, whether or not connected with his business or profession, but does not include any stock-in-trade, consumable stores or raw materials held for the purposes of business or profession, etc. The definition is inclusive but not exhaustive. It has excluded the items, which are not capital assets. The licence was not connected with the business of the assessee this absence of connection would not stand in the way of its being a capital asset. Having regard to the definition, in our view, the licence was definitely a capital asset.

10. If it was a capital asset then it had to be dealt with under the provisions of sections 45 to 55 of the Income-tax Act, 1961. Once it was chargeable under section 45, it had to be computed according to section 48, 49 or 50, as the case may be. The computation provided in section 48, applicable in this case, was based on the cost of acquisition of the capital asset. The cost of acquisition was the primary component on which the chargeability was to be determined. The cost of acquisition was to be determined under section 55(2) as it stood for the assessment year 1986-87. In order to be assessable under the head “Capital gains”, the receipt was to be computed under section 48 by deducting from the full value of the consideration received on the transfer of the capital asset, (i) the expenditure incurred wholly and exclusively in connection with such transfer, and (ii) the cost of acquisition of the capital asset and the cost of improvement thereto. In the present case, the cost of acquisition could not be determined in the manner provided in section 55(2) as it stood then.

11. A reading of these two sections shows that if the cost of acquisition of the licence could not be assessed, it could not be computed under section 48 and unless it was computable under section 48, it could not be charged under section 45. The apex court in B.C Srinivasa Setty's case, [1981] 128 ITR 294 had held that section 45 and section 48 are integral parts of the charging section.

12. Profits or gains arising from the transfer of a capital asset are chargeable under section 45. In order to compute the profits or gains under that head, Parliament has enacted detailed provisions. Unless those provisions can be applied to a particular transaction, it must be regarded as never intended by section 45 to be the subject of the charge. This is clear from the general arrangement of the provisions in the Act. The charging provision is accompanied by a set of provisions for computing the income subject to charge under each head of income. In each case, the character of the computation provisions bears a relationship to the nature of the charge. The charging section and the computation provisions together constitute an integrated code. The computation device provided in section 48 contemplates that an asset is something in the acquisition of which it is possible to envisage a cost. It hints at the nature and character of the asset. Such asset must possess the inherent quality of being available on the expenditure of money to a person seeking to acquire it. Section 49 provides for determining the cost of acquisition of assets without the payment of money for the purpose of computation under section 48. Section 48 is concerned with an asset capable of acquisition at a cost. 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. In the acquisition of an asset in which no cost element can be identified or envisaged, if sold and the consideration is brought to tax, it will be the capital value of the asset and not any profit or gain that will be charged. Then it will be charging something else other than what is contemplated to be charged under section 45 non-computable under section 48 incapable of ascertaining the cost of acquisition of the asset.

13. Subsequently, section 55, sub-section (2) was amended in order to avoid the implication of the ratio decided in B.C Srinivasa Setty's case, [1981] 128 ITR 294 (SC). But we are concerned with the case, which was to be governed under the statute as existed in 1985-86 (previous year) prior to the amendment. Therefore, the cost of acquisition being unascertainable, in view of the decision in B.C Srinivasa Setty's case, [1981] 128 ITR 294 (SC), the receipt could not be assessed to capital gains.

14. Though no appeal was preferred by the Revenue, yet it could have resisted the appeal before the Tribunal as is permissible under section 254(1) and the Tribunal is empowered within the said provision to decide the question even if no cross-objection or cross appeal is filed. The order or judgment, if open to appeal can be supported or objected to by either of the parties in the appeal. In fact, the entire question becomes open to be decided in the appeal. Therefore, we are in agreement with the contention of Mr. Saha to the extent that even though the Revenue did not file cross-objection or cross appeal, it was entitled to support the order of the Commissioner (Appeals) and alternatively that of the Assessing Officer. But the Revenue is precluded from raising the same contention in this reference under section 256(2), since the said question has not been referred to this court. In the result, this reference is disposed of by directing the Tribunal to dispose of the appeal in the light of the observations made hereinbefore and we answer the question referred to us in the manner following:

What was received on transfer of the licence, a capital asset within the meaning of section 2(14), was not an income from business under section 28 more particularly under clause (iv) and though chargeable under the head “Capital-gains” under section 45 but since incomputable by reason of sections 48 and 49, read with section 55(2) in assessment year 1986-87, the same could not be assessed to capital gains.

15. All parties are to act on a signed xerox copy of this dictated order on the usual undertaking.

R.N Sinha, J.:— I agree.