ORDER
R.V. Easwar, Judicial Member
1. The first issue in this appeal by,the assessee is against the disallowance of the amalgamation expenses of Rs. 41,700 as capital expenditure. This issue is decided against the assessee following with respect the judgments of the Allahabad High Court in the case of Raza Buland Sugar Co. Ltd. v. CIT [1980] 122 ITR 817 and of the Calcutta High Court in the case of Bengal and Assam Investors Ltd. v. CIT [1983] 142 ITR 156.
2. The only other issue is whether the CIT (Appeals) was justified in directing the Assessing Officer to assess the receipt of Rs. 10 lakh on transfer of letter of intent for manufacture of white cement to tax as business income. This issue arises this way. The assessee is engaged in the business of manufacture of cotton and manmade fabrics, jute goods, carpet backing cloth, steel fabrication, paper and board, etc. On 5-11-1981, an application was made by the assessee to the Ministry of Industry, Govt. of India for the grant of an Industrial Licence under the Industries (Development and Regulation) Act, 1951 for manufacture of white cement. On 31-12-1981, a letter of intent was issued by the Ministry. The letter indicated the Govt.’s sanction for issuing an Industrial Licence to the assessee for the establishment of a new undertaking at Revadar Tehsil, Distt. Sirohi in the State of Rajasthan for the manufacture of white cement upto the capacity of one lakh tonnes. The issue of the licence was made subject to various conditions stipulated in paragraph 2 of the letter as well as in the annexures to the letter. The letter of intent, as per paragraph 5 of the letter, was to be valid for a period of 12 months from the date of issue. The assessee transferred the letter of intent to Crystal White Cement Industries Ltd. on 31-7-1985 for a consideration of Rs. 10 lakh. The assessee claimed that the said sum was not taxable since it was a capital receipt. The Assessing Officer noticed that there was a common director in the two companies and that the assessee-company was holding 10,000 shares in the transferee-company. He was of the view that the transfer gave rise to capital gains on the ground that the letter of intent was a capital asset. He overruled the assessee’s objection in this behalf and brought the sale price of Rs. 10 lakh after deducting Rs. 10,000 as estimated cost of acquisition of the letter of intent to tax as capital gains.
3. On appeal, the CIT (Appeals) was of the view that the sum of Rs. 10 lakh on sale of the letter of intent should be considered as receipt in the course of the assessee’s business and brought to tax as business income. He directed the Assessing Officer accordingly.
4. In the appeal it is contended that the assessee’s business is not that of dealing in letters of intent. It is further submitted that the letter of intent was for setting up a cement factory which, had it been set up by the assessee, would have been a capital asset and, therefore, the transfer of the letter of intent would also give rise only to capital receipt. The decision of the Madras High Court in CIT v. A.R. Damodara Mudaliar and Co. [1979] 119 ITR 583 was relied on. The second contention was that there was no cost of acquisition for the letter of intent and, therefore, there can be no liability to capital gains tax. In this connection our attention was drawn to the judgment of the Supreme Court in Addl. CIT v. Ganapathi Rqju Jogi [1993] 200 ITR 612 and CIT v. B.C. Srinivasa Setty [1981] 128 ITR 294. The ld. departmental representative, on the question as to whether the receipt was a trading profit, drew our attention to the provisions of Section 28(iv) of the IT Act as well as the judgment of the Calcutta High Court in Jeewanlal (1929) Ltd. v. CIT [1983] 139 ITR 865. On the question as to whether there was any cost of acquisition in respect of letter of intent, he submitted that the assessee had incurred some nominal licence fee which should be taken as cost and may be deducted from the sale price and the balance is to be brought to tax as capital gains. At this stage a preliminary point may be cleared. Though the Assessing Officer brought the amount to tax as capital gains, the CIT (Appeals) has directed him to tax the same as business profit. The quantum of course remains the same. The department has not filed any appeal against the order of the CIT (Appeals) contending that he was wrong in taking the view that the amount is not taxable under the head capital gains. We have to therefore limit ourselves to the question whether the sale price is taxable as profit of the business. The question whether there is any liability to capital gains tax is beyond the scope of this appeal.
5. We now proceed to examine whether the CIT (Appeals) was right in bringing the amount to tax as business profit. As rightly pointed out by the ld. representative for the assessee, the assessee is not shown to have been a dealer buying and selling letters of intent or industrial licences. The assessee applied for the letter of intent for setting up a cement factory in Rajasthan and the same was granted to it. Had the cement factory been set up by the assessee itself, it would have constituted a capital asset in the assessee’s hands and this position cannot be disputed. For reasons, not relevant for the purpose of the appeal, the assessee chose to transfer the letter of intent to another company for a price. The fact that the assessee-company is connected to the other company is neither here nor there. The transfer, in our opinion, is not in the course of carrying on of the business of the assessee nor did the receipt of the sale price arise out of the business activities of the assessee. There is no evidence, as stated earlier, to show that the assessee was dealing in buying and selling of letters of intent. No such instance in the past has been brought on record. The sale price is, therefore, referable only to the capital asset, viz., the right to establish a white cement factory with the annual capacity of one lakh tonnes. The receipt, in our opinion, is, therefore, a capital receipt. The decision of the Madras High Court cited by the ld. representative for the assessee supports the contention. The judgment of the Calcutta High Court cited by the ld. departmental representative is clearly distinguishable since in that case the import entitlements were acquired by the assessee in the course of the export business and, therefore, it was held that the receipts arising out of sale of the entitlements were business profits. The provisions of Section 28(iv) of the Act do not also assist the revenue since even under that provision, there has to be a benefit or perquisite arising from the business which is not the case before us. That section, therefore, has no application to the receipt in question.
6. We are, therefore, of the; view that the receipt of Rs. 10 lakh cannot be brought to tax as business profit. The assessee’s ground is allowed.
7. In the result, the appeal is partly allowed.