JUDGMENT
K.S. Paripoornan, J.
1. At the instance of an assessee to income-tax, the Income-tax Appellate Tribunal has referred the following two questions of law for the decision of this court:
“(1) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that it was possible to envisage a cost of acquisition with regard to the route permits acquired by the assessee and, consequently, in holding that the claim of the assessee that no tax on capital gains will be attracted to the sale of the route permits is not sustainable ?
(2) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the claim of the assessee that the cost of improvement of the route permits is not ascertainable and that, consequently, no tax on capital gains is attracted will be sustainable only if it is found that the assessee had improved the route permits after they were acquired by the assessee?”
2. The respondent is the Revenue. We are concerned with the assessment year 1974-75. The previous year ended on June 30, 1973. The assessee is a registered firm. It is engaged in the business of motor transport. During the relevant accounting period, the assessee sold six vehicles for Rs. 4,56,000. The written down value of these vehicles as on July 1, 1972, was only Rs. 1,18,961. The assessee claimed that the value of the route permit for the six vehicles came to Rs. 3,29,500 and that this was not assessable to tax as capital gains. It was’ so stated since, according to the assessee, the route permits had no cost of acquisition and their value of improvement cannot be ascertained. The route permits for these six vehicles were originally obtained by the predecessor-in-interest of the assessee, namely, P. S. N. Motors (P.) Ltd. The permits were issued about 20 years earlier. On July 1, 1971, the buses were transferred to the assessee-firm at their written down value. The partners of the assessee-firm were the shareholders of P. S. N. Motors (P.) Ltd., the transferor. The assessee-firm did not pay anything towards the route value. This was relied upon to show that there was no cost of acquisition for the route permits. The old buses were replaced with new ones. Thereafter, the assessee operated the vehicles only for two years. During the assessment year 1973-74, the assessee-firm incurred a loss of Rs. 72,484. For the assessment year 1974-75, the firm incurred a loss of Rs. 89,677. In reckoning the said loss, profit under Section 41(2) and the capital gains arising out of the sale of the buses were not taken into account. The Income-tax Officer held that the assessee had no power to transfer the route and the sale proceeds really represent the value of the buses. In appeal, the Commissioner of Income-tax (Appeals) held that regard being had to the fact that the assessee had sold away the buses within two years of their acquisition and that during these years the assessee incurred a loss, the routes have no value at all and the sale proceeds represented only the price of the vehicles and not of the route. On further appeal, the Income-tax Appellate Tribunal held that the materials adduced by the assessee itself showed that the sale consideration did not represent the value of the vehicles only. It was held that a
portion of the consideration must have been on account of the route value. The plea of the assessee was that the value of the route permits is similar to the value of goodwill and so cannot be brought to tax, in the light of the Supreme Court decision in CIT v. B. C. Srinivasa Setty [1981] 128 ITR 294. The Revenue contended that this is not a case of transfer of a route permit obtained by the assessee for the first time to say it was totally built up by that person, but it is a case where the assessee obtained the vehicles along with the route permits, issued to its predecessor-in-interest, that the vehicles along with the route permits were acquired at a cost and so a reasonable allocation of the consideration between the buses and the routes should be made. The assessee acquired the route permits by way of transfer and so it would normally attract tax on capital gains. The fact that the assessee had not actually paid any consideration for the route permit, nor stated so in any document, will not absolve the assessee from liability to tax, since the ratio of Srinivasa Setty’s case [1981] 128 ITR 294 (SC) is applicable only to a case where no cost of acquisition could be envisaged. The Tribunal also relied on the decision of this court in CIT v. E. C. Jacob [1973] 89 ITR 88 [FB] and held that it is not necessary that the assessee should improve the value of the route permit after the assessee acquired the same for exigibility to tax. On the facts of this case, it was held that since a portion of the sale proceeds is attributable to the route permit and a reasonable allocation of the sale proceeds between the buses and the route permits should be made, the matter requires appraisal by the Income-tax Officer. In the above perspective, a remit was ordered. It is, thereafter, at the instance of the assesse, that the Appellate Tribunal has referred the above two questions of law for the decision of this court.
3. We heard counsel for the assessee and also counsel for the Revenue. The Tribunal has not passed any final order. It has only ordered a remit. Whether, at this stage, the questions referred to us should be answered itself is doubtful. Our answer to the questions may turn out to be academic, depending upon further evidence and the findings of the statutory authorities. Be that as it may, on the facts of this case, we have no doubt that the Appellate Tribunal was justified in stating that the cost of acquisition should be envisaged in the case of route permits, as the assessee acquired the same from P. S. N. Motors (P.) Ltd. The assessee had purchased the buses and route permits from P. S. N. Motors (P.) Ltd. It was as early as July 1, 1971. The transfer was for the written down value of the buses. The permits for the routes were obtained about twenty years earlier. The partners of the asses see-firm were the shareholders of P. S. N. Motors (P.) Ltd. The Tribunal held that the consideration varied from route to route and that will show that the routes had their own value. The value of the buses fairly compared with the value of the new buses, according to the quotations of T. V. Sundaram Iyengar and Sons. It was evident that a
portion of the sale consideration received by the assessee was for the routes, though it was not so specifically mentioned. The Tribunal held that the value obtained was much more than the possible value of the buses. This is a finding of fact which has not been assailed in the questions referred to this court.
4. If the value paid is much more than the possible value of the buses, the difference in the value should represent the route value. This is not a case where the goodwill was totally built up by the assessee. The permits were obtained by the assessee’s transferor long ago, They operated the vehicles for a few years and transferred the buses to the assessee. The assessee substituted new vehicles and operated the routes. In those cases, where an operator obtains a permit for the first time and goodwill accrued ‘ or was generated over a number of years in his hands, it could be said that the cost of acquisition of the asset is nil. The transfer of the permit by such an operator will be similar to the transfer of a goodwill. But, that is not the case here. The route permits were obtained by the assessee’s transferor, P. S. N. Motors (P.) Ltd. They were operating the service for a number of years. Thereafter, the assessee obtained the buses with route permits for consideration. This is not a case where the assessee obtained the permits for the first time. Permits obtained by the transferor continued to be operated. In such cases, there is no self-generated goodwill. The cost of acquisition of the asset cannot be said to be nil. The Appellate Tribunal held so. Amongst others, the Appellate Tribunal referred to the decision of the Supreme Court Srinivasa Setty’s case [1981] 128 ITR 294 (SC), the decision of the Andhra Pradesh High Court in Addl. CIT v. Ganapathi Raju Jegi, Sanyasi Raju [1979] 119 ITR 715, as also the decision of the Bombay High Court in CIT v. Modiram Laxmandas (P.) Ltd. [1983] 142 ITR 702 and drew a dichotomy between a case where the sale proceeds arose out of the transfer of a route permit obtained by the assessee for the first time and the sale proceeds which arose out of the transfer of route permits which were acquired by the assessee at a cost, and held that the latter case cannot be held to be similar to the valuation of a goodwill. It distinguished the decision of the Supreme Court in Srinivasa Setty’s case [ 1981 ] 128 ITR 294. We see no error in the said approach and reasoning. The result is that, in the case of a transfer of a bus along with the route permit which was obtained by transfer from another person, it cannot be said that there is no cost of acquisition of the asset. This court had occasion to refer to this aspect of the matter in CIT v. P. S. N. Motors (P.) Ltd. [1989] 180 ITR 345 (Ker). That was a case where the transferor of the assessee who obtained the route permits for the first time was sought to be assessed to capital gains tax. This court held that, where a route was obtained for the first time and there is profit on sale of such
permit, it is similar to profit from sale of “goodwill”, a self-generated asset. The said decision is totally inapplicable to the case on hand.
5. Counsel for the assessee further argued that it is not possible to assess the cost of subsequent improvements of the permits and, in such a case also, no tax on capital gains is attracted. Emphasis was laid on the decision of the Bombay High Court in Evans Fraser and Co. Ltd. v. CIT [1982] 137 ITR 493. We are of the view that the question of valuation of improvements will arise only in cases where there could be a claim for the value of improvements and not where there could be no claim for the value of improvements at all, because, in such case, the ascertainment of the value does not arise. This view is in accord with the Full Bench decision of this court in CIT v. E. C. Jacob [1973] 89 ITR 88, 93. We are bound by the ratio laid down by the Full Bench of this court in E. C. Jacob’s case [1973] 89 ITR 88. It is for the assessee to show that it has improved the value of the route permits after acquisition. The Commissioner of Income-tax (Appeals) has held that though the assessee introduced new buses, after the acquisition of the route, the business was running at a loss during the two assessment years during which the assessee operated the buses. The matter has not been properly investigated on this score. We are of the view that the Appellate Tribunal was justified in holding that a portion of the sale proceeds is attributable to the route permit and that a reasonable allocation of the sale proceeds between the buses and the route permits was called for. There was paucity of material to arrive at a definite finding based on such a view of the situation. So, the Appellate Tribunal, after indicating the legal position, ordered a remit of the matter to the assessing authority. It was justified in doing so. It is for the fact-finding authority to investigate further whether the assessee has improved the value of the route permits, after it was acquired, and if so; what will be the reasonable value that should be determined. All these aspects should receive consideration of the assessing authority, in the light of the remit ordered by the Appellate Tribunal. We fully concur with the approach and conclusion made by the Appellate Tribunal in the matter.
6. In the light of our reasoning and conclusion, our answer to question No. 1 is in the affirmative, against the assessee and in favour of the Revenue. Our answer to question No. 2 is also in the affirmative, against the assessee and in favour of the Revenue.
7. Both the questions referred to us are answered as above while upholding the order of remit made by the Appellate Tribunal with the observations contained in the appellate order.
8. A copy of this judgment under the seal of this court and the signature of the Registrar shall be forwarded to the Income-tax Appellate Tribunal, Cochin Bench.