Sabyasacht Mukharji, J. - (1.) In this reference under Section 256(1) of the I.T. Act, 1961, the Tribunal has referred the following question : " Whether, on the facts and in the circumstances of the case, the Tribunal misdirected itself in law in holding that the profits or gains arising from the sale of loom hours were not 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 ? "
(2.) This reference relates to the assessment year 1961-62 for which the relevant accounting year is the financial year ending March 31, 1961. The assessee-company, which is in liquidation, had income from property and income from business during the year under consideration. It also sold loom hours and the ITO treated the sale proceeds of Rs. 1,18,526 as short-term capital gains. The matter went up to the Tribunal. The Tribunal in its order disposed of the matter, relying on its earlier order dated March 21, 1975. Therefore, it would be appropriate to refer to that order of March 21, 1975, which begins at p. 33 of the paper book wherein the Tribunal after considering the rival contentions observed as follows : " We have considered the rival submissions. The assessee was allotted loom hours in both the years on account of its owning looms and the allotment of the loom hours did not cost anything to the assessee. Even the ITO has taken the cost of loom hours at nil and has held that the loom hours sold were out of the current allotment. The facts of the case reported in 76 ITR 566 (CIT v. Chunilal Prabhudas & Co.) were that the assessee was a registered firm of six partners deriving income from import and export business. Its head office was in Calcutta and it had branches in Bombay. On the last day of the accounting year the assessee transferred its assets and liabilities and also the goodwill of its Calcutta business to a private limited company, C. P. & Co., Calcutta (P.) Ltd. and the assets and liabilities and the goodwill of its Bombay business to another company under the name, C. P. & Co. Bombay (P.) Ltd. These transfers were made by two registered deeds of the same date. The assessee valued its goodwill of the Calcutta business and the Bombay business at Rs. 60,000 each and received the total amount of Rs. 1,20,000 in respect of transfer of such goodwill. The consideration for the goodwill of the firm was not paid to each partner but each shareholder got as many shares of the company as his share in the partnership justified. The ITO included the entire amount of the sum of Rs. 1,20,000 allocated towards the goodwill of the firm as the firm's capital gains under Section 12B of the (Indian) Income-tax Act, 1922, rejecting the assessee's contention that the goodwill being an intangible asset did not come within the definition of capital asset and Section 2(4)(a) of the (Indian) Income-tax Act, 1922, and this decision was upheld by the Tribunal. It was held by the High Court that goodwill was not a capital asset within the meaning of section 12B of the (Indian) Income-tax Act, 1922, as it produced no profit or gain in the case of transfer to the companies. In this case their Lordships quoted with approval the decision of the Madras High Court in the case, CIT v. K. Rathnam Nadar [1969] 71 ITR 433. It has been observed in this decision that section 12B(2)(ii) of the (Indian) Income-tax Act, 1922, suggests that capital gain arises only on the transfer of a capital asset which has actually cost to the assessee something. Such cost in the context of the Income-tax Act being cost in terms of money cannot apply to transfer of capital asset which did not cost anything to the assessee in terms of money in its creation or acquisition. In the present case also the acquisition of the loom hours did not cost anything to the assessee. The sale of loom hours, therefore, does not attract the provision of Section 45 of the Income-tax Act, 1961. The additions on account of sale proceeds of loom hours in both the years are accordingly deleted."
(3.) The Tribunal in those circumstances, following the aforesaid decision, deleted the additions on account of sale proceeds of loom hours. In the premises, the question indicated before has been referred to this court. On behalf of the Revenue our attention was drawn to the fact that the previous decision of the Tribunal to which reference had been made by the Tribunal in disposing of the present appeal had come up before this court in Income-tax Reference No. 108 of 1976, and on 24 February, 1981, that matter was disposed of. The judgment does not indicate that the matter was gone into in detail, but its observation is that in the case of Empire Jute Co. Ltd, v. CIT [1980] 124 ITR 1, the Supreme Court has held that the receipt from sale of "loom hours" is receipt in the nature of revenue receipts. In that view of the matter, the Tribunal could dispose of the appeal before it taking into consideration the decision of the Supreme court. On behalf of the Revenue it was stressed that the Supreme Court in the case of CIT v. Maheshwari Devi Jute Mills Ltd. has held that loom hours were capital assets. Therefore, in view of that decision, it was argued that the decision has not been varied and it* there were capital assets then the sale of such capital asset would be attributed to capital gains. This question directly fell for consideration before the Supreme Court in the case of Empire Jute Co. Ltd. v. CIT. There, the Supreme Court held that the payment of Rs. 2,03,255 made by the assessee for purchase of loom hours represented revenue expenditure. Learned advocate for the Revenue tried to emphasise that the Supreme Court did not deal with the acquisition of loom hours and whether such acquisition was a capital asset or not. Now, it is true that at p. 7 of the said report, the Supreme Court referred to the previous decision of Maheshwari Devi Jute Mitts Ltd.'s case, and the basis upon which it was referred has been explained at pp. 8 and 9 of the report of the Supreme Court. In view of the contentions raised, it would be instructive to set out the observations of the Supreme Court in which are as follows (at p. 8): " But, more importantly, it may be pointed out that Maheshwari Devi Jute Mills' case, proceeded on the basis that loom hours were a capital asset and the case was decided on that basis. It was common ground between the parties throughout the proceedings, right from the stage of the ITO up to the High Court, that the right to work the looms for the allotted hours of work was an asset capable of being transferred and this court, therefore, did not allow counsel on behalf of the revenue to raise a contention that loom hours were in the nature of a privilege and were not an asset at all. Since it was a commonly accepted basis that loom hours were an asset of the assessee, the only argument which could be advanced on behalf of the revenue was that when the assessee transferred a part of its hours of work per week to another member, the transaction did not amount to sale of an asset belonging to the assessee, but it was merely the turning of an asset to account by permitting the transferee to use that asset and hence the amount received by the assessee was income from business. The revenue submitted that "where it is a part of the normal activity of the assessee's business to earn profit by making use of its asset by either employing it in its own manufacturing concern or by letting it out to others, consideration received for allowing the transferee to use that asset is income received from business and chargeable to income-tax". The principle invoked by the revenue was that "receipt by the exploitation of a commercial asset is the profit of the business irrespective of the manner in which the asset is exploited by the owner in the business, for the owner is entitled to exploit it to his best advantage either by using it himself personally or by letting it out to somebody else." This principle supported as it was by numerous decisions, was accepted by the court as a valid principle, but it was pointed out that it had no application in the case before the court, because though loom hours were an asset, they could not from their very nature be let out while retaining property in them and there could be no grant of temporary right to use them. The Court, therefore, concluded that this was really a case of sale of loom hours and not of exploitation of loom hours by permitting user, while retaining ownership and, in the circumstances, the amount received by the assessee from sale of loom hours was liable to be regarded as capital receipt and not income. It will thus be seen that the entire case proceeded on the commonly accepted basis that loom hours were an asset and the only issue debated was whether the transaction in question constituted sale of this asset or it represented merely exploitation of the asset by permitting its user by another while retaining ownership. No question was raised before the court as to whether loom hours were an asset at all nor was any argument advanced as to what was the true nature of the transaction. It is quite possible that if the question had been examined fully on principle, unhampered by any predetermined hypothesis, the court might have come to a different conclusion. This decision cannot, therefore, be regarded as an authority compelling us to take the view that the amount paid for purchase of loom hours was capital and not revenue expenditure. The question is res integra and we must proceed to examine it on first principles. ";