SABYASACHI MUKHERJI, S. M. GUHA ( 1 ) IN this reference under Sec. 256 (1) of the Income Tax Act, 1961, for the year assessment year 1969-70 for which the event previous year ended on 31st March, 1969 the following questions been referred to this Court :-1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that assessee's right to acquire foreign change by entering into forward contracts with the State of bank India was not a capital asset within the meaning of section 2 (14) of the Income Tax Act, 1961. 2. If the answer to question No. 1 is in the negative, then whether on the facts and in the circumstances of the case, the Tribunal was right in holding that though there was a relinquishment or extinguishment of the said right amounting to a transfer within the meaning of Section 2 (47) of the Income Tax Act, 1961, no capital gains arose therefrom which was chargeable under Section 45 of the said Act ?? ( 2 ) THE assessee is engaged in the manufacture of jute goods. It wanted to import certain machinery for the production of carpet backing. An import licence was also granted to it on the 8th October, 1964 which was valid for a period of two years from the date of its issue. The import was to be made from M/s. James Mackie and Sons Ltd. of U. K. On the 27th January, 1966, the assessee also placed orders with the above U. K. Exporter for supply f machinery. In order to safeguard the financial deal the assessee entered into a forward contract with the State Bank of India, Calcutta for the purchase of ? 7201-7-3 being roughly equivalent to the cost of the machinery for which the assessee was required to make the payment in sterling. The Indian Rupee was devalued on 6th June, 1966 and as a result of this devaluation the cost of the import machinery increased by about 57 per cent. After the devaluation the Bank informed the assessee that the Reserve Bank of India has raised certain objections regarding the booking of the foreign exchange. The Reserve Bank of India finally approved the foreign exchange contract in May, 1967 but by the time the import licence granted to the assessee by the Government has expired on the 7th October, 1966. After the devaluation the Bank informed the assessee that the Reserve Bank of India has raised certain objections regarding the booking of the foreign exchange. The Reserve Bank of India finally approved the foreign exchange contract in May, 1967 but by the time the import licence granted to the assessee by the Government has expired on the 7th October, 1966. The assessee requested the State Bank of India to permit it to utilize the foreign exchange contracted for import of another machinery for which the licence was expected to be issued in the near future. It appears that nothing tangible materialized and the State Bank of India on the 16th December, 1968 cancelled the outstanding balances of the contracts and credited the assesse's account with a sum of Rs. 3,13,651 being the difference in exchange rate, viz. contract rate and current TT buying rate less charges on the periodical extension of the contracts arranged by its foreign department. It should be clarified here that the assessee did not advance nay sum to the Bank against the above contracts. The assessee showed the aforesaid amount in Part IV of its report submitted to the Income tax Department but claimed that it did not constitute the assessee's income. It was contended before the Income Tax Officer that the transaction arose in respect of a capital item and therefore the amount should not be treated as a revenue receipt. The Income Tax Officer rejected the contention. He was of the opinion that the profit had arisen to the assessee during the course of its business and, therefore, it was taxable. He accordingly taxed the entire amount of Rs. 3,13,651. He treated it as a revenue receipt arising out of the transaction of the assessee in carrying out its business. ( 3 ) THE assessee appealed to the Appellate Assistant Commissioner. The Appellate Assistant Commissioner held that the surplus received at the trading activities of the assessee company and the surplus was not on account of the business carried on by the assessee company or an excess realised by the company from the stack-in-trade. Accordingly, the Appellate Assistant Commissioner held that it was not a business Profit. The Appellate Assistant Commissioner, however, examined the question from another point of view. Accordingly, the Appellate Assistant Commissioner held that it was not a business Profit. The Appellate Assistant Commissioner, however, examined the question from another point of view. He was of the opinion that the assessee by virtue of the sanction of the import licence on 8th October, 1966 strengthened by entering into a forward contract with the State Bank to finance funds towards the purchase of the machinery and it was a valuable right and could be characterised as intangible asset or an actionable claim. He, therefore, held that such a right was a capital asset within the definition of the term laid down under Section 2 (14) of the Income Tax Act, 1961. The Appellate Assistant commissioner, However, held that the assessee in canceling the forward contract and surrendering the import licence had relinquished an asset and had also extinguished the right contained therein which amounted to transfer within the meaning of Section 2 (47) of the Act. He, therefore, confirmed the addition of the amount in question in the assessment of the assessee as capital gains. He also discussed certain authorities relating to the taxability of the various amount as also dealing with casual and non recurring nature of a receipt and held that the amount which the assessee was to receive on account of devaluation was forseen and anticipated and hence was not casual in nature. ( 4 ) FROM the aforesaid order of the Appellate Assistant Commissioner both the revenue and the assessee went up in appeal before the Tribunal. On behalf of the revenue it was contended before the Tribunal that the Appellate Assistant Commissioner was wrong in deleting the sum of Rs. 3,13,651 from the business income and treating the same a capital gains. The contention of the assessee on the other hand, was that the Appellate Assistant Commissioner had exceeded its jurisdiction in directing the Income Tax Officer to tax the amount as capital gains and in any case it could not be so taxed. ( 5 ) THE Tribunal in dealing with the revenue's appeal as to whether this amount could at all be brought to tax as business income of the assessee, following the decision of the Supreme court in the case of Commissioner of Income Tax vs. Tata Locomotive and Engineering Co. Ltd. , 60 ITR 405 and Swadeshi Cotton Mills Co. ( 5 ) THE Tribunal in dealing with the revenue's appeal as to whether this amount could at all be brought to tax as business income of the assessee, following the decision of the Supreme court in the case of Commissioner of Income Tax vs. Tata Locomotive and Engineering Co. Ltd. , 60 ITR 405 and Swadeshi Cotton Mills Co. Ltd. vs. Commissioner of Income Tax, 63 ITR 65 held that the receipt of the surplus in the hands of the assessee was a capital receipt not liable to be taxed as business income and confirmed the order of the Appellate Assistant Commissioner on this aspect of the matter. The tribunal, further, held that even the principle laid down by this Court in the case of Sutlej Cotton Mills vs. Commissioner of Income Tax, 81 ITR 641 that to bring the loss arising out of devaluation could not be allowed in the computation of the assessee's income as the act of devaluation was an act of the State and an act of sovereign power extrinsic to the business was applied to the asessee's case. The Tribunal therefore observed that in the light of that principle it could be held that the devaluation profits having not arisen from the carrying on of the business could not be brought to tax as business income. It accordingly dismissed the revenue's appeal. The revenue sought to raise the following questions from the said rejection order :1. Whether, on the facts and in the circumstances of the case, the finding of the Tribunal that the profit due to devaluation arising form the forward contract of the assessee with the State Bank of India for the purchase of sterling exchange for import of machinery for its business did not arise form the carrying on of the business of the assessee was unreasonable or perverse ?2. Whether, on the facts and in the circumstances of the case, the Tribunal, was right in holding that the sum of Rs. 3,13,651 received by the assessee form the State Bank of Indian on account of the difference in exchange rate was no liable to be taxed as a business income ??the Tribunal by its order dated 23rd July, 1974 rejected the said application. 3,13,651 received by the assessee form the State Bank of Indian on account of the difference in exchange rate was no liable to be taxed as a business income ??the Tribunal by its order dated 23rd July, 1974 rejected the said application. We are told, at the time of hearing of this reference, that a separate application under Section 256 (2) had been made to this Court and this Court had directed certain questions to be referred to this Court. We were not, however, informed a to the actual position whether any reference had been made or not and if o at what stage that reference was. Therefore, we should retrain from expressing any opinion on the question posed by the said rejection of the revenue's contention before the Tribunal. ( 6 ) SO far as the appeal preferred by the assessee before the Tribunal was concerned, the first contention was that the amount of Rs. 3,13,651 was brought to tax as business income of the assessee by the by the Income Tax Officer and the Appellate Assistant Commissioner could either uphold his order or delete the addition and no power to hold that the said amount could be brought to tax as capital gains in the hands of the assessee. The assessee relied on the decision of the Supreme Court in the case of Commissioner of Income Tax vs. Raj Bahadur hardutroy Motilal Chamaria, 66 ITR 443 in support of its contention. The Tribunal, however, was unable to accept this contention. The Tribunal found that the Income Tax Officer in his order had stated that the amount had not been offered as capital gains as there was no transfer involved in the transaction as envisaged under Section 2 (47) of the Act. In the opinion of the Tribunal, the facts of the case went to show that the Appellate Assistant Commissioner had not traveled outside the record with a view to finding out the new sources of revenue and that he had confined himself to the sources of income which had been submitted for consideration by the Income Tax Officer from the point of view of taxability. This contention of the assessee was there fore rejected. It was not argued that the assessee has not acquired any capital asset as per its definition under Section 2 (14) of the Act. It assumed certain rights viz. This contention of the assessee was there fore rejected. It was not argued that the assessee has not acquired any capital asset as per its definition under Section 2 (14) of the Act. It assumed certain rights viz. the right of importing machinery by virtue of the grant of import licence on the 8th October, 1964 but that right had lapsed and was not surrendered or relinquished in favour of the bank so as to give rise to any capital gains to the assessee. As a corrolary it was also argued that the capital asset, if at all there was one, had cost nothing to the assessee and thee was also no transfer of any such asset within the definition of Section 2 (47) of the Income Tax Act, 1961. It was urged that the 'relinquishment of the asset' postulated the continued existence of the asset over which the rights of its holder were relinquished or surrendered. It was urged that in the instant case no such asset continued to exit as the assessee's rights vanished the moment its licence expired. Reliance in this connection was placed on certain in the case of Commissioner of Income Tax vs. Chunilal Prabhudas and Co. , 76 ITR 566. On the other hand, reliance was placed on a decision of the Gujarat high Court in the case of Commissioner of Income Tax vs. Mohanbhai Pamabhai, 91 ITR 393. The Tribunal after considering the rival contentions of the parties was of the opinion that the instant case was governed by the principles laid down by this Court in the case of Commissioner of Income Tax vs. K. Rathnam Nadar 71 ITR 433. The Delhi High Court has also followed the same principle. The Tribunal observed that the Gujarat High Court had taken a different view. But in view of the decision of this Court the Tribunal was of the view that the instant case was similar to the case before the Calcutta high Court. In the premises, the Tribunal came to the conclusion that no capital gains arose in this case. ( 7 ) ON these findings, at the instance of the revenue the questions as indicated before have been referred to this Court. In our opinion, the true controversy on this aspect of the matter before the Tribunal, was, whether the amount of Rs. ( 7 ) ON these findings, at the instance of the revenue the questions as indicated before have been referred to this Court. In our opinion, the true controversy on this aspect of the matter before the Tribunal, was, whether the amount of Rs. 3,13,651 was taxable as capital gains under Section 45 of the Income Tax Act, 1961. In view of the several decisions of this Court and all other Courts and in view of the other references at the instance of the revenue, in our opinion, it would be advisable to reframe the two questions as follows : ?whether, on the facts and in the circumstances of the case, the receipt of the sum of Rs. 3,13,651 is taxable under Section 45 of the Income Tax Act, 1961?? we reframe the question in the manner indicated above to bring about the true controversy and in order to avoid making any comments or observations on the question whether by the contract with the State Bank the rights acquired by the assessee company was of a capital nature or the same could be in certain circumstances, treated as capital receipts or revenue receipts. Furthermore, in our opinion, even though the contract with the State Bank of India may be a capital asset, the manner in which the contract was adjusted or the receipt of the sum of Rs. 3,13,651 might not be a transfer or exchange or relinquishment of an asset or extinguishment of right therein as contemplated under Section 2 (47) of the Income Tax Act, 1961. This is material for the purpose of computing the capital gains under Section 45 of the Income Tax, 1961. ( 8 ) IT is, therefore necessary, in our opinion, to analyse the true nature of the receipt of the sum of Rs. 3,13,651 on or about 16th December, 1961 by the assessee company. As we have narrated the facts before the assessee wanted to purchase certain machinery from abroad. For this purpose, the assessee had done all that were necessary for obtaining the permission or having the import liecnce. 3,13,651 on or about 16th December, 1961 by the assessee company. As we have narrated the facts before the assessee wanted to purchase certain machinery from abroad. For this purpose, the assessee had done all that were necessary for obtaining the permission or having the import liecnce. The asessee, in order to protect itself from the fluctuations of the exchange rate, had entered into, as is common practice now, a forward contract with the State Bank entitling to it to obtain the requisite amount of sterling at the time when the contract comes to an end or is required to be performed. It is that right which the assessee had acquired. Whether that right was a capital asset or whether a contractual right, in certain circumstances, could give rise to a capital asset as contemplated under Section 2 (14) of the Income Tax Act, 1961 may be a relevant factor, but is not decisive or the conclusive factor in considering whether any gain or any profit in respect of such an asset can be described as capital gains under Section 45 of the Income Tax Act, 1961. The question in the other words is, is the realization of dues which have accrued under a contract, assuming that contract to be capital asset and as a result of such realization of the dues if some money accrues to the assessee can such an accrual or such a realization be treated as a transfer under Section 2 (47) of the Income Tax Act, 1961 or such a transaction can result in having capital gains under Section 45 of the Income Tax Act, 1961. In order to appreciate this, we must bear in mind three important aspects of the question. One is, what was happening on the 16th December, 1968. Second, is such kind of an asset, an asset which is contemplated as an asset which comes under the scheme of Section 45 of the Income Tax Act, 1961. Third question which is material to be borne in mind is, even if that right be a right of a capital nature and nothing has been spent by the assessee, as in this case a fact which has been so found by the Tribunal, then can a capital gains arise out of such a transaction. Third question which is material to be borne in mind is, even if that right be a right of a capital nature and nothing has been spent by the assessee, as in this case a fact which has been so found by the Tribunal, then can a capital gains arise out of such a transaction. In order to consider this, as we have said, we must first determine the nature of the contract with the State Bank of India. The contract was to get, on the relevant date, the required dollars. Now, the assessee had placed an order with the U. K. Exporter. The assessee could not get this machinery because the licence expired on the 7th October, 1966 and as the licence lapsed the question for enforcing payment in dollar did not arise. Therefore, the State Bank pursuant to their commitment credited the assessee on the 16th December, 1968 minus the necessary cost, charges and expenses, with the difference between the exchange rate and the assessee got a credit balance of Rs. 3,13,651 as we have mentioned before. Therefore the amount was obtained not because the assessee surrendered any licence and not because the assessee gave up its own right under a contract but because the assessee realized its dues or in other words, the assessee transformed its rights under the contract in money form which it always had. The assessee had not the money but the right which it had under the contract. It was the result of the right of the assessee that had accrued. Bearing this character in mind, it would be relevant to refer to the relevant statutory provisions. ( 9 ) FIRST, we must refer to section 2 (14) of the Income Tax Act, 1961 which defines ?capital Asset?. The said section reads as follows :2 (14) - ?capital asset? means property of any kind held by an assessee, whether or not connected with his business or profession, but does not include - (i) any stock-in-trade, consumable stores or raw materials held for the purpose of his business or profession; (ii) Personal effects, that is to say moveable property (including wearing apparels and furniture, but excluding jewellery) held for personal use by the assessee or any member of his family depending on him?; ( 10 ) WE have set out the relevant portions omitting other potions which are not material for our purpose. Next we refer to Section 2 (47) of the Act which says that ?transfer in relation to a capital asset, includes the sale, exchange or relinquishment of the asset or the extinguishment of any rights therein or the compulsory acquisition thereof under any law?. Section 45 of the Act with which we are directly concerned in this controversy states that any profits or gains arising from the transfer of a capital asset effected in the previous year, leaving aside the exceptions with which we are not concerned, be chargeable to income tax under the head 'capital gains' and shall be deemed to be the income of the previous year. Section 46 deals with the capital gains on distribution of assets by companies in liquidation. We are no concerned with this. Section 47 deals with certain transactions which are not considered to be transfer and Section 48 provides for mode of computation and deductions and is in the following terms :48 - Mode of computation and deductions - The income chargeable under the head 'capital gains' shall be computed by deducting from the full value of the consideration received or accruing as a result of the transfer of the capital asset the following amounts namely : (i) expenditure incurred wholly and exclusively in connection with such transfer ; (ii) the cost of acquisition of the capital asset and the cost of any improvement thereto?. ( 11 ) BEARING the aforesaid scheme of the provisions in our opinion, the essential thing to find out from this provision in order to be capital gains under Section 45 there must be profit and gain arising from a transfer of a capital asset. The expression profit or gain indicates that there must be some gain arising from the transfer, that is to say, something more than what one has spent or what one has laid out in order to get the asset one has obtained. All receipts by the sale of a capital goods or a capital asset are not capital gains. In order to be a capital gain it must be a profit or a gain arising from a transfer. This is important and must be read in conjunction and in co-relation with the mode of computation and deduction. All receipts by the sale of a capital goods or a capital asset are not capital gains. In order to be a capital gain it must be a profit or a gain arising from a transfer. This is important and must be read in conjunction and in co-relation with the mode of computation and deduction. It is important to bear in mind that even though it is true that a charging section cannot be limited or circumscribed by the machinery section being the view of the Gujarat High Court which we shall presently note, but it is also important to bear in mind in construing the charging section the expressions used in that charging section must be borne in mind. This Section 45 in the instant case must be given its full natural meaning and in that respect if any assistance can be drawn from the machinery section such assistance can be drawn or relied upon. Viewed in that light, in our opinion, it appears to us that in view of the nature by which Rs. 3,13,651 was obtained by the assessee, in the instant case, it could not be said that thee was any profit or gain as contemplated under Section 45 because there was no profit or gain. The assessee did not spend anything. The assessee got its right under the contract. The assessee transformed that contractful right into monetary right. Therefore, neither was there any transfer nor was there any profit arising. In that background of the fact there was no cost of acquisition. Therefore, the cost of acquisition is also a relevant factor to be taken into consideration. We shall discuss the authorities and we shall also analyse the true ratio of the decisions of the Madras High Court, Calcutta High Court, Bombay High Court, Delhi High Court and the High Court of Karnataka on this point. Before we do so, we shall have to deal with several decisions cited from the Bar which we shall presently notice. We shall discuss the authorities and we shall also analyse the true ratio of the decisions of the Madras High Court, Calcutta High Court, Bombay High Court, Delhi High Court and the High Court of Karnataka on this point. Before we do so, we shall have to deal with several decisions cited from the Bar which we shall presently notice. ( 12 ) LEARNED advocate for the revenue drew our attention to certain observations appearing in Chesire and Fifoot's Law of Contract, 9th Edition, page 66 where dealing with the consideration price of a promise, the learned editors of that book quoted at page 65, Fedrick Pollock when he summarized the position from the decision of the House of Lords as follows : 'an act or a forbearance of one party or a promise thereof is the price for which the promise of the other is bought and the promise which is given for value is enforceable' The House of Lords had occasion to discuss this aspect of the matter in the case of Van Den Burghs Ltd. vs. Clark (H. M. Inspector of Taxes) 19, Tax Cases 390=3 ITR 17 at page 25. There, what happened, was that the assessee company which had carried on business, inter alia, of manufacturing products entered into an agreement with a competing Dutch company by which the two companies bound themselves for the future to work in friendly alliance and agreed inter alia, (a) to share the profits of their respective margarine business in specified proportions, (b) to bring within the operation of the agreement, if required, any interest I other margarine concerns acquired by companies under their control, (c) not to enter any pooling or price arrangements with third parties inimical to the interests of the two Companies, (d) to set up a joint committee to make arrangements with outside firms as to prices and limitation of areas of supply of margarine and (e) to promote generally the interests of business. Supplemental agreements made in 1913 and 1920 provided that with certain modifications the provisions of the 1908 agreement were to continue in force until 1940. In the period from 1908 to 1913 payments were made under the agreements by and to the assessee company and were treated for Income Tax purposes as trading expenses and receipts respectively, of the years in which they were made. In the period from 1908 to 1913 payments were made under the agreements by and to the assessee company and were treated for Income Tax purposes as trading expenses and receipts respectively, of the years in which they were made. From 1913 to 1919 the two companies were unable to compute their profits owing to the difficulties caused by the war. In 1922, the assessee company arrived at the sum of ? 449,042 as being the amount due to it by the Dutch company under the agreements. This liability was not admitted by the Dutch company, which claimed that under the agreements there was, on balance, a sum due to it by the assessee company. The matter was referred to arbitration which, however, proved so lengthy and costly that in 1927 the companies in contemplation of a merger interse entered into negotiations with a view to a settlement of the dispute. The Dutch company desired to cancel the agreements but the assessee company, which considered that such a course would be to the disadvantage, refused to consent to cancellation unless the Dutch company paid to it, at least, ? 449,042. A settlement was finally reached in 1927, whereby, inter alia, (a) all claims and counters under the agreements for the period from 1914 to 1927 were withdrawn, and (b) in consideration of the payment by the Dutch company of ? 450,000 to the assessee company as damages the agreements were determined as at 31st December, 1927 and each party released the other party from all claims made thereunder. That sum was paid in 1927 and credited in the assessee company's books of account for that year. The assessee company was assessed to income tax under Schedule D for the year 1928-29 in an amount which included the sum of ? 450,000. On appeal, the General Commissioners decide that the sum was paid in respect of the pooling agreements and must be brought in for the purpose of arriving at the balance of profits and gains of the assessee company for the year to 31st December, 1927. It was held that the payment was for the cancellation of the assessee company's future rights under the agreements which constituted a capital asset of the company and that it was a capital receipt. There, Lord Macmillan, had observed as follows : what were the appellants giving up ? It was held that the payment was for the cancellation of the assessee company's future rights under the agreements which constituted a capital asset of the company and that it was a capital receipt. There, Lord Macmillan, had observed as follows : what were the appellants giving up ? They gave up their whole rights under the agreements for thirteen years ahead. These agreements are called in the Stated Case 'pooling agreements' but that is a very inadequate description of them, for they did much more than merely embody a system of pooling and sharing profits. If the appellants were merely receiving in one sum down the aggregate of profits which they would otherwise have received over a series of years, the lump sum might be regarded as of the same nature as the ingredients of which it was composed. But even if a payment is measured by annual receipt, it is not necessarily itself an item of income. As LORD BUCKMASTER pointed out (1922) S. C. (II. L) at p. 115) in the case of Glenboig Union Fireclay Co. vs. Inland Revenue Commissioners : 'there is no relation between the measure that is used for the purpose of calculating a particular result and the quality of the figure that is arrived at by means of the test'. The three agreements which the appellants consented to cancel were not ordinary commercial contracts made in the course of carrying on their trade; they were not contracts for the disposal of their products or for the engagement of agents or other employees necessary for the conduct of their business nor were they merely agreements as to how their trading profits when earned should be distributed as between the contracting parties. On the contrary, the cancelled agreements related to the whole structure of the appellant's profit making apparatus. They regulated the appellants' activities defined what they might and what they might not do, and affected the whole conduct of their business. I have difficulty in seeing how money laid out to secure or money received for the cancellation of, so fundamental an organisation of a trader's activities can be regarded as an income disbursement or an income receipt. They regulated the appellants' activities defined what they might and what they might not do, and affected the whole conduct of their business. I have difficulty in seeing how money laid out to secure or money received for the cancellation of, so fundamental an organisation of a trader's activities can be regarded as an income disbursement or an income receipt. Counsel for the Crown very properly warned your Lordship against being misled as to the legal character of the payment by its magnitude for magnitude is a relative term, and we are dealing with companies which think in millions. But the magnitude of a transaction is not an entirely irrelevant consideration. The legal distinction between a repair and a renewal may be influenced by the expense involved. In the present case, however it is not the largeness of the sum that is important but the nature of the asset that was surrendered. In my opinion that asset, the congeries of rights which the appellants enjoyed under the agreements and which for a price they surrendered, was a capital asset. ? ( 13 ) BUT, as we have mentioned before, this was only a question of whether the pooling agreements was a capital asset and the same relates to, as a result of the pooling agreements, the capital asset or not. It depends, whether a particular agreement gives right to a capital right or not. On the nature, as the pooling agreements were to affect to the structure and the running of the company it was held to be capital assets. The same view was reiterated by the decision of Madras high Court in the case of V. Gangaswami Naidu vs. Commissioner of Income Tax, Madras, 31 ITR 711. There, it was held that the share of a partner in the partnership concern was property and therefore a capital asset within the meaning of Section 2 (4a) of the Indian Income Tax Act 1922. There, what had happened was, the assessee and one V. G. N. were partners in three partnership concerns A and Co. , B and Co. and C and Co. , were the managing agents of Radhakrishna Mills. The partnership deed of A and Co. provided that the partners should have an individual right to sell or mortgage his share or interest in the partnership subject to an option in favour of the other partners. , B and Co. and C and Co. , were the managing agents of Radhakrishna Mills. The partnership deed of A and Co. provided that the partners should have an individual right to sell or mortgage his share or interest in the partnership subject to an option in favour of the other partners. The partnership deed of B and Co. provided that each of the partners could sell his right in the partnership. The deed of C and Co. also recited that the agreement should be binding on the heirs and assigns of the partners. The managing agency agreement of the Coimbatore Spinning Co. provided that it should be lawful for the said firm, A and Co. to assign this agreement and also that it should be lawful for any member of the said firm to assign the whole or a part of the interest in the said firm. The assessee's share in A and Co. was transferred to V. G. N. in exchange for the latter's share in B and Co. and C and Co. and an additional sum of Rs. 1,00,000/- Madras high Court held that (1) the congeries of rights which the assessee enjoyed under the partnership agreements of Aand Co. and which he conveyed for a price to V. G. N. was a capital asset within the meaning of Section 2 (4a) of the Indian Income Tax Act 1922. (2) What was payable under the managing agency agreement between A and Co. and the Coimbatore Spinning Co. was not mere remuneration for services rendered by each of the partners but the managing agency itself was a transferable asset of A and Co. (3) The transaction involved both an exchange and transfer of capital assets and had all the elements of a sale, and the sum of Rs. 1,00,000/- received by the assessee was, therefore, assessable to income tax as capital gains under section 12b of the Income Tax Act. There, at page 719 of the report, the observations of Lord Macmillan in Van Dan Bergh's case, quoted above, were which stated that the congeries of rights which the assessee enjoyed under the agreement and which for a price they surrendered was a capital asset. In the case of Commissioner of Income Tax vs. Provident Fund Investment Co. There, at page 719 of the report, the observations of Lord Macmillan in Van Dan Bergh's case, quoted above, were which stated that the congeries of rights which the assessee enjoyed under the agreement and which for a price they surrendered was a capital asset. In the case of Commissioner of Income Tax vs. Provident Fund Investment Co. Ltd. 32 ITR 190, the Supreme Court was considering the question of capital gains of sale of shares and the resignation of managing agency. This question was considered under Sec. 2 (12) of the Indian Income Tax Act, 1922 before its amendment in 1956. It was held that the agreement was modified before the insertion of Section 12b of the Indian Income Tax Act, 1922 and no question of deliberate or fraudulent evasion arose and the letters dated 14th September and 30th September, with which the Supreme Court was concerned, did not by themselves mount to a sale of shares of the managing agencies. It was held that the letter of 7th October had substituted a new contract and did not merely change mode of performance under the contract concluded performance under the contract concluded earlier. The entire assessment proceedings, according to the Supreme Court, proceeded on the basis that the sum of Rs. 1,00,000/- was a consideration for the sale or relinquishment of the managing agency and the only dispute between the parties was whether a transaction with regard to the managing agency was a sale or a transfer or a relinquishment. It was not open to the department to contended that there was only one indivisible consideration for the whole transaction including the sale of the shares and the sale of the managing agency. The transaction of relinquishment of managing agency, according to the Supreme Court, was neither a sale nor a transfer and therefore, section 12b did not apply. We are not concerned directly with the facts in the instant case and the ratio of that decision was arrived at entirely on a different context. In the case of Kettlewell Bullen and Co. Ltd. vs. Commissioner of Income Tax, Calcutta 53, ITR 261 it was held that the receipts that gave the managing agency were capital receipt and must be treated as such. In the case of Kettlewell Bullen and Co. Ltd. vs. Commissioner of Income Tax, Calcutta 53, ITR 261 it was held that the receipts that gave the managing agency were capital receipt and must be treated as such. The Supreme Court, there was concerned, whether a particular receipt was a capital or revenue receipt and laid down the tests to be applied in such cases. Therefore, the principles enunciated in the said decision will not also be of any assistance in deciding the issue involved in the facts and circumstances of the case. ( 14 ) THE most significant decision and which is relevant for our purpose is the decision of the Madras High Court. In the case of Commissioner of Income Tax, Madras vs. K. Rathnam Nadar reported in 71 ITR 433 the Madras High Court had to consider this question in the context of goodwill under section 12b of the Indian Income -Tax Act, 1922. There the Madras High Court expressed the view that the goodwill was created by the trading activities of the assessee and probably by the name he had earned and the goodwill he had created amongst his customers. Goodwill of a firm was an intangible asset and could be compared to a seed which was planted on the date the firm began its business and sprouted and grew as the firm grew in its dealings, in its statute and in its reputation. It was difficult to say that it cost anything in terms of money for its coming into existence. Though goodwill was a capital asset, in the case of a goodwill of a business it could not be said that it became the capital asset of the firm at any particular point of time. It was something which went on slowly growing and perhaps waxing and wanning also. What exactly was the value of the goodwill of a business at any point of time might have to be worked on a proper basis by cost accountants. It was something which went on slowly growing and perhaps waxing and wanning also. What exactly was the value of the goodwill of a business at any point of time might have to be worked on a proper basis by cost accountants. ( 15 ) SECTION 12b (2) (ii) of the Income Tax Act, 1922, suggested that capital gains arose only on the transfer of a capital asset which had actually cost in the context of the Income-Tax Act being cost in term of money, it could not apply to transfer of capital assets which did not cost anything to the assessee in terms of money in its creation or acquisition. ( 16 ) THOUGH the British and American taxation laws proceeded on the footing that Capital gains a re assessable in the case of transfer of goodwill, the Indian Act did not have in contemplation when enacting section 12b that self created assets like copyright, patents and goodwill should be subjected to capital gains arising on their transfer and hence capital gains on the transfer of a goodwill were not liable to be taxed under Section 12b. There the Division Bench of the Madras High Court observed at pages 449 to 450 of the report as follows : we have, therefore, to proceed on the basis that, while the British and the American taxation laws proceed on the footing that capital gains are assessable in the case of transfer of goodwill, the Indian Act did not have in contemplation, when enacting sec, 12b, that self created assets like copyright. Patents and goodwill should be subjected to capital gains arising on their transfer. It is enough to say that, complex and difficult as this question is, we are not satisfied that either the legislature intended to include either the legislature intended to include property of the kind now in question for the purpose of taxation of capital gains, or that the wording of section 12b supports such a contention. We therefore hold though not without hesitation, that capital gains on the transfer of goodwill are not liable to be taxed under section 12b. ? ( 17 ) FOR our present purpose it is not necessary to examine the question whether goodwill is a capital asset or any capital gains would really arise on the transfer of a goodwill. We therefore hold though not without hesitation, that capital gains on the transfer of goodwill are not liable to be taxed under section 12b. ? ( 17 ) FOR our present purpose it is not necessary to examine the question whether goodwill is a capital asset or any capital gains would really arise on the transfer of a goodwill. We are not as we have mentioned before concerned with really the goodwill or the nature of the goodwill. Whether creation of goodwill costs anything to the assessee or not is another question with which we are not concerned directly in this reference. The only principle which may be relevant for our present purpose is the question whether an asst, even it is a capital asset which has not cost anything to the assessee for its acquisition, could be said to be liable to capital gains if on the transfer of the said asset certain amount is realized by the assessee. The Madras High Court was of the view that it did not. The same view has been echoed by several other decisions which we shall presently note. It is important to bear in mind that in view of the expression 'profits and gains' used in Section 45 an asset which has cost nothing, can it be aid that such an asset would result in profits and gains on its transfer even if there was a transfer in a particular case ? This decision was considered and the ingredients of Section 12b were examined by the Division Bench of this Court to which I myself was a party being the decision in the case of the Commissioner of Income Tax West Bengal III vs. Chunilal Prabhudas and Co. reported in 76 ITR 566. As some observations have been made in the subsequent decisions in respect of the said decision, it is important to bear in mind that the said decision was not concerned with the question whether goodwill as such is a capital asset or not. The said decision was concerned only, in the word of the learned Judge, who delivered the judgment at page 571 of the report : but the question then finally boils down to this whether goodwill is a capital asset? within the meaning of section 12b of the Income-Tax Act, 1922 read with section 2 (4a) of the Act. The said decision was concerned only, in the word of the learned Judge, who delivered the judgment at page 571 of the report : but the question then finally boils down to this whether goodwill is a capital asset? within the meaning of section 12b of the Income-Tax Act, 1922 read with section 2 (4a) of the Act. ( 18 ) THE Court was not concerned whether the goodwill was a capital asset as such under Section 2 (4a) similar to Section 2 (14) of the present Act. The learned Judge therefore went on to analyse that in order to be taxable gain within the meaning of section 12b of the Income-tax Act, there has to be four primary tests, namely, (1) profit or gains, (2) capital asset, (3) arising out of and (4) sale, exchange and relinquishment or transfer. These are the four ingredients which were indicated in the said judgment and the learned Judge observed that in case of transfer of goodwill this test could not be satisfied for out present purpose, that is material. Because this decision has in several subsequent decisions been indicated as if it is held goodwill was not a capital at all. We are not concerned whether goodwill is a capital asset as such in some circumstances. In the case of Khushar Khengar Shah vs. Mrs. Khorshed Bam Dabila Boatwalla reported in A. I. R. 1970 S. C. 1147 at page 1149, it has been observed that goodwill can be transferred either as a whole or in part. But for an asset which has not cost anything to the assessee there cannot be any capital gains in respect of such assets. This proposition has been relied on by the Division Bench of this Court on the observations of the Madras High Court. ( 19 ) IN the case of Commissioner of Income-tax, Bombay City I vs. Tata Locomotive and Engineering Co. Ltd. reported in 60 I. T. R. 405, it was a case where foreign exchange was earned abroad and retained for purchase of capital goods, on devaluation the Supreme Court was concerned with the question whether it was capital receipt or not. The Supreme Court held that it was capital receipt because it was purchased for the machinery. We are not concerned with the same controversy. The Supreme Court held that it was capital receipt because it was purchased for the machinery. We are not concerned with the same controversy. But it is material for our present purpose to refer to the Division Bench decision of the Gujarat High Court in the case of Commissioner of Income-tax v. Mohanbhai Pamabhai reported in 91 I. T. R. 393. There the Division Bench of the Gujarat High Court was concerned with the question of transfer of goodwill, whether it could result in capital gains. Chief Justice P. N. Bhagwati speaking for Gujarat High Court had observed that the charging provision in section 45 was not confined to those cases where the capital asset had cost something to the assessee in terms of money in acquiring it. There was nothing in any of the sections relating to capital gains which indicated that the charging provision should be construed in a narrow manner by excluding self-created capital assets or capital assets which had cost nothing to the assessee in terms of money in acquiring it. Section 48 provided for deduction from the value of the capital asset of ?the cost of acquisition of the capital asset?. The word ?acquire?, according to its plain natural meaning, according to the learned Chief Justice, was a word of very wide import. It was not confined to the obtaining of a thing from a third party. Creation or production of a capital asset was not foreign to the concept of acquisition. Thereafter, the learned Chief Justice dealt with Section 2 (47) and observed that the interest of a partner in a partnership was not interest in any specific item of the partnership property. The transfer of a capital asset in order to attract capital gains tax must be one as result of which consideration was received by the assessee or accrued to the assessee. With respect it may however, be pointed out that though it is true that charging section should not be construed in the ordinary cases with reference to the machinery section. But the expression used in section 45 does not make all capital receipts as capital gains. There must be a profit or gain in the commercial sense and a profit or gain in the commercial sense would only accrue if one has got money more than one had pain for or spent. But the expression used in section 45 does not make all capital receipts as capital gains. There must be a profit or gain in the commercial sense and a profit or gain in the commercial sense would only accrue if one has got money more than one had pain for or spent. That charging section is clarified in the machinery section. The mode of computation is provided in section 48. This aspect of the mater was highlighted by the Bombay High Court decision in the case of Commissioner of Income-tax Bombay City III vs. Home Industries and Co. reported in 107 I. T. R. 609. The Division Bench of the Bombay High Court had occasion to consider this and there Acting Chief Justice Tulzapurkar, as his Lordship then was, of the Bombay High Court analysed the scheme of Section 45 and observed at page 633 to 634 of the report as follows : it will appear clear on a reading of both the charging provisions that the incidence of tax is on ?profits or gains? arising from the transfer or sale of a capital asset. In other words, the charging provision in both the Acts makes it very clear that there must be profit or gain which must arise from the transfer or sale of capital asset and it is such ?profit or gain? that is chargeable to tax. The concept of ?profit or gain? arising from transfer or sale necessarily implies that there is something received in excess of the cost capital asset which is transferred or sold. Profit or gain arising from sale has a necessary reference to the difference between the cost price of the asset and the sale price of the asset. In other words it is not necessary to have nay recourse to the machinery provision contained in sub section (2) of Section 12b of the 1922 Act, or Section 48 of the 1961 Act, in order to come to the conclusion that the incidence of tax contemplated by the charging provision necessarily refers to the difference between the cost price and the selling price of a particular capital asset, the profit or gain arising from transfer of which is the subject matter of the charge. The charging provision in both the Acts, therefore, itself brings in the concept of actual cost to the assessee of the capital asset and what is done by the machinery provision which is contained in sub-section (2) of Section 12b of the 1922 Act, and section 48 of the 1961 Act, is to elaborate that concept and lay down the mode or method by which such profit or gain is to be computed; the machinery provision reiterates what is contained is the charging provision and goes on to indicate that capital gain is to be arrived at after deducting the actual cost form the full value of the consideration for which the transfer of the capital asset is made. If the capital asset is such that it has cost nothing in terms of money to the assessee, the charging provision must be interpreted as being not referable to such capital asset, and self-created or self-generated goodwill being such asset will be outside the purview of the charging provision. Mr. Joshi's contention that the machinery provision should not be allowed to control or affect the charging provision becomes irrelevant and inapplicable. Moreover the argument that if the self-created or self-generated goodwill has cost nothing to the assessee, then the actual cost to the assessee should be treated as zero and the entire consideration received for the goodwill should be regarded as capital gain made upon transfer of that asset, would run counter to the scheme of section 12b, for the scheme of that section does not imply taxation on gross receipt but implies a charges only on the profit or gain arising form the transfer of that asset. Therefore, on a proper interpretation of the charging provision itself, it seems to us clear that the concept cost expressed in terms of money to the assessee of the capital asset at some particular point of time would be a necessary ingredient before the transfer of that capital asset can give rise to chargeable capital gain. Therefore, on a proper interpretation of the charging provision itself, it seems to us clear that the concept cost expressed in terms of money to the assessee of the capital asset at some particular point of time would be a necessary ingredient before the transfer of that capital asset can give rise to chargeable capital gain. Since we have come to the conclusion that self-created or self-generated goodwill is not capital asset which could be said to have been acquired by the assessee firm at any particular point of time and is not a capital asset which could be said to have cost something in terms of money to the assessee, such goodwill will not be a capital asset the transfer of which will give rise to chargeable capital gain under either section 12b (1) of the 1922 Act or Section 45 of the 1961 Act?. ( 20 ) HIS Lordship was unable to accept the view of the Gujarat High Court referred to above and preferred to adhere the view of the Madras High Court and the Division Bench of this Court, which we have mentioned before. We are concerned with the situation where money is realized in the enforcement of a right. Though in a different context the Supreme Court had expressed its view in the case of liquidation of a company in the decision of Commissioner of Income Tax, Gujarat vs. R. M. Amin reported in 106 ITR 368. Long before of this, however, the Division Bench of this Court in the case of Commissioner of Income-Tax (Central) Calcutta vs. Associated Industrial Development Co. reported in 73 ITR 50 had expressed the similar view. ( 21 ) WE must, however, refer to the decision of this Court namely the decision in the case of K. N. Daftary vs. Commissioner of Income-Tax, West Bengal reported in 106 I. T. R. 998. There the Division bench was concerned with the import entitlements and whether the transfer of import entitlements could generate capital gains. Reliance was placed on the decision in the case of Commissioner of Income-tax vs. K. Rathnam Nadar reported in 71 I. T. R. 433 (Mad.) as well as the decision of the Division Bench of this Court in the case of Commissioner of Income-Tax vs. Chunilal Prabhudas and Co. reported in 76 I. T. R. 566 (Cal.) referred to hereinbefore. Mr. reported in 76 I. T. R. 566 (Cal.) referred to hereinbefore. Mr. Justice Deb delivering the judgment observed at page 1002 of the report : ?it was wholly unnecessary for Mukharji, J. to rely on the above observations of their Lordships of the Madras High Court. ? Whether in the context of the question of import entitlement it was necessary for Mr. Justice Deb to make the aforesaid observation, with due difference to the learned Judge, we refrain from making any observation. Mr. Justice Dipak Kumar Sen in a concurring judgment observed at page 1002 and 1003 as follows : it appears to me it was not necessary in the facts of Chunilal's case (1970) 76 I. T. R. 566 (Cal) to come to any general conclusion regarding the actual cost of any incurred in acquiring a capital asset. If it be contended that in quoting the said judgment of the Madras High Court this court intended to lay down generally that in all cases where there was no actual cost to acquire a capital asset then there would be no capital gain in any subsequent dealing with the said capital asset, then I would hold that this proposition, if so laid down, is obiter. ? as we have mentioned the Division bench of the Calcutta High Court in the case of Chunilal's case was not concerned with the question whether the goodwill is a capital asset as such. Furthermore, whether in the context of import entitlements it was necessary for their Lordships to make the aforesaid observations, we also refrain from making any observation. ( 22 ) SPEAKING for myself like Lord Devlin under the discipline of law I have never felt the tyranny of precedent, it is a tie certainly, but so is the rope which the mountaineers use so that each gives strength and support to the others. The proper handling of precedent is part of judicial craftsmanship ; a Judge must learn how to use it and in particular how to identify the rare occasions when it is necessary to say that what others have put together they can put as under. It is after all sometimes better to be humble and remember the warning of Justice Holmes that time has upset many fighting faiths and we must always wager our salvation upon some prophecy based upon imperfect knowledge. It is after all sometimes better to be humble and remember the warning of Justice Holmes that time has upset many fighting faiths and we must always wager our salvation upon some prophecy based upon imperfect knowledge. Our knowledge changes; our perception of truth changes. This is however a matter of personal opinion and all may not agree. ( 23 ) RELIANCE was also placed on the decision in the case of Commissioner of Income-tax, Central, Calcutta v. Bird and Co. (P) Ltd. reported in 108 I. T. R. 253. There the Court was concerned with the question of fixed asset of a company and whether the goodwill can be taken into account in determining the reasonableness of the dividend declared. In discussing that controversy at page 259 of the report Mr. Justice Dipak Kumar Sen discussed the effect of Chunilal's case 76 I. T. R. 566 and observed that the said decision did not consider whether goodwill should be considered to be a capital asset in the context of other sections apart from Sections 12b of I. T. Act. We respectfully agree. In the case of V. R. Sonti vs. Commissioner of Income Tax, West Bengal VIII reported in 117 I. T. R. 838 the Court was concerned with this problem. There the Court expressed the view that if there was a divergence of judicial opinion on a question of law or two conceivable views are possible on it, proceedings for rectification under section 154 or under section 254 (2) of the Income-tax Act 1961, could not be taken at all. The Income-tax Officer or the Appellate Authorities under the Income-tax Act when dealing with a rectification application, should not look only at the decisions of the particular High Court under whose advisory jurisdiction it acted in order to find out whether that High Court had taken different views on the question of law involved before it. They must consider the decision of all the High Courts and if there was a divergence of judicial opinions on the question of law or two conceivable opinions were possible on it, they must hold that the mistake was not apparent from the records. The Court further observed that as the Supreme Court had decided that goodwill was a capital asset of a business it could not be contended that there was any longer a divergence of judicial opinion on this question. The Court further observed that as the Supreme Court had decided that goodwill was a capital asset of a business it could not be contended that there was any longer a divergence of judicial opinion on this question. ( 24 ) IT was well settled, according to that decision, that the goodwill of a business was a capital asset and, therefore, even if no cost was incurred in building up the goodwill of a business, it was still a capital asset for the purposes of capital gains and the cost of acquisition being nil the entire amount of sale proceeds relating to the goodwill should be brought to tax under the head ?capital gains? It considered the case of Devidas Vithaldas and Co. vs. Commissioner of Income Tax reported in 84 I. T. R. 277 and observed that it was held by the Supreme Court that the goodwill was a capital asset. Mr. Justice Deb observed at page 843 of the report ?therefore the case of Commissioner of Income-tax vs. Chunilal Prabhudas and Co. reported in 76 ITR 566 can no longer be regarded as good law?. Whether that is a correct observation or not it does not fall for our decision in the context of the controversy before us and we refrain from making any observation. I for myself would remain contend with what I have already said on this aspect. We may, however, point out that the Supreme Court in the case of Devidas Vithaldas and Co. vs. Commissioner of Income Tax 84 ITR 277 was not concerned with the question whether sale of goodwill would attract either section 12b of 1922 Act or Section 45 of 1961 Act. We have mentioned before that we are not concerned with goodwill in the instant case. ( 25 ) IN order to complete the citations we may observe that Delhi High Court in the case of Jagadev Singh Manick vs. Commissioner of Income Tax, Delhi reported in ITR 500 Kerala High Court in the case of Commissioner of Income Tax vs. E. C. Jacob reported in 89 ITR 88 at page 94-95, Karnataka High Court in the case of Commissioner of Income Tax, Mysore vs. B. C. Srinivass Setty reported in 96 ITR 667 have held that the goodwill was not such a capital so as to come within the purview of the capital gains. So far as the import entitlement was concerned, the Division Bench of the Madras High Court in the case of Commissioner of Income-tax, Madras vs. T. Kuppuswamy Pillai and Co. reported in ITR 954 at the page 956 and the Full Bench of the Madras high Court in the case of Addl. Commissioner of Income-tax, Tamil Nadu I vs. K. S. Sheik Mohideer reported in 115 ITR 243 have held that the sale of import entitlement cannot attract capital gains. Similar view has been expressed by the Andhra Pradesh High Court in the case of Adal. Commissioner of Income-tax A. P. vs. Ganapathi Raju Jegi, Samyasi Raji reported in ITR 715 at page 721. ( 26 ) LEARNED advocate for the revenue, however, drew our attention that the theory right to get dollars if it was settled by getting money then it might result in capital gains and reliance was placed on the case of Imperial Tobacco Co. Ltd. vs. Commissioner of Inland Revenue reported in 25 Tax Cases 292, and the observation of Lord Greene, M. R. at 300 of the report. But in the view we have taken of the nature of the transactions we are of the opinion that the said decision cannot be much assistance to us. Reliance was also placed on the decision of the Supreme court in the case of Commissioner of Income-tax, Bombay City 1 v. Tata Locomotive and Engineering Co. Ltd. reported in 60 ITR 405. In the view we have taken of the nature of the rights in the instant case we do not think the said decision cannot also help us much. ( 27 ) WE therefore, answer the question as reframed by saying that the receipt of such money cannot be considered to be capital gains in terms of section 45 of the act. The question a re-framed is answered in favour of the assessee. In that facts and circumstances of the case there will be no order as to costs. Sudhindra Mohan Guha , J. I agree. Question be framed and answered in favour of the Assessee.