Andhra HC (Pre-Telangana)
Sri Krishna Dairy And Agricultural Farm vs Commissioner Of Income-Tax on 2 April, 1987
Equivalent citations: [1988]169ITR291(AP)
Author: B.P. Jeevan Reddy
Bench: B.P. Jeevan Reddy
JUDGMENT Upendralal Waghray, J.
1. In this reference under section 256(1) of the Income-tax Act, 1961, at the instance of the assessee, the following question is referred for the opinion of this court :
"Whether, on the facts and in the circumstances of the case, the sum of Rs. 29,730 realised on sale of calves was liable to capital gains tax ?"
2. The assessee-firm in connection with its business runs a dairy farm and also raises agricultural produce. During the period relevant to the claimed that it represented a capital receipt and not liable to levy of income-tax. The Income-tax Officer held that it was a sale of capital asset resulting in a short-term capital gain (as the age of the calves that were sold was less than one year). Applying the principle in the decision of the Supreme Court in CIT v. Gold Mohore Investment Co. Ltd. (a case of transfer of bonus shares issued by the company), he estimated the capital gains at 75 per cent. of the price realised, that is, Rs. 22,298. The appellate authority rejected the assessee's contention that because there was no cost of acquisition, there was no capital gain, as it considered the expenditure on feeding and maintenance of the calves after their birth till the date of sale as a part of the cost of acquisition. It directed the Income-tax Officer to determine to deduction to be granted for the expenditure on the maintenance of the calves from their birth to the date of sale. The further appeal by the assessee was dismissed by the Tribunal.
3. Counsel for the assessee, relying upon the decision of the Supreme Court in CIT v. B. C. Srinivasa Setty (a case of transfer of goodwill), has urged that because there was no cost of acquisition for the calves within the meaning of section 55(2), the sale proceeds of the calves which were a capital asset of the firm did not result in a capital gain. The further argument is that the rearing or sale of the calves is not a part of the business of the assessee which runs a dairy. The birth of calves is not a part of the business of the assessee which runs a dairy. The birth of calves was an addition to their assets and it did not involve any cost of acquisition and hence no capital gain arises in view of the ratio of the aforesaid Supreme Court decision. He also urged that the decision of the Supreme Court in CIT v. Gold Mohore Investment Co. Ltd. relied upon by the Income-tax Officer does not apply to the facts of this case.
4. The standing counsel for the Revenue has supported the view taken by the Tribunal.
5. Before dealing with the controversy, it is necessary to point out the inconsistency which has arisen because of the order of the Income-tax Officer and that of the appellate authority which was confirmed by the Tribunal. The Income-tax Officer had treated 75 per cent. of the price as capital gain. The appellate authority, however, directed the Income-tax Officer to determine the expenditure incurred on the rearing and maintenance of the calves from the birth to the date of sale, as it constituted a part of the actual cost of the calves. Apparently, the adoption of the figure of 75 per cent. as capital gain by the Income-tax Officer does not stand and in its place, the sale price less cost of rearing will be the cost of acquisition.
6. For this purpose, it would be necessary to exclude the amount so determined from the revenue or business expenditure. This will naturally result in an increase in the taxable income. The net result will be that whatever is given as a deduction from the price for determining capital gains would bel added to the income of the assessee, as a result of reduction of the revenue or business expenditure. It is doubtful whether the birth of calves in a case like this would amount to addition to the assets. Milk-producing cows or she-buffaloes are capital assets and these have to be fed and maintained for production of milk. The birth of calves, male or female, is incidental to this business activity. Prima facie, it is difficult to visualise them as assets particularly when they are sold in their young age. As the assessee and the Department have proceeded on the basis that the birth of calves is an addition to the capital asset, we have to consider the question on the same basis.
7. The decision of the Supreme Court in CIT v. B. C. Srinivasa Setty dealt with transfer of goodwill. The decision in CIT v. Markapakula Agamma - R. C. No. 182 of 1982 decided on January 20, 1987, since - dealt with the question whether transfer of protected tenancy rights under agricultural land by compulsory acquisition resulted in a capital gain, because there was no cost of acquisition for the tenant. Following the aforesaid decision of the Supreme Court, the Bench held that there was no capital gain, as there was no cost of acquisition. However, in a separate but concurring judgment, one of us (Jeevan Reddy J.), who was a party to the said judgment, has pointed out the need for redressal of the deficiencies, viz., excluding from capital gain of transfers of capital assets because they do not involve any cost of acquisition and several anomalies resulting therefrom. I too agree with the said observation of may learned brother, but, in view of the aforesaid Supreme Court decision, which is binding on us under article 141 of the Constitution of India, it has to be held that because there was no cost of acquisition for the calves in this case, there cannot be capital gain by their sale as capital asset. The question is, therefore, answered in the negative, in favour of the assessee and against the Department. No costs.