A. KRISHNAMURTHY, J.M., T.V.K. NATARAJA CHANDRAN, A.M., T.D. SUGLA, PRESIDENT (AS THIRD MEMBER) ORDER This appeal is filed by Department. It is in case of assessee, City Transport (P) Ltd. Coimbatore, relating to its income-tax assessment for year 1981-82. assessee is private limited company running passenger bus service. It is stated that previous year for asst. yr. 1981-82 consists of 15 months from 1st Jan., 1980 to 31st March, 1981. During material previous year assessee under agreement dt. 14th Dec., 1979 sold three transport buses. According to agreement, consideration for transfer of three buses along with its respective route permits comes to Rs. 2,50,000. agreement further provided that transferee will pay sum of Rs. 4 lakhs as consideration for transfer of business name `City Transport . assessee agreed to assign and transfer to transferees business name which is stated as goodwill of company since its registration from year 1946. ITO in assessment made for relevant year determined capital gains of Rs. 3,98,000 by holding that sum of Rs. 4 lakhs was received for transfer of route permits only, though in agreement it is mentioned that Rs. 2,50,00 is for sale of buses and also for permits. He estimated cost of route permit to assessee at Rs. 2,000 and deducting this amount of Rs. 2,000 from amount of Rs. 4 lakhs determined capital gains as Rs. 3,98,000. 2 . In appeal against assessment, CIT(A) held that no capital gains resulted from transfer. Aggrieved by his order, Department is in appeal. 3 . Department s contention is in grounds of appeal is that CIT(A) had wrongly applied ratio of Supreme Court decision in CIT vs. B.C. Srinivsa Setty (1981) 21 CTR (SC) 138 : (1981) 128 ITR 294 (SC) to facts of this case because that case related to goodwill which is self generating assets whereas route permits is not such asset. Reliance was placed also on decisions of Madras High Court in S. Vaidyanathaswami vs. CIT (1979) 8 CTR (Mad) 88 : (1979) 119 ITR 369 (Mad), K. alasubramania Nair vs. CIT (1979) 11 CTR (Mad) 155 : (1979) 119 ITR 504 (Mad) and CIT vs. Shri Venkateswara Bus Union (1979) 12 CTR (Mad) 374 : (1979) 119 ITR 507 (Mad). ld. counsel for assessee pointed out that what assessee transferred is not merely three buses along with route permits but also certain other obligations and rights such as obligation on part of transferee to take over liability in respect of its employees and right to use business name. Thus, what assessee transferred was its transport business and parties clearly stated in agreement that consideration for transfer of three buses together with route permits will be Rs. 2,50,000 while for transferee of business name representing its goodwill it will be sum of Rs. 4 lakhs. It is argued that when parties have clearly stipulated different considerations for different assets, it is not open for Department to hold otherwise by rewriting agreement. He also relied on Andhra Pradesh High Court decision in Addl. CIT vs. Ganapathi Raju Jegi, Sanyasi Raju (1979) 119 ITR 715 (AP) wherein it was held that route permit does not cost anything and case is similar to that of sale of goodwill and consideration in terms of money realised on transfer of said capital asset cannot be brought to tax as capital gains. Order of Tribunal, Madras Bench `A , in case of Annamalai Bus Transport (IT Appeal Nos. 1188 and 1293 (Mad) of 1977-78) is also relied on. Departmental Representative contended in reply that what parties agree to in agreement is not binding on Department and it is entitled to pierce veil and look into reality of transaction. 4 . On consideration of facts and circumstances of case and submissions of parties, we find no merits in Department s objections. There can be no manner of doubt that, according to decisions relied on by Department, route permit constitutes property and that if there was cost of acquisition, then any profit arising from transfer thereof will be chargeable as capital gains. In present case, points that arise for consideration are firstly, whether in spite of agreement to contrary, sum of Rs. 4 lakhs received by assessee can be held to relate to transfer of route permits. Secondly, whether route permit has any cost of acquisition to assessee and thirdly, if it has, what was amount of cost. Departmental authorities are undoubtedly entitled to pierce veil of any transaction embodied in any formal document and to look into reality of transactions. But that can be done only when material and circumstances support that action. For this it was incumbent on Department to establish that sum of Rs. 2,50,000 would not and did not represent value of buses along with route permits and secondly, that Rs. 4 lakhs was reasonable price for obtaining route permits. Beyond mere suspicion based on no evidence ITO has held that sum of Rs. 4 lakhs is for transfer of route permits. He has further held, again without any basis of material, that there is no goodwill for transfer of business and his reasons are totally devoid of substance. agreement clearly shows that business was in existence since 1946 and it is incorrect to say that in competitive field passenger transport business of transport company which is in existence for about three decades has no goodwill. In transport business goodwill is acquired by prompt and efficient service, behaviour of personnel and record of accident, free transport, etc. It is, therefore, idle to say that nobody would be bothered about travelling by any particular transport. Again ITO has not, by bringing any comparative material, shown what would be market price for acquiring route permit from existing transport business, but has simply assumed that Rs. 4 lakhs represents consideration for transfer of route permits. Further, he has also not, by any material bought on record, shown what will be reasonable cost of acquisition, but has merely estimated nominal amount of Rs. 2,000 as cost of acquisition. If route permit can be obtained for mere for Rs. 2,000, it is difficult to uphold that value can rise to Rs. 4 lakhs. There is no proper rise to Rs. 4 lakhs. There is no proper basis and relevant material to come to conclusion that either sum of Rs. 4 lakhs was consideration for transfer of route permit or that there was nominal cost of acquisition or no cost at all and also that agreement entered into by parties are mere camouflage to conceal real consideration for transfer of route permit. In circumstances, we find no merit or substance in Department s contentions and uphold finding of CIT(A). We have no material on record brought by Department to discredit consideration of 4 lakhs paid as for transfer of goodwill of business of assessee and since it is not case of Department that goodwill was obtained by assessee at any particular cost, applying ratio of Supreme Court decision in B.C. Srinivasa Setty s (supra), we hold that there is no capital gains chargeable. 6. I have carefully considered that order passed by my learned brother and I am unable to agree entirely with his views and conclusion. In this case assessee sold its transport business, lock, stock and barrel, so to say. This is clear from first sentence of order of CIT(A) according to which, transport business was transferred as going concern. agreement dt. 14th Dec., 1979 (paragraph No. 1 at p. 3) shows that assessee agreed to assign all its rights of passenger transport business to and in favour of transferees. entire fleet of 3 buses was transferred alongwith route permits. At time of transfer route permits were in force. Some of transferees, viz., Shri V. Jagadesan, V. Selvadurai and Shri K. Veerappan, were connected with Jagadessan Transports, 297, Trichy Main Road, Namakkal, Salem District. Thus, transferor and transferees were persons interested in transport business and they are well-acquainted with value of route permits. central issue in this case is whether sale consideration paid by transferees includes any payment for route permits or whether it relates to only goodwill. case of assessee was that amount of Rs. 4 lakhs was entirely for transfer of goodwill of business and trade name, namely, ``City Transport , while amount of Rs. 2,50,000 was for transfer of 3 buses along with route permits. case of ITO was that there was no goodwill of business and sum of Rs. 4 lakhs was for transfer of route permits only. Although stand taken by ITO is extreme, I consider stand taken by assessee also is on other extreme. truth of matter lies in-between opposite views says maxim. I agree with my ld. brother when he says that assessee s transport business has goodwill as company was incorporated in 1946 and has been carrying on business thereafter till material time when business has been sold. Goodwill could be built up by prompt and efficient service, behaviour of personnel and record of accident free transport, etc., as stated by my ld. brother. But question is whether entire sum of Rs. 4 lakhs meant to be consideration for transfer of goodwill or name of business entirely pertains to it or it is camouflaged payment for route permits also to extent of unexpired period of route permits. No doubt, Departmental authorities are entitled to pierce veil of any transaction embodied in any formal document and to look into reality of transactions. 7 . There is no dispute regarding fact that according to decisions cited by Department, route permit constitutes property and profits arising on sale thereof is chargeable to capital gains tax as Courts have held that route permit is not self-generating asset. perusal of agreement dt .14th Dec., 1979 (paragraph No. 1 at p. 3) shows that assessee-company has agreed to assign all its rights of passenger transport business to and in favour of transferees. Therefore, consideration received for transfer of all its rights must and should include right to exploit route permits which is also valuable property. preamble to agreement (last paragraph at p. 2) shows that transferees have `offered to take over passenger bus service of company with its three routes [Emphasis italicized in print supplied]. Thus, there is clear offer on part of transferee to take over not only buses but also their respective route permits. route permits in my view, can be compared to rails on which train runs, be it called superfast or express or mail with all reputation attached to it. Take out rails train cannot run. Thus, goodwill of business depends on route through which transport business is carried on. Therefore, in my opinion, goodwill and route value are he obverse and converse of same coin and both go hand in hand in transport business. In this case town bus routes in route Nos. 3 and 4 are always crowded as passenger traffic is heavy. This is material fact found by ITO which has vital bearing on deciding issue before us. T h e recital part of agreement (paragraph No. 1 at p. 5) shows that company has agreed to transfer 3 buses TNB 5079, TNB 5277 and TNB 1479 on `as is where is basis with their respective route permits for consideration of Rs. 60,000 Rs. 65,000 and Rs. 1,25,000 respectively, totalling to Rs. 2,50,000. order of ITO shows at page 2 thereof particulars of purchase price of buses and respective sale price. perusal of same shows that buses were transferred at depreciated value although written down values of buses were not shown .Thus, although recital shows that buses were transferred along with route permits and transferees have offered to take over route also, no specific amount is either earmarked or assigned for route permits taken over. Thus, no consideration has been mentioned for route permits offered to be taken over by transferee along with buses. omission cannot be countenanced as oversight or accidental. matter assumes very great significance. In paragraph No. 2 of recital part (paragraph No. 2 at p. 5) reads as under : ``It is hereby agreed that joint application be made under Motor Vehicles Act to regional transport authority, for transfer of route permits, to transfer and issue route permits to and in favour of transferees or to their firm to be constituted referred to above and company will do all that is necessary for transferee obtaining such transfer. above recital shows that there was condition precedent for parties to make joint application to regional transport authority for transfer of route permits in favour of transferees or firm constituted by them and assessee-company should also do all that is necessary for enabling transferees to obtain transfer of route permits. Thus, it is abundantly clear that primary consideration of acquiring transport business is not merely to purchase depreciated buses but also valuable rights of route permits on which transferees might ply buses acquired by them. Thus, I am of firm view that real intention of parties was camouflaged so as to bring entire payment of Rs. 4 lakhs under goodwill of business which is self- generating asset and thereby surplus arising on sale of such asset could escape net of taxation within ratio of Supreme Court in case of B.C. Srintvasa Setty (supra). As has been stated earlier, decisions of Madras High Court relied upon by ITO clearly show that route permit is not self-generating asset and some costs must necessarily have to be incurred for acquiring them and sale of such permits attracts capital gains. 8. My ld. brother has observed that ITO has not proved actual cost of acquisition of route permits nor brought evidence to show that market price for acquiring such route permits from existing business nor what could be reasonable cost of acquisition of route permits. Unfortnately, nature of property is such that real cost of acquisition of property cannot be ascertained nor divulged by person for obvious reasons. fact is within personal knowledge of person who requires route permit. In such situation, it is impossible and impracticable to ascertain market value of acquisition of route permits from existing business or reasonable cost of acquisition. Therefore, ITO cannot be blamed for not bringing on record any evidence in this regard. In this connection, I would like to emphasise fact that parties to agreement have only paid lip sympathy to route permits by making casual and uncommitted reference to route permits in preamble and recital of agreement whereas they have taken every care to see that they apply for transfer of route permits in names of transferees and assessee was also obliged to see to it that transferees obtain route permits. Thus, real intention was to acquire valuable route permits along with depreciated buses although payment of Rs. 4 lakhs is designated as payment for goodwill. I agree that there is also goodwill which is also transferred inasmuch as goodwill goes with business and trade name. There is no magic talisman in trade name, at any rate of transferees unless routes are commercially viable or profitable. Therefore, I cannot subscribe to view of my learned brother that entire consideration of Rs. 4 lakhs was towards transfer of goodwill of business as such so as to make resultant capital gains not liable to tax by virtue of ratio of Supreme Court in case of B.C. Srinivasa Setty (1981) 21 CTR (SC) 138 : (1981) 128 ITR 294 (SC). 9. As has been already indicated earlier, assessee has transferred entire transport business as going concern and transferred all rights which obviously include goodwill and value of route permits. As such part of consideration of Rs. 4 lakhs must relate to right of route permits and capital gains attributable thereto should be liable to capital gains tax. In absence of any evidence regarding cost of acquisition of route permits it should be taken at Rs. 2,000 as estimated by ITO while as matter of fact it should be substantially more. quantum of goodwill of business also requires to be determined on basis of super-profits earned during last three years of business before transfer and taking one year as purchase price thereof. Consequently, following maxim, I am of view that orders passed by CIT(A) and also ITO require to be made aside and matter should be restored to ITO for fresh adjudication in accordance with law after ascertaining goodwill of business as directed above and also computing capital gains with reference to consideration for transfer of route permits. 10. In result, appeal is allowed for statistical purposes. 1-8-1984 REFERENCE UNDER S. 255(4) OF INCOME TAX ACT, 1961 Whereas we are unable to agree on point set out below for asst. yr. 1981-82 we refer following points of difference of opinion to President for reference to Third Member under s. 255(4) of IT Act, 1961 : ``1. Whether consideration of Rs. 4 lakhs agreed to between assessee and transferees in this case for transfer of business name `City Transport should be held to be entirely for transfer of goodwill and, consequently, liable to capital gains on facts of this case or it should be held to be in part of transfer of route permit also ? 2. If in part consideration is to be held to transfer of route permit whether any capital gain is chargeable in respect of same ? 3. If capital gain is so chargeable in respect of part of consideration of Rs. 4 lakhs as relatable to transfer of route permit, whether cost of acquisition is to be held to be Rs. 2,000 only ? 28-6-1985 11. On difference of opinion between ld. Members, who heard appeal originally, following points of difference were stated : ``1. Whether consideration of Rs. 4 lakhs agreed to between assessee and transferees in this case for transfer of business name `City Transport should be held to be entirely for transfer of goodwill and, consequently, not liable to capital gains on facts of this case or it should be held to be in par for transfer of route permit also ? 2. If in part of consideration is to be held for transfer of route permit, whether any capital gain is chargeable in respect of same ? 3. If capital gains is so chargeable in respect of part of consideration of Rs. 4 lakhs as relatable to transfer of route permit, whether cost of acquisition is to be held to be Rs. 2,000 only ? case having been assigned by President to himself under s. 255(4), it has come up for hearing before me. 12. assessee is private limited company running passenger bus service. proceedings relate to its assessment for asst. yr. 1981-82 for which previous year consists of 15 months, i.e., from 1st Jan., 1980 to 31st March, 1981. It is common ground that assessee had sold its transport business as going concern under agreement, dt. 14th Dec., 1979 for sum o f Rs. 6,50,000. In terms of agreement, sum of Rs. 2,50,000 is attributable to value of three buses along with their three route permits and Rs. 4 lakhs to transfer of goodwill and use of assessee s name `City Transport and `CT . Transferees have, it may be, stated inter alia, taken over all existing employees of assessee-company with all obligations as to their provident fund and gratuity and all other liabilities arising thereunder, etc. 13. assessee s contention that no part of amount of Rs. 4 lakhs was liable to be taxed as income under head `Capital gains as it represented sale price of self-generated goodwill, has been rejected by ITO. He has held that there was no goodwill of transport business and that there was no separate computation for same. amount was mutually arrived at and this in fact represented sale price of route permits. Estimating cost of route permits at Rs. 2,000 ITO computed surplus liable to tax as capital gains at Rs. 3,98,000. CIT(A) has, for reasons given in paragraph No. 2 of his order, accepted assessee s submission. He has held that even if it were to be assumed that ITO s finding to effect that sum of Rs. 4 lakhs ostensibly received for transfer by assessee of its goodwill, represented in reality consideration for transfer of route permits, no capital gain resulted from transfer as acquisition of route permits cannot be said to have any cost to assessee. 14. As already stated, ld. Member who heard appeal originally have differed. ld. Judicial Member has for detailed reasons given in paragraph No. 4 of his order held that assessee-company has goodwill as it was running passenger transport business for about three decades. He found no material on record for holding that sum of Rs. 4 lakhs represented not price of goodwill but price of route permits. He also did not find any material to justify conclusion that route permits had cost sum of Rs. 2,000 as estimated by ITO. For these and other reasons, he has, following Supreme Court decision in case of B. C. Srinivasa Setty (1981) 21 CTR (SC) 138, held that no capital gins were chargeable in case of assessee. ld. Accountant Member has, on other hand, dealth with controversy in paragraph Nos. 2 to 4 his order. He has taken view that primary consideration of acquiring transport business was not merely to purchase depreciated buses but also valuable rights over route permits on which transferees might ply buses acquired by them. According to him, real intention of parties was to camouflage payment so as to bring entire amount of Rs. 4 lakhs to goodwill of business which is self-generated asset and thereby avoiding tax on surplus arising on sale thereof. Observing that at best sum of Rs. 4 lakhs might represent value of goodwill as well as route permits. He directed ITO to compute value of goodwill and treat balance as price of route permits for purpose of taxing same under head Capital gains . 1 5 . parties have been heard at length. Departmental Representative has strongly relied on order of learned Accountant Member. counsel for assessee has, on other hand, relied on order of learned Judicial Member. In response to query from Bench it was stated on behalf of assessee that two of three buses were about two years old and third one was comparatively new bus heaving been used for about year only. Their respective cost of acquisition and written down values were found to be as under. Sale value of Unexpired Bus Cost Written buses with period of No. Price down value route permits route permits as per agreement . Rs. Rs. . Rs. TNB 60,000 50,993 2 months 65,000 5079 TNB 1 year & 65,000 55,667 60,000 5277 2 months TNB 1,25,000 1,13,350 2 months 1,25,000 1479 I have heard rival contentions carefully. agreement of sale admittedly provides that buses along with route permits are sold for Rs. 2,50,000 and that sum of Rs. 4 lakhs represents value of goodwill and assessee s name. transferees have also undertaken certain liabilities under agreement. No doubt it is open to Department authorities to go behind agreement and find facts if they are really different from what have been mentioned in agreement. For this purpose, it would be necessary to see whether terms of agreement are on face of it absurd. Having regard to unexpired period of route permits in case of three buses which is two months, one year and two months, it is difficult, if not impossible, to hold that route permits would have very high market value. That apart there is no material on record that sale price of buses, which is certainly higher than written down values, does not include reasonable price attributable to unexpired period of route permits. It is true that on face of it value of goodwill at Rs. 4 lakhs seems to be little excessive However, having regard to fact that assessee-company has been running passenger transport services for about 30 year and that transferees have taken over certain liabilities also, it cannot be accepted without anything more on record that sum of Rs. 4 lakhs could not represent value of goodwill. I am also in agreement with learned Judicial Member that expenditure on making application for route permit does not represent cost of route permit. For these and other reasons given by learned Judicial Member, with which I agree, I hold that assessee is not liable to capital gains on sale of its business as going concern. 16. Moreover, goodwill is something which is easy to describe but very difficult to define. Supreme Court has made attempt to define it in its decision in case of S. C. Cambatta & Co. (P.) Ltd. vs. CEPT (1961) 41 ITR 500 (SC) in following words : ".........the goodwill of business depends upon variety of circumstances or combination of them. location, service, standing of business, honesty of those who run it, and lack of competition and many other factors go individually or together to make up goodwill, though locality to make up goodwill, though locality always plays considerable part. Shift locality, and goodwill may be lost. At same time, locality is not everything. power to attract custom depends on one or more of other factors as well ........" (p. 505) Therefore, even route permits in case of transport business can and will form part of goodwill. 1 7 . Third Member s order will now go to Division Bench for deciding appeal according to majority view. *** INCOME TAX OFFICER v. CITY TRANSPORTS (P) LTD.