COMMISSIONER OF INCOME TAX I V. RAJESH VITTHALBHAI PATEL

TAXAP/13/2013

AI Insights

The case revolves around the computation of capital gains tax for Rajesh Vitthalbhai Patel, who sold a property acquired through a gift from his brother. The primary legal contention was whether the indexed cost of acquisition for calculating capital gains should be based on the date the property was acquired by the respondent (1995) or the date it was first held by the previous owner before April 1, 1981. The Assessing Officer initially calculated the indexed cost based on the 1995 acquisition date, but this was contested and ultimately overturned by the CIT(Appeals) and the Tribunal, which favored the 1981 date based on Section 49 of the Income Tax Act, 1961.

• Counselvise Citation: [2013] 140 COUNSELVISE.COM (IT) 744938 (HC-GUJARAT)
• Appeal Type: Others
• Pronouncement Date: 17-04-2013
• Assessment Year: misc
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Others
• Court: HIGH COURT
• Assessee Lawyers: K M PARIKH
• Keywords: Capital Gain; Cost inflation index; Cost of acquisition; Gift deed; Indexed cost
• Section: 48; 49

Judgement Text

"O/TAXAP/13/2013 JUDGMENT IN THE HIGH COURT OF GUJARAT AT AHMEDABAD TAX APPEAL NO. 13 of 2013 FOR APPROVAL AND SIGNATURE: HONOURABLE MR.JUSTICE AKIL KURESHI and HONOURABLE MS JUSTICE SONIA GOKANI ================================================================ 1 Whether Reporters of Local Papers may be allowed to see the judgment ? 2 To be referred to the Reporter or not ? 3 Whether their Lordships wish to see the fair copy of the judgment ? 4 Whether this case involves a substantial question of law as to the interpretation of the Constitution of India, 1950 or any order made thereunder ? 5 Whether it is to be circulated to the civil judge ? ================================================================ COMMISSIONER OF INCOME TAX I....Appellant(s) Versus RAJESH VITTHALBHAI PATEL....Opponent(s) ================================================================ Appearance: MR KM PARIKH, ADVOCATE for the Appellant(s) No. 1 ================================================================ CORAM: HONOURABLE MR.JUSTICE AKIL KURESHI and HONOURABLE MS JUSTICE SONIA GOKANI Page 1 of 10 O/TAXAP/13/2013 JUDGMENT Date : 17/04/2013 ORAL JUDGMENT (PER : HONOURABLE MR.JUSTICE AKIL KURESHI) 1. Revenue is in appeal against the judgement of the Income Tax Appellate Tribunal dated 1.6.2012 raising following questions for our consideration: “(A) Whether on the facts and in the circumstances of the case, the Tribunal has erred substantially in law in not recognizing that the “cost of acquisition of an asset” and “cost inflation index” are two different legal concepts and are mutually exclusive? (B) Whether the Appellate Tribunal erred in law in not applying the provisions of section 48, Explanation(iii) which clearly states that inflation index would apply for the first year when the asset was first held by the assessee?” 2. Question pertains to computing of capital gain of the respondent assessee. Brief facts necessary to understand the issue are as under: 2.1) For the assessment year 2005-2006, assessee had filed his return of income on 30.12.2006 declaring a total income of Rs.84,34,643/- in which he had shown long term capital gain of Rs.59,04,692/-. This capital gain had accrued to the assessee upon sale of land with a dwelling house situated in the city of Baroda. Page 2 of 10 O/TAXAP/13/2013 JUDGMENT 2.2) The return was taken in scrutiny. The Assessing Officer inquired with the assessee with respect to the computation of the capital gain. It was found that property was received by the assessee by way of gift made by his brother under a gift deed dated 23.5.1995. The assessee had soon thereafter expended a sum of Rs. 7 lakhs for renovation. The assessee sold the property to one Oceanic Builders for a sale consideration of Rs.2.51 crores on 7.2.2006. In computing the liability of the capital gain, the assessee had applied the cost of inflation index as on 1.4.1981 under section 48 of the Income Tax Act, 1961. The Assessing Officer was of the opinion that the indexed cost of acquisition was to be worked out with reference to the date on which the assessee acquired the property by gift i.e. 23.5.1995. He noted that the index for the year 1995-1996 was 281 and for the year under consideration it was 497. The Assessing Officer adopted the cost of acquisition of the property at Rs.15,63,000/- as on 23.5.1995, added Rs. 7 lakhs expended by the assessee by way of cost of improvement. Total of Rs.22,63,000/- was multiplied by him by a ratio of 497/281. 2.3) The assessee carried the matter in appeal. CIT(Appeals) accepted the assessee’s contention that the indexed cost of the acquisition is to be worked out with reference to 1.4.1981 and not 23.5.1995. He accordingly, gave the benefit to Page 3 of 10 O/TAXAP/13/2013 JUDGMENT the assessee and directed the Assessing Officer to recompute the assessee’s capital gain tax. Revenue thereupon approached the Tribunal. Tribunal by impugned judgement rejected the Revenue’s appeal making following observations : “5. We have considered the submissions of the learned DR and perused the orders of the AO and the CIT(A). We find that the property in question was acquired by the assessee by way of gift in the year 1995 from his brother. Accordingly, the mode of acquisition is as provided under section 49(i)(ii) of the I.T.Act. The provision of section 49 of the IT Act lays down that where the capital asset become the property of the assessee in a gift or will, the cost of acquisition of the asset shall be deemed to be a cost for which the previous owner of the property acquired it, as increased by the cost of any improvement of the asset incurred or borne by the previous owner or the assessee as the case may be. In this case, admittedly, the property in question was acquired by the assessee’s brother prior to 1.4.1981 and the assessee became owner thereof by way of gift of property by the brother of the assessee. Accordingly, as per the provisions of Section 49 of the IT Act, the cot of acquisition has to be taken as the cost to the previous owner and since the previous owner, the brother of the assessee, owned this property prior to 1.4.1981, the indexed cost of acquisition was rightly called by the assessee as on 1.4.1981. The action of the AO in taking the cost of acquisition as in March, 1995 is not justified. In these facts, we hold that the action of the CIT(A) in directing the AO to recompute the long term capital gain on the basis of the indexed cost of acquisition as on 1.4.1981 is in accordance with the statutory provisions of the IT Act, and accordingly, the order of the CIT(A) is confirmed and the ground of the appeal of the Revenue is dismissed.” 3. Drawing our attention to the provisions contained Page 4 of 10 O/TAXAP/13/2013 JUDGMENT in section 48 and 49 of the Act, learned counsel Shri Parikh vehemently contended that the Assessing Officer had correctly taken the indexed cost of acquisition with reference to the date of acquisition of property by the assessee himself and not by the previous owner. Putting much stress on explanation (iii) to section 48, he stated that the reference to first year in the which the asset was held by the assessee must be taken to be the year 1995, the date on which the property was acquired by the assessee through gift. 4. We are however, of the opinion that CIT(Appeals) as well as Tribunal committed no error. We may recall that in the present case, since the assessee had acquired the property through gift, in normal understanding of law, there would be no cost of acquisition attached to such property. Section 49 of the Act, however, makes a deeming provision for computing the cost of acquisition in such cases. Relevant portion of section 49 reads as under : “49. Cost with reference to certain modes of acquisition: (1) Where the capital asset became the property of the assessee- xxx (ii) under a gift or will; xxxx the cost of acquisition of the asset shall be Page 5 of 10 O/TAXAP/13/2013 JUDGMENT deemed to be the total cost for which the previous owner of the property acquired it, as increased by the cost of any improvement of the assets incurred or borne by the previous owner or the assessee as the case may be. Explanation : In this sub-section the expression “previous owner of the property” in relation to any capital asset owned by an assessee means the last previous owner of the capital asset who acquired it by a mode of acquisition other than that referred to in clause(i) or clause(ii) or clause(iii) or clause(iv) of this sub-section.” 5. In terms of sub-section(1) of section 49, thus, the assessee having acquired the property through a gift, the cost of acquisition on the asset by deeming fiction would be the cost for which the previous owner of the property acquired it, as increased by the cost of any improvement of the asset incurred or borne by the previous owner or the assessee as the case may be. 6. For the purpose of computation of such cost of acquisition of assets, one shall have to fall back to section 48, relevant portion of which reads as under : “48. Mode of computation – 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 asset and the cost of any improvement thereto. xxx Page 6 of 10 O/TAXAP/13/2013 JUDGMENT Explanation – For the purpose of this section : xxx (iii) “indexed cost of acquisition” means an amount which bears to the cost of acquisition the same proportion as the Cost Inflation Index for the year in which the asset is transferred bears to the Cost Inflation Index for the first year in which the asset was held by the assessee or for the year beginning on the 1st day of April, 1981, whichever is later.” 7. Under section 48 of the Act, thus capital gain is computed by deducting from the full value of the consideration received or accruing as a result of the transfer, the amounts of expenditure incurred wholly and exclusively in connection with such transfer, the cost of acquisition of the asset and the cost of any improvement thereto. Term “cost of acquisition of the asset” is explained in explanation (iii) to section 48. In terms of such explanation, indexed cost of acquisition would be an amount which bears to the cost of acquisition the same proportion as the Cost Inflation Index for the year in which the asset is transferred bears to the Cost Inflation Index for the first year in which the asset was held by the assessee or for the year beginning on the 1st day of April, 1981, whichever is later. In simple words, therefore for an asset acquired prior to 1.4.1981 the indexed cost of acquisition would be the cost of acquisition multiplied by the ratio of the Cost Inflation Index in the year in which assessee’s asset is transferred to the Cost of Inflation Index for the year beginning on Page 7 of 10 O/TAXAP/13/2013 JUDGMENT 1.4.1981. It was therefore, that the Tribunal in our opinion correctly held that the indexed cost of acquisition shall have to be worked out with reference to 1.4.1981 since in the present case the asset was acquired by the previous owner of the property. Learned counsel for the Revenue however, submitted that such interpretation would fail to take into account the expression “Cost Inflation Index for the first year in which the asset was held by the assessee”. In his opinion the “assessee” referred to under such expression would be the present assessee and not the previous owner. In our opinion, such interpretation cannot be accepted. We say so for the following reasons. Firstly, by virtue of a deeming fiction provided in sub-section(1) of section 49, cost of acquisition in hands of the assessee would be the cost for which the previous owner of the property acquired it. It is for this purpose that we need to fall back on computation provision of section 48. When we do so, we work out the cost of acquisition of the asset in the hands of previous owner. While doing so, we cannot transpose the assessee in explanation (iii) of section 48. Doing so, would amount to falling short of giving full effect to the deeming fiction contained in sub-section(1) of section 49. To our opinion such deeming fiction must be allowed to have its full play. As is often stated, a deeming fiction must be allowed its full application and should not be allowed to Page 8 of 10 O/TAXAP/13/2013 JUDGMENT boggle. 8. Additionally, we notice that in sub-section(1) of section 49, the legislature has provided that cost of acquisition of the asset shall be deemed to be the cost for which the previous owner of the property acquired, as increased by any cost of improvement of the assets incurred or borne by the previous owner or the assessee as the case may be. If the interpretation of the counsel for the Revenue was correct, this later reference to the cost of improvement borne by the assessee would not have been necessary since section 48 itself would take care of any improvement on the capital asset to be included for the cost of acquisition. It is precisely because such improvement referred to in section 48 would have reference only to that made by the previous owner that the additional provision had to be made in the deeming fiction provided in sub-clause(1) of section 49. Further the interpretation sought to be given by the Revenue would be unacceptable because there is no provision under which the cost of acquisition in the hands of the assessee in cases such as gift on the date of acquisition of the property can be made and found in the Act. A Serious road-block would be created if such property is acquired through Will and would therefore have no reference to its actual cost on the date of operation of the Will. Page 9 of 10 O/TAXAP/13/2013 JUDGMENT 9. There is nothing on record to show on what basis the Assessing Officer adopted the cost of acquisition of the property at 15.63 lakhs as on 23.5.1995. In the assessment year there is no indication whatsoever on what basis the Assessing Officer arrived at such a figure. Counsel doing some guess work submitted that the said figure may have been indicated in the sale deed itself or may have been the amount on which necessary stamp duty for the purpose of registration of the gift deed might have been computed. In absence of any provision in the Act enabling the Assessing Officer to adopt either of the said figures as the cost of acquisition of the property on the date of gift, simply cannot be accepted. 10. Under the circumstances, we do not find the interpretation adopted by the Tribunal to be incorrect. 11. Tax Appeal is therefore, dismissed. (AKIL KURESHI, J.) (MS SONIA GOKANI, J.) raghu Page 10 of 10 "