THE COMMISSIONER OF INCOME TAX V. SMT.KAVERI THIMMAIAH

ITA/386/2013

AI Insights

The case involves three appeals by the Commissioner of Income Tax against the legal heirs of Mr. C B Devaiah, concerning the computation of capital gains tax on the sale of inherited property. The property, acquired before 1.4.1981 by Mr. C B Devaiah, was sold by his heirs in 2004. The key legal issue was the correct date for applying indexation for calculating the cost of acquisition for capital gains tax purposes. The Income Tax Appellate Tribunal had earlier set aside the Commissioner of Income Tax's order, which had revised the assessment to allow indexation from 2000, the year of Mr. C B Devaiah's death, instead of 1981, as claimed by the heirs. The High Court's decision favored the assesses, aligning with the precedent set by the Bombay High Court.

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 729028 (HC-KARNATAKA)
• Appeal Type: Others
• Pronouncement Date: 06-06-2014
• Assessment Year: misc
• Other Referred Cases: Commissioner of Income Tax vs Manjula J Shah (2012) 68 DTR 269 (Bombay)
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Others
• Court: HIGH COURT
• Department Lawyers: A SHANKAR A LAVA
• Assessee Lawyers: E SANMATHI
• Keywords: Capital Gains; Devolution; Indexed cost of acquisition; Inheritance; Succession
• Section: 143(3); 263; 48; 49; 260-A

Judgement Text

" 1 IN THE HIGH COURT OF KARNATAKA AT BANGALORE DATED THIS THE 6TH DAY OF JUNE 2014 PRESENT THE HON’BLE MR JUSTICE N. KUMAR AND THE HON’BLE MR JUSTICE B. MANOHAR ITA NO. 386/2013 C/W ITA NOS.387/2013 & 388/2013 IN ITA NO.386/2013: BETWEEN: THE COMMISSIONER OF INCOME TAX NO.55/1, VISHWESHWARANAGAR, MYSORE – 570 008 ... APPELLANT (BY SRI E.SANMATHI, ADVOCATE) AND: SMT. KAVERI THIMMAIAH, PAN NO. AVVPK5626L MATTADEAD ESTATE, ULIGULI NARGANE VILLAGE, SUNTIKOPPA – 571 237 .. RESPONDENT (BY SRI A.SHANKAR, ADV. & SRI A.LAVA, ADV.) *** THIS APPEAL IS FILED UNDER SECTION 260-A OF THE INCOME TAX ACT, 1961 PRAYING TO ALLOW THE APPEAL AND SET ASIDE THE ORDERS PASSED BY THE INCOME TAX APPELLATE TRIBUNAL, BANGALORE IN ITA NO.724/BANG/2012 DATED 15.03.2013 AND ETC. 2 IN ITA NO 387/2013: BETWEEN: THE COMMISSIONER OF INCOME TAX NO.55/1, VISHWESHWARANAGAR, MYSORE – 570 008 ... APPELLANT (BY SRI E.SANMATHI, ADVOCATE) AND: SMT. ASHA MACHIAH, PAN NO. AJYPA 8026D MATTADEAD ESTATE, ULIGULI NARGANE VILLAGE, SUNTIKOPPA – 571 237 ... RESPONDENT (BY SRI A.SHANKAR, ADV. & SRI A.LAVA, ADV.) *** THIS APPEAL IS FILED UNDER SECTION 260-A OF THE INCOME TAX ACT, 1961 PRAYING TO ALLOW THE APPEAL AND SET ASIDE THE ORDERS PASSED BY THE INCOME TAX APPELLATE TRIBUNAL, BANGALORE IN ITA NO.725/BANG/2012 DATED 15.03.2013 AND ETC. IN ITA NO. 388/2013:` BETWEEN: THE COMMISSIONER OF INCOME TAX NO.55/1, VISHWESHWARANAGAR, MYSORE – 570 008 ... APPELLANT (BY SRI E.SANMATHI, ADVOCATE) AND: SMT. NINA DEVAIAH, PAN NO. AFRPN2473A 3 MATTADEAD ESTATE, ULIGULI NARGANE VILLAGE, SUNTIKOPPA – 571 237 ... RESPONDENT (BY SRI A.SHANKAR, ADV. & SRI A.LAVA, ADV.) *** THIS APPEAL IS FILED UNDER SECTION 260-A OF THE INCOME TAX ACT, 1961 PRAYING TO ALLOW THE APPEAL AND SET ASIDE THE ORDERS PASSED BY THE INCOME TAX APPELLATE TRIBUNAL, BANGALORE IN ITA NO.726/BANG/2012 DATED 15.03.2013 AND ETC. THESE APPEALS COMING ON FOR ADMISSION THIS DAY, KUMAR J., DELIVERED THE FOLLOWING: J U D G M E N T These three appeals are preferred by the revenue is against the common order passed by the tribunal in respect of three assesses setting-aside the order passed by the Commissioner of Income Tax under Section 263 of the Income Tax Act, 1961 (For short hereinafter referred to as ‘The Act’) and grant relief to the assesses. 2. The assesses in these three appeals are individuals. They are the legal heirs of One Mr C B Devaiah. Mr C B Devaiah owned the property which had been acquired by him prior to 1.4.1981. Mr C B Devaiah died on 23.4.2000. His legal heirs sold the property owned by him during the previous year relevant to 2005-06 i.e., on 18.10.2004. The 4 three assesses as legal heirs were entitled to 1/5 share each over the property owned by Mr C B Devaiah. They declared capital gain on sale of the property in their returns of income filed for the assessment year 2005-06. In the computation of capital gains, they adopted the fair market value(FMV) of the property as on 1.4.1981 as the cost of acquisition of the property. The revenue did not dispute this valuation. The assesses while computing their cost of acquisition also claimed indexation on FMV as on 1.4.1981. The assessing authority while completing the assessment of the assesses, accepted the claim of the assessees in the order of assessment dated 24.12.2010 passed under Section 143(3) of the Act allowing the benefit of indexation from 1.4.1981. The Commissioner of Income Tax exercising his power under Section 263 of the Act was of the view that the assessment officer’s order in the case of the assesses allowing the benefit of indexation from 1.4.1981 was erroneous and prejudicial to the interest of the revenue because as per explanation (iii) to Sec.48 of the Act, “indexed cost of acquisition” means an amount which bears to the cost of acquisition the same proportion as Cost Inflation Index for the year in which the asset is transferred bears to 5 the Cost Inflation Index for the first year in which the asset was held by the assessees or for the year beginning on the 1st day of April 1981, whichever is later. According to the appellate authority, the assets was held by the assesses only from 23.4.2000 when Mr C B Devaiah died. Therefore, the benefit of indexation has to be allowed only from 23.4.2000 and not from 1.4.1981 as claimed by the assesses. Accordingly, the order passed by the Assessing authority was revised and assessing authority was directed to allow indexation benefit from financial year 2000-01 only. 3. Aggrieved by the said order, the assesses preferred appeals to the tribunal. The tribunal after hearing both the parties and relying on a judgment of the Bombay High Court in the case of Commissioner of Income Tax vs Manjula J Shah reported in (2012) 68 DTR 269 (Bombay) held the Commissioner was not justified in not following the decision of the Hon’ble Bombay High Court, the ratio of the decision of the Bombay High Court rendered in the context of acquisition of property by way of gift will apply with greater force when property devolves by succession. The view taken by the assessing authority was correct and therefore, the 6 Commissioner of Income Tax was not justified in exercising his jurisdiction under Section 263 of the Act and in interfering with the order passed by the Assessing Authority. Therefore, the appeal was allowed. The order of the Appellate Authority was set-aside. The order of assessment was restored. 4. Aggrieved by the said order, the revenue is in appeal. 5. Learned counsel for the revenue assailing the impugned order contends as is clear from explanation (iii) to Section 48, the indexed cost of acquisition is to be allowed for the first year in which the asset was held by the assesses or in the year beginning on the first day of April, 1981, whichever is later. Therefore, the tribunal was not justified in interfering with the order passed by the Commissioner of Income Tax. In fact, the revenue has preferred a Special Leave Petition against the judgment of the Bombay High Court and it is pending consideration before the Apex Court and therefore, he submits the order requires to be interfered with. 7 6. Per contra, learned counsel for the assesses submitted if the cost of acquisition of the property as on 1.4.1981 is taken into consideration, then the indexed cost of acquisition has to be calculated from that date, not from the day the assesses held the property by way of succession. He submits in view of Section 49, the cost of acquisition of the asset shall be deemed to be the 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 assesses as the case may be, if the acquisition is by way of succession, inheritance or devolution. If, cost of acquisition is to be computed as on the day the previous owner held the property on 1.4.1981, though the assesses acquired the said property by way of succession, indexed cost of acquisition is to be allowed from the day the property was owned by previous owner and not when the assesses held the property after his death and that is the ratio decided by the Bombay High Court in the aforesaid Judgment and therefore, he submits no case for interference is made out. 8 7. The appeals are admitted to consider the following Substantial question of law: “Whether on the facts and in the circumstances of the case, the tribunal is right in law in concluding that while computing the capital gains arising on transfer of a capital asset acquired by the assessee through succession, the indexed cost of acquisition has to be computed with reference to the year in which the previous owner first held the asset and not the year in which the assessee actually became the owner of the asset through succession?” 8. Section 45 of the Act provides that any profits or gains arising from the transfer of a capital asset effected in the previous year shall be chargeable to income tax under the head “Capital gains”. Capital Gains is of two types. Short-term capital gains and long term capital gains. Depending upon the nature of capital gains the liability of the tax is determined. The mode and manner of computing the capital gains is provided under Section 48 of the Act. The income chargeable under the head capital gain shall be computed by deducting from the full value of the consideration received or accruing as a result of the transfer 9 of the capital asset, the expenditure incurred wholly and exclusively in connection with such transfer and the cost of acquisition of the asset and the cost of any improvement thereon. The 2nd proviso to Section 48 provides where long term capital gain arises from the transfer of a long term capital asset, the cost of acquisition of the asset has to be read as “indexed cost of acquisition”. Indexed cost of acquisition has been defined in the explanation to the said Section, it means an amount which bears to the cost of acquisition the same proportion as 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 assesses or for the year beginning on the 1st day of April 1981, whichever is later. Section 49 deals with the cost with reference to certain modes of acquisition. One such mode is if the assesses acquires a capital asset by way of succession, inheritance or devolution, then the cost of acquisition of the asset shall be deemed to be the 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 assesses, as the case may be. 10 Therefore, when an asset is acquired by way of inheritance, the cost of acquisition of the asset should be calculated on the basis of the cost of acquisition by the previous owner and the said cost of acquisition of the previous owner has to be calculated on the basis of indexed cost of acquisition as provided in explanation (3) to Section 48. 9. Though in the definition of ‘indexed cost of acquisition’, the word used are, “in which the asset was held by the assessee”, a harmonious reading of Sections 48 and 49 makes it clear for the purpose of ‘Indexed Cost of Acquisition’, it has to be understood as the first year in which the previous owner held the said property. Otherwise, if the date of inheritance is taken into consideration, then the cost of acquisition of the asset on that date corresponding to the market value is to be taken into consideration. Otherwise, take the cost of acquisition on the day the previous owner acquired it and apply the “Indexed Cost of Acquisition” and then calculate the capital gains and the tax payable. That is precisely what has been held by the Bombay High Court in the aforesaid Judgment which in our view is the correct legal decision. 11 10. In that view of the matter, the tribunal was justified in following the Judgment of the Bombay High Court and in setting-aside the order passed by the Commissioner of Income Tax. Therefore, the substantial question of law framed is answered in favour of the assesses and against the revenue. Appeals are dismissed. No costs. Sd/- JUDGE Sd/- JUDGE brn "