Punjab & Haryana H.C : where the cost of acquisition of capital asset cannot be ascertained but the asset has a market value, capital gain will be attracted

High Court Of Punjab And Haryana (Fb)

CIT Vs. Raja Malwinder Singh

Assessment Year : 1977-78 & 1979-80

Section : 49

Adarsh Kumar Goel, Rajesh Bindal And Alok Singh, JJ.

IT Reference Nos. 578 And 579 Of 1995

January 28, 2011

JUDGMENT

Adarsh Kumar Goel, J.-This matter has been placed before this Bench in pursuance of order of reference dated October 1, 2010 as under :

“1. The following question of law has been referred for opinion of this court by the Income-tax Appellate Tribunal, Chandigarh, arising out of its order dated December 19, 1994 in I.T.A. Nos. 301/Chd/90 and 404/Chd/92 for the assessment years 1977-78 and 1979-80 :

‘Whether on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that the assets which were the subject-matter of capital gains were acquired by the assessee for nothing and that the same could not be subjected to capital gains?’

2. The assessee sold certain plots for consideration and the income derived therefrom was sought to be taxed as ‘capital gains’. The Commissioner of Income-tax (Appeals) reversed the view taken by the Assessing Officer, holding that cost of acquisition of the property in question was nil and thus, no capital gain was attracted. The Tribunal upheld the said view, inter alia, relying upon the judgment of the hon’ble Supreme Court in CIT v. B.C. Srinivasa Setty [1981] 128 ITR 294 (SC).

3. We have heard learned counsel for the parties.

4. Learned counsel for the Revenue submitted that the principle of excluding taxability of capital gains where an asset is not capable of being valued, such as goodwill, cannot extend to capital assets like land which are capable of being valued. The judgment of the hon’ble Supreme Court in B.C. Srinivasa Setty [1981] 128 ITR 294 (SC) was not applicable to such a situation. Reliance has been placed on the judgment of the hon’ble Supreme Court in CIT v. D.P. Sandu Bros. Chembur P. Ltd. [2005] 273 ITR 1 (SC) wherein the judgment in B.C. Srinivasa Setty [1981] 128 ITR 294 (SC) was distinguished in its applicability to an asset which was capable of acquisition at a cost. The observations therein are as under (page 5) :

‘In other words, an asset which is capable of acquisition at a cost would be included within the provisions pertaining to the head ‘Capital gains’ as opposed to assets in the acquisition of which no cost at all can be conceived..’

5. Learned counsel for the assessee, on the other hand, submits that even in respect of land acquired without cost, no capital gain was attracted on the principle applied by the hon’ble Supreme Court in B.C. Srinivasa Setty [1981] 128 ITR 294 (SC). He relies on a judgment of this court in CIT v. Amrik Sing [2008] 299 ITR 14 (P&H) and a judgment of the Madhya Pradesh High Court in CIT v. H.H Maharaja Sahib Shri Lokendra Singhji [1986] 162 ITR 93 (MP).

6. We are of the view that the principle applied to assets like goodwill for excluding taxability of capital gain cannot be applied to the assets like land which are clearly capable of being valued. The view taken by the Madhya Pradesh High Court and by this court on the basis of the principle laid down in B.C. Srinivasa Setty [1981] 128 ITR 294 (SC) may need reconsideration by a larger Bench in the light of the judgment in D.P. Sandu Bros. Chembur P. Ltd. [2005] 273 ITR 1 (SC).

7. Accordingly, let the matter be placed before hon’ble the Chief Justice for constitution of an appropriate Bench.”

2. The assessee is an individual. For the assessment years in question, i.e., 1977-78 and 1979-80, the assessee sold plots of land for consideration on which tax under the head of “Capital gains” was sought to be levied. The assessee contested the levy by submitting that cost of acquisition by the previous owner was incapable of being ascertained. The previous owner was an ex ruler of the Pepsu State and the asset was acquired under the instrument of annexation and thus, its cost of acquisition could not be ascertained. Capital gain was attracted only when the cost of acquisition was capable of being ascertained. This plea was rejected and the Assessing Officer proceeded to assess capital gain taking the cost of acquisition equal to the market value as on January 1, 1954/January 1, 1964 depending on the dates specified under section 55(2) of the Act as applicable to the year of assessment. On appeal, the Commissioner of Income-tax (Appeals) rejected the plea of the assessee that the cost of acquisition being incapable of ascertainment, no capital gain was attracted. However, the Tribunal reversed the said view following the judgment of the hon’ble Supreme Court in CIT v. B.C. Srinivasa Setty [1981] 128 ITR 294/5 Taxman 1 (SC) and also earlier orders passed by the Tribunal in the cases of Amrinder Singh and Shiv Dev Inder.

3. Since at the time of hearing of the references before the Division Bench, reliance was placed upon a judgment of this court in CIT v. Amrik Singh [2008] 299 ITR 14 / 169 Taxman 196, prima facie, differing with the view taken therein, the matter was referred to be heard by a larger Bench.

4. Learned counsel for the Revenue submits that the plea of the assessee that no capital gain was attracted, is untenable in the face of section 55(2) and (3) read with sections 48 and 49 of the Act. The said provisions as existed on April 1, 1978 are as under :

“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.

49. Cost with reference to certain modes of acquisition.-(1) Where the capital asset became the property of the assessee-

(i) on any distribution of assets on the total or partial partition of a Hindu undivided family ;

(ii) under a gift or will ;

(iii) (a) by succession, inheritance or devolution, or

(b) on any distribution of assets on the dissolution of a firm, body of individuals or other association of persons, or

(c) on any distribution of assets on the liquidation of a company, or

(d) under a transfer to a revocable or an irrevocable trust, or

(e) under any such transfer as is referred to in clause (iv) or clause (v) or clause (vi) of section 47 ;

(iv) such assessee being a Hindu undivided family, by the mode referred to in sub-section (2) of section 64 at any time after the 31st day of December, 1969

the cost of acquisition of the assets 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 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.

(2) Where the capital asset being a share or shares in an amalgamated company which is an Indian company became the property of the assessee in consideration of a transfer referred to in clause (vii) of section 47, the cost of acquisition of the asset shall be deemed to be the cost of acquisition to him of the share or shares in the amalgamating company.

55.(1) For the purposes of sections 48, 49 and 50,-

(a) ‘adjusted’, in relation to written down value or fair market value, means diminished by any loss deducted or increased by any profits assessed, under the provisions of clause (iii) of sub-section (1), or clause (ii) of sub-section (1A) of section 32 or sub-section (2) or sub-section (2A) of section 41, as the case may be, the computation for this purpose being made with reference to the period commencing from the 1st day of January, 1954, in cases to which clause (2) of section 50 applies ;

(b) ‘cost of any improvement’, in relation to a capital asset,-

(i) where the capital asset became the property of the previous owner or the assessee before the 1st day of January, 1954, and the fair market value of the asset on that day is taken as the cost of acquisition at the option of the assessee, means all expenditure of a capital nature incurred in making any additions or alterations to the capital asset on or after the said date by the previous owner or the assessee, and

(ii) in any other case, means all expenditure of a capital nature incurred in making any additions or alterations to the capital asset by the assessee after it became his property, and, where the capital asset became the property of the assessee by any of the modes specified in sub-section (1) of section 49, by the previous owner,

but does not include any expenditure which is deductible in computing the income chargeable under the head ‘Interest on securities’, ‘Income from house property’, Profits and gains of business or profession’, or ‘Income from other sources’, and the expression ‘improvement’ shall be construed accordingly.

(2) For the purposes of sections 48 and 49, ‘cost of acquisition’, in relation to a capital asset,

(i) where the capital asset became the property of the assessee before the 1st day of January, 1954, means the cost of acquisition of the asset to the assessee or the fair market value of the asset as on the 1st day of January, 1954, at the option of the assessee ;

(ii) where the capital asset became the property of the assessee by any of the modes specified in sub-section (1) of section 49, and the capital asset became the property of the previous owner before the 1st day of January, 1954, means the cost of the capital asset to the previous owner or the fair market value of the asset on the 1st day of January, 1954, at the option of the assessee ;

(iii) where the capital asset became the property of the assessee on the distribution of the capital assets of a company on its liquidation and the assessee has been assessed to income-tax under the head ‘capital gains’ in respect of that asset under section 46, means the fair market value of the asset on the date of distribution ;

(iv) [omitted by Finance Act, 1966, w.e.f 1-4-1966] ;

(v) where the capital asset, being a share or a stock of a company, became the property of the assessee on-

(a) the consolidation and division of all or any of the share capital of the company into shares of larger amount than its existing shares,

(b) the conversion of any shares of the company into stock,

(c) the reconversion of any stock of the company into shares,

(d) the sub-division of any of the shares of the company into shares of smaller amount, or

(e) the conversion of one kind of shares of the company into another kind,

means the cost of acquisition of the asset calculated with reference to the cost of acquisition of the shares or stock from which such asset is derived.

(3) Where the cost for which the previous owner acquired the property cannot be ascertained, the cost of acquisition to the previous owner means the fair market value on the date on which the capital asset became the property of the previous owner.”

5. It is pointed out that the judgment in B.C. Srinivasa Setty’s case (supra) is distinguishable. It was observed therein that in a newly started business the value of goodwill was not ascertainable, and on sale of goodwill, capital gain was not attracted. It is submitted that in the case of acquisition of land, the same is either acquired at some cost or without cost and under the scheme of the Act, there can be no situation when the cost is incapable of ascertainment. Section 55(2) provides for taking the cost either equal to the market value as on January 1, 1954, or at the option of the assessee equal to the cost of acquisition of the previous owner. Section 55(3) provides that where the cost of acquisition of the previous owner cannot be ascertained, it has to be taken to be equal to the market value on the date the asset was acquired by the previous owner. The Explanation to section 49 provides that previous owner is the person not covered by the clauses mentioned in section 49(2), i.e., who acquires property otherwise than by way of gift, will or by succession.

6. In the present case, the assessee acquired the property by succession from the previous owner. According to the stand of the assessee, the cost of acquisition by the previous owner could not be ascertained. However, he failed to exercise the option of going either by the date of market value on the date of acquisition or by the cost of the previous owner in which case the only option available to the Assessing Officer was to proceed to compute capital gain by taking the cost of the asset to be the fair market value on the specified date, i.e., January 1, 1954 as per applicable provision for assessment year 1977-78 and as on January 1, 1964 for the assessment year 1978-79. Even in a case where the cost of acquisition cannot be ascertained, section 55(3) statutorily prescribes the cost to be equal to the market value on the date of acquisition. This being the position, capital gain is not excluded even on the plea that value of the asset in respect of which capital gain is to be charged was incapable of being ascertained. The view taken in Amrik Singh’s case (supra) based on the assumption that where market value cannot be ascertained, capital gain cannot be applied, is not correct being against the statutory scheme. Similarly, the view taken by the Madhya Pradesh High Court in CIT v. H.H Maharaja Sahib Shri Lokendra Singhji [1986] 162 ITR 93 / 25 Taxman 66 cannot be accepted. The said judgment also does not give effect to the mandate of section 55(3) which provides for a situation where the value of the asset acquired could not be ascertained. If the market value can be ascertained, it has to be taken to be equal thereto and if the value cannot be ascertained, it has to be equal to the market value on a specified date at the option of the assessee. It is not the case of the assessee that land had no market value at all on the date of its acquisition. The contention that the value was incapable of being ascertained, as already observed, the value in such case has to be taken as being equal to market value on a specified date.

7. We, thus, hold that even where the cost of acquisition of capital asset cannot be ascertained but the asset has a market value, capital gain will be attracted by taking the cost of acquisition to be fair market value as on January 1, 1954, or on date statutorily specified or at the option by the assessee, the market value on the date of acquisition.

8. The question will stand answered accordingly in favour of the Revenue and against the assessee.

[Citation : 334 ITR 48]

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