1993 (8) TMI 20 - HC - Income Tax

A Firm A Partner Diversion Of Income Income By Overriding Title Income Tax Act Interest In Property Transfer Of Property

Summary

Issues Involved:
1. Justification of the Tribunal in quashing the order passed under section 263 of the Income-tax Act, 1961.
2. Determination of the fair market value versus the cost of acquisition of shares for capital gains computation.
3. Jurisdiction and correctness of the Commissioner of Income-tax's order under section 263.

Detailed Analysis:

1. Justification of the Tribunal in Quashing the Order Passed Under Section 263 of the Income-tax Act, 1961
The Tribunal found that the Income-tax Officer (ITO) had allowed a deduction of Rs. 1,00,000 as the cost of acquisition of the shares, not as the fair market value as on January 1, 1964. The Commissioner of Income-tax (CIT) had incorrectly assumed that the ITO had taken the fair market value of the shares as on January 1, 1964, at Rs. 1,00,000. The Tribunal held that the assessment order passed by the ITO was neither erroneous in law nor prejudicial to the interests of the Revenue. Therefore, the Tribunal quashed the CIT's order under section 263 of the Income-tax Act.

2. Determination of the Fair Market Value Versus the Cost of Acquisition of Shares for Capital Gains Computation
Section 48 of the Income-tax Act, 1961, requires the computation of income chargeable under the head "Capital gains" by deducting the cost of acquisition from the full value of the consideration received. Section 55(2) provides an option for the assessee to substitute the fair market value as on January 1, 1964, for the cost of acquisition if the asset was acquired before that date. In this case, the ITO computed the capital gains based on the cost of acquisition, which was Rs. 1,00,000, and not the fair market value. The CIT's order was based on the incorrect assumption that the ITO had taken the fair market value as on January 1, 1964, at Rs. 1,00,000.

3. Jurisdiction and Correctness of the Commissioner of Income-tax's Order Under Section 263
The CIT initiated proceedings under section 263 on the grounds that the ITO had incorrectly taken the fair market value of the shares as on January 1, 1964, at Rs. 1,00,000. However, the Tribunal found that the ITO had actually taken the cost of acquisition at Rs. 1,00,000, which was supported by the company's balance sheet and notes. The CIT's order was based on a wrong premise and was therefore without jurisdiction. The Tribunal concluded that the CIT's assumption that the fair market value of the shares as on January 1, 1964, was "nil" was factually incorrect and unsupported by any cogent material.

Conclusion
The High Court affirmed the Tribunal's decision, stating that the CIT's order was based on incorrect facts and was without jurisdiction. The ITO had correctly computed the capital gains based on the cost of acquisition, and there was no error in the assessment order. The question referred to the court was answered in the affirmative and in favor of the assessee, with no order as to costs.