1988 (1) TMI 1 - HC - Income Tax

Summary

Issues:
1. Whether the assessee can claim deduction of the cost of the asset to the donor while computing capital gains on the property sold.
2. Whether the assessee can change her option for deduction of value/cost for computation of capital gains.

Analysis:
The High Court of Madhya Pradesh considered a reference under section 256(1) of the Income-tax Act, 1961, where the Tribunal had raised questions regarding the deduction of the cost of the asset and the option for deduction of value/cost for computing capital gains. The assessee, an individual, sold a house received as a gift for Rs. 2,00,000, claiming the cost at Rs. 2,00,000, the market value on January 1, 1964. The Income-tax Officer disagreed, valuing the property at Rs. 1,10,000. The Tribunal upheld the decision, stating the assessee could not change her option under section 55(2)(ii) of the Act. The assessee argued that the option could be exercised until the final computation of capital gains, while the Revenue contended once the option was exercised, it was binding.

The Court referred to relevant provisions, noting that section 49 determined the cost of acquisition for capital gains, and section 55(2)(ii) allowed the assessee to choose the cost of the asset to the previous owner or the fair market value on January 1, 1964. The Court highlighted that the Act did not restrict the assessee from varying the option once exercised under section 55, unlike in other sections where such restrictions existed. It held that the freedom of choice under section 55(2)(ii) could be exercised until the income chargeable under capital gains was computed. Therefore, the Tribunal was unjustified in disallowing the assessee from claiming the cost of acquisition as per section 55(2)(ii).

Consequently, the Court answered both questions in the negative and in favor of the assessee, stating that the assessee could claim the cost of acquisition as per section 55(2)(ii) until the computation of income under capital gains was finalized. Each party was directed to bear their respective costs in this reference.