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2016 (4) TMI 709 - ITAT MUMBAI

2016 (4) TMI 709 - ITAT MUMBAI - TMI - Sale of tenancy right of a property - FMV adoption - Held that:- As decided in Mina Deogun (2015 (5) TMI 10 - CALCUTTA HIGH COURT ). Since the assessee, in the present case, is held liable for long-term capital gains tax by treating the period for which the capital asset in question was held by the previous owner as the period for which the said asset was held by the assessee, the indexed cost of acquisition has also to be determined on the very same basis. .....

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he view based on the assumption that where the market value cannot be ascertained, capital gains cannot be applied, is not correct being against the statutory scheme, that 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.

Now, coming back to the facts of the case, we find that the FAA had adopted the fair market value as on 01. .....

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nsideration raising various Grounds of appeal. Assessee, an individual filed his return of income on 20/07/2008 declaring total income of ₹ 56. 22 lakhs. The AO completed the assessment u/s. 143(3)of the Act on 21. 12. 2010, determining the income of the assessee at ₹ 2. 40 crores. ITA No. 6917/Mum/2011(A. Y. 2008-09)Revenue s Appeal : 2. During the assessment proceedings, the AO found that the assessee had sold his half share in tenancy right of a property, for ₹ 1. 83 crores, .....

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n 45 r. w. s. 49 and 55(2) of the Act. The AO referred the matter to the JCIT u/s. 144A of the Act, who observed that the assessee had not denied that the tenancy right was a capital asset, that there was transfer of tenancy right in respect of immovable property, that the consideration received on transfer of tenancy right was capital receipt. He referred to the provisions of section 49 and section 55(2)of the Act and held that in the case under consideration the father of the assessee had acqu .....

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at the fair market value of the tenancy right as on 01. 04. 1981 could not be considered for determining the tax liability, that the clause (b) to section 55(2) was not applicable in respect of the tenancy right while computing the cost of acquisition. In view of the direction of the JCIT the AO assessed the entire sale consideration of ₹ 1, 83, 33, 334/- as LTCG. 3. Aggrieved by the order of the AO, the assessee preferred an appeal before the First Appellate Authority(FAA). It was contend .....

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or the purpose of section 49 and 48 the cost of acquisition in any other case had to be taken as nil, that as per the provisions of section49(1)(iii)(a)where the capital asset became the property of the assessee by succession, inheritance or devolution, the cost of acquisition of the asset would be deemed to be cost for which the previous owner of the property acquired at has increased by the cost of any improvement of the assessee incurred or borne by the previous owner for the assessee as the .....

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g that cost of tenancy rights would be taken as nil would not be applicable to the facts of the case, as the case of the assessee clearly fell under section 49(1) (ii) of the Act. After considering the submissions of the assessee and the assessment order, the FAA held that section 49(1)(ii) was an exception to the main provisions provided under section 55 (2) of the act and therefore the cost could not be taken as nil, that in case of the assessee the law to prior to assessment year 1995-96 woul .....

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ling under section 49 (1), that in the case of the assessee FMV as on 01. 04. 1981 was to be adopted for determining the taxable capital gains. After considering the submissions of the assessee and assessment order, the FAA held that assessee was not justified in claiming the amount received by him was not taxable as LTCG, that provisions of sec. 55(2)were amended from 1. 4. 95, that law as stood prior to 1996 will not be applicable, that the assessee had acquired the inherited tenancy right in .....

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d it prior to 1981, that as per the provisions of section 55(2)(b)(i) of the Act the market value as on 01. 04. 81 as determined by the valuer, was to be considered for computing indexed cost. He also referred to the case of Manjula J Shah (35SOT105) and directed the AO to re-compute indexed cost. He referred to the value determined by the valuer as on 01. 04. 48 lacs and indexed it to ₹ 79, 81, 237/-. Accordingly, he held that LTCG would be computed at ₹ 1, 03, 52, 098/-(1, 83, 33, .....

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s capital receipt and not liable to tax u/s. 55(2)(a) of the Act. He alternatively stated that FMV as on 01. 4. 81 plus the indexing worked out by using cost inflation index in reverse manner should have been allowed. That provisions of sec. 49(a) were applicable to the facts of the case, that in case of tenancy capital gain was not taxable. He referred to the case of D. P. Sandu Bros. Chembur P. Ltd. (273 ITR 1), Tara Agencies (292 ITR444) and B. Srinivasa Shetty (128 ITR294) 5. We have heard t .....

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gs, further, we would like to refer to certain principles governing the provisions of sections 48, 49 and 55 of the Act and they stipulate as under: i. Section 48 of the Act deals with the mode of computation of capital gains, whereas section 49 refers to cost with reference to certain modes of acquisition are machinery provisions relating to the assessment of capital gains meant for computing the capital gains under different circumstances. Sections 48, 49 and 55 are not charging sections. ii. .....

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sition and same is provided in sub-clauses (i) to (iv) of the section. It further provides that 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 assessee, as the case may be. iv. The option under section 55 to take the cost of acquisition of the asset as the fair market value of the asset as on 01. 01. 1981, or at th .....

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p Singh on 16. 04. 1958, that he died on 29. 06. 1968, that the aforesaid property devolved on her widow, who died on 16. 09. 1999, that, the assessee and her three sisters succeeded to the property in equal shares. During the financial year 2003-04 the property was sold at a sum of ₹ 12 crores. The share of the assessee in the sale proceeds was a sum of ₹ 3 crores. Matter travelled up to the Hon ble Calcutta High Court, wherein following question about valuation of the property was .....

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, on the ground that a literal interpretation of the provisions was to be discarded ? Deciding the matter, the Hon ble Court held as follow: 10. Section 49 referred to in the aforesaid clause (b) of Explanation 1 provides for various circumstances including acquisition by succession, inheritance or devolution. Therefore, the period for which the asset was held by the previous owner, namely, the mother of the assessee can also be included to the period of holding of the property by the assessee. .....

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previous owner before the 1st day of April, 1981, means the cost of the capital asset to the previous owner or the fair market value of the asset on the 1st day of April, 1981, at the option of the assessee. " 11. Based on the aforesaid provision the cost of acquisition of capital asset at the option of the assessee is the fair market value of the asset on April 1, 1981. When that is permissible in law, indexation on the fair market value as on April 1, 1981, until the date of transfer has .....

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m 439 wherein the following views were expressed : "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. The term 'cost of acquisition of the asset' is explained in Explanation (iii) to section 48. In te .....

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cost of acquisition multiplied by the ratio of the cost inflation index in the year in which assessee's asset is trans ferred to the cost of inflation index for the year beginning on April 1, 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 April 1, 1981, since, in the present case, the asset was acquired by the previous owner of the property. Learned counsel for the Revenue, however, .....

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tion 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 fic tion contained in sub-section (1) of sectio .....

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s owner or the assessee, as the case may be. If the interpretation of the counsel for the Revenue was cor rect, 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 .....

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date of operation of the Will. " 13. Mr. Murarka has also relied upon a judgment of CIT v. Manjula J. Shah reported in [2013] 355 ITR 474(Bom)and referred to paragraphs 21 to 24 of the judgment which are as under (page 482) : "To accept the contention of the Revenue that the words used in clause (iii) of the Explanation to section 48 of the Act has to be read by ignoring the provisions contained in section 2 of the Act runs counter to the entire scheme of the Act. Section 2 of the Act .....

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the Act. If the meaning given in section 2(42A) is not adopted in construing the words used in section 48 of the Act, then the gains arising on transfer of a capital asset acquired under a gift or will be outside the purview of the capital gains tax which is not intended by the Legislature. Therefore, the argument of the Revenue which runs counter to the legislative intent cannot be accepted. Apart from the above, section 55(1)(b)(2)(ii) of the Act provides that where the capital asset became th .....

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rise only if the period for which the asset was held by the previous owner is included in determining the period for which the asset was held by the assessee. Therefore, it is reasonable to hold that in the case of an assessee covered under section 49(1) of the Act the capital gains lia bility has to be computed by considering that the assessee held the said asset from the date it was held by the previous owner and the same analogy has also to be applied in determining the indexed cost of acquis .....

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nt and then deduct the same from the sale consideration to arrive at the long-term capital gains. If indexation is linked to the period of holding the asset and in the case of an assessee covered under section 49(1) of the Act, the period of holding the asset has to be determined by including the period for which the said asset was held by the previous owner, then obviously in arriving at the indexation, the first year in which the said asset was held by the previous owner would be the first yea .....

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