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2016 (11) TMI 246 - ITAT KOLKATA

2016 (11) TMI 246 - ITAT KOLKATA - TMI - Capital gain computation - taking the cost inflation index factor of 1981 i.e. 100 - disregarding the valuation report made by DVO u/s 55A - Held that:- Considering the totality of the facts and the scheme of the Act relating to taxation of capital gains, we are of the considered opinion that as per the schematic interpretation the cost of inflation index should be made applied with reference to the year in which the capital asset was first acquired by th .....

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hould be interpreted in a manner which will result in harmonious interpretation which avoids absurdity and promote the objective of an enactment. We, therefore, direct the AO to re-compute the capital gains by applying cost inflation index of 100 per cent applicable for financial year 1981-82. Hence, we uphold the order of Ld. CIT(A) on this point and this ground of Revenue’s appeal is dismissed. - ITA No.2864/Kol/2013 - Dated:- 19-10-2016 - Shri Waseem Ahmed, Accountant Member and Shri S.S.Visw .....

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enue per its appeal are as under:- The Ld. CIT(Appeals) had erred in law as well as in facts by giving relief to the assessee on the ground of Cos Inflation Index factor, that in the event of adoption of Fair Market Value of 1981, the Cost Inflation Index factor of 1981 (i.e. 100) could only be taken, ignoring the Cost Inflation Index factor of FYr. 2002-03 (447) prevailing on the subsequent inheritance of the ownership of the property. Furthermore, the Ld. CIT(Appeals) had also erred in law as .....

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The only inter-connected issue raised by Revenue in this appeal is that Ld. CIT(A) erred in deleting the addition made by the Assessing Officer under the head capital gain by taking the cost inflation index factor of 1981 i.e. 100 and further erred by disregarding the valuation report made by DVO u/s 55A of the Act. 3. The fact in brief are that assessee in the present case is an individual and has shown income from salary, capital gains and other sources. Assessee inherited the property from hi .....

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e as detailed below:- Particulars AO observation Appellant s 1/8th undivided share (Rs) Sale price (gross consideration) 8137500.00 8137500.00 Brokerage and commission 182,671.00 182,671.00 Net sale price (net consideration) 7,954,829.00 7,954,829.00 FMV as on 01/04/1981 486,500.00 (vide DVO s report) 1083375.00 (vide valuation report) FMV as on 01/04/1981 indexed by the following Indexed factor: * 564,862.42 *486500 x 519 447 (FY 2002-03) 5622710.000* * 1083375 x 519 100 (FY 1981) Resultant LT .....

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ation index of the year when the property was first held by the assessee i.e. 447 for the financial year 2002-03. In that view of the matter, AO worked out the LTCG taxable in the hands of assessee for ₹46,46,655/-. 4. Aggrieved, assessee preferred an appeal before Ld. CIT(A). The assessee before ld. CIT(A) submitted that reference made by AO to the DVO u/s 55A of the Act for the valuation of the property as on 1.4.1981 is against the provision of law and his action is ultra varies as per .....

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he is of the opinion that the value so claimed is at variance with its fair market value. However, AO was authorized to make the reference to the DVO with effect from 1st July 2012 and instant case pertains to the AY 2007-08. Therefore, the AO cannot make the reference to the DVO as the assessee has shown more value of the property as on 1.4.1981 than the value of the DVO. With regard to action of the AO for adopting the index factor for the FY 2002-03, assessee submitted that the ownership of .....

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ion of adoption of some remote index factor to some distant and discrete FMV, prevailing in two different years, in the light of the clarificatory CBDT Circulars and concluded that in the event of adoption of FMV of 1981, the indexed factor of 1981 only could be taken, ignoring the indexed factor prevailing around or on the subsequent inheritance of acquisition of ownership vide section 49. This judgment from the jurisdictional Tribunal being applicable to the facts of the present appeal. I feel .....

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nflation index for that year should be adopted. He further submitted that the AO is very much authorized to refer the matter to DVO in terms of provision of Sec. 55A of the Act. Ld. DR further submitted that assessee intentionally has shown valuation of the property as on 01.04.1981 at a higher value with the motive of avoiding capital gains. Therefore, the action of AO for making the reference to DVO is within the provision of law. In this connection, Ld. DR relied on the judgment of Hon'bl .....

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property for ₹ 97,50000 which was purchased by assessee on 31-7-1979 at a purchase price of ₹ 2,80,882 - However, while calculating long-term capital gain, assessee adopted market value of property at ₹ 34,55,000 as on 1-4-1981 - Assessing Officer considered such estimation of fair market value at a higher side and referred matter to DVO who computed fair market value of property at ₹ 3,77,250 and completed assessment accordingly Whether since assessee inflated market va .....

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ied. He further submitted that the case law cited by Ld.DR is different from the instant case, in that case the question before the Hon'ble jurisdictional High Court whether there was a motive to avoid tax or not but in the instant case, assessee has no such ill-motive to avoid his tax liability. He further submitted that on similar facts, the Hon'ble High Court of Calcutta has decided the issue in favour of assessee in the case of CIT Vs. Smt. Mina Deogun in 375 ITR 0586. The relevant e .....

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ssessing officer to refer the matter to the valuation officer under section 55A. therefore, the valuation at a sum of ₹ 18,40,244/- as at 1st April, 1981 was correctly accepted by the learned Tribunal. The first question is answered in the positive and against the revenue. Mr. Agarwal, learned advocate appearing for the revenue submitted that the computation of capital gains has to be made in accordance with section 48 and in particular explanation (iii), which provides as follows:- (iii) .....

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ilable to the assessee from the year 1999 when she inherited the property which was in fact the first year of her inheritance. That can certainly be one way of looking at it. But if a harmonious construction is to be given then reference has to be made to the other provisions contained in the Act. Section 2(42A) defines short term capital asset. Clause (b) of Explanation (1) to Section 2(42A) provides as follows:- (b) in the case of a capital asset which becomes the property of the assessee in t .....

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olding of the property by the assessee. The mother held the property since 1968 as indicated above. Here is, as such, the reason why the assessee in the case before us can be said to have held the property since 1968. In order to ascertain the cost of acquisition to the assessee reference can also be made to Section 55(2)(b)(ii) which reads as follows:- (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 capita .....

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81 until the date of transfer has to be allowed. Any other interpretation will not only lead to absurd result but shall also cause immense prejudice to the assessee. If the previous owner that is to say the mother had not died and if she herself had sold the property in the year 2003, she would have got the benefit of indexation on the fair market value as at 1st April, 1981. We are supported in our view by a judgment of the Gujarat High Court in the case of C.I.T- I Vs. Rajesh Vitthalbhai Patel .....

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tion 48. In terms of such explanation, indexed cost of acquisition would be an amount which bears to the cost of acquisition the same proportion as the 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 assessee or for the year beginning on the 1st day of April, 1981, whichever is later. In simple words therefore for an asset acquired prior to 1.4.1981 the indexed cost of acquisition would be .....

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such interpretation would fail to take into account the expression Cost Inflation Index for the first year in which the asset was held by the assessee . In his opinion the assessee referred to under such expression would be the present assessee and not the previous owner. In our opinion, such interpretation cannot be accepted. We say so for the following reasons. Firstly, by virtue of a deeming fiction provided in sub- section (1) of section 49, cost of acquisition in hands of the assessee would .....

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ction must be allowed to have its full play. As is often stated, a deeming fiction must be allowed its full application and should not be allowed to boggle. 8. Additionally we notice that in Sub-section (1) of section 49, the legislature has provided that 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 any cost of improvement of the assets incurred or borne by the previous owner or the assessee as the case .....

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ed in sub-section (1) of section 49. Further the interpretation sought to be given by the Revenue would be unacceptable because there is no provision under which the cost of acquisition in the hands of the assessee in cases such as gift on the date of acquisition of the property can be made and found in the Act. A Serious road-block would be created if such property is acquired through Will and would, therefore, have no reference to its actual cost on the date of operation of the Will . Mr. Mura .....

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ires, the provisions of the Act have to be construed as provided under section 2 of the Act. In section 48 of the Act, the expression asset held by the assessee is not defined and, therefore, in the absence of any intention to the contrary the expression asset held by the assessee in clause (iii) of the Explanation to section 48 of the Act has to be construed in consonance with the meaning given in section 2(42A) of the Act. If the meaning given in section 2(42A) is not adopted in construing the .....

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aw of Hon'ble jurisdictional High Court in the case of CIT vs. Smt. Mina Deogun 375 ITR (2015)586 (Cal). In rejoinder, Ld. DR submitted that the jurisdictional High Court has decided the issue on 09.06.2016 which is the latest decision. Therefore this case should have bearing on the issue of the instant case. 6. We have heard the rival contentions and perused the materials available on record. From the foregoing discussion, we find that AO has disregarded the valuation report submitted by as .....

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t;the year in which the assessee first held the capital assets" is interpreted by him to be the year in which the assessee succeeded to the assets. We find that s. 2(42A) also uses a somewhat similar expression. Explanation 1 to section 2(42A) provides that in determining the period for which any capital asset is held by the assessee, in the case of a capital asset which become the property of the assessee, in any of the circumstances mentioned in s. 49(1), there shall be included the perio .....

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on inheritance and succession. The liability for capital gain arises only when the capital asset is actually transferred by the successor. It is only when the ultimate successor transfers the capital asset for a consideration the capital gains are assessed to tax. In assessing capital gain in the hands of successor, date of acquisition and period of holding, is determined taking into consideration the date on which and the cost of which the first owner acquires the capital asset. It is for this .....

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er the provisions of these sections, where an assessee sells an inherited capital asset, the capital gain is computed with reference to the period of holding and cost of acquisition incurred by the previous owner. It is, so because in fact the successor assessee does not actually incur any cost. If for applying other provisions relating to computation of capital gains, period of holding and cost incurred by the previous owner is considered, then it will be improper to apply only the cost inflati .....

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ot take into account the inflation which occurred over a period of time. The new system was therefore, enacted for computing capital gain which allowed the cost of asset to be adjusted for general inflation before deducting it from the sale proceeds. The statutory objective of the new system was to favour those assessee s where capital gains accrued over a long period. The CBDT, in Circular No. 636, dt. 31st Aug., 1992, explained provisions of Finance Act, 1992 relating to amended scheme of capi .....

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rcular further clarified that if an asset was acquired before 1st April, 1981, the market value of the capital asset as on 1st April, 1981 would be taken for the purpose of indexation. A co-joint reading of the Memorandum explaining the Finance Bill, 1992 and CBDT Circular No. 636 shows that the indexation is to be allowed in respect of period of holding of the asset and not in relation to the individuality of the assessee. For the purpose of determining the period of holding intermediate transf .....

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5(2)(b)(ii) r/w s. 2(42A) of the Act. In our considered opinion therefore, the cost inflation index applicable for financial year 1981-82 and not to financial year 2002-03 should have been applied by the AO. A similar view was taken by Chandigarh Bench of the Tribunal in the case of Smt. Pushpa Sofat Vs. ITO (2004) 89 TTJ (Chd) 499. In that case house property was inherited by the assessee from her father was sold in asst. yr. 1993-94. The father of the assessee acquired the property in 1972 and .....

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gain by applying cost inflation index of 1st April, 1981. Considering the totality of the facts and the scheme of the Act relating to taxation of capital gains, we are of the considered opinion that as per the schematic interpretation the cost of inflation index should be made applied with reference to the year in which the capital asset was first acquired by the previous owner. If only for the purpose of computing indexed cost of acquisition, the date of acquisition by the previous owner is exc .....

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nactment. We, therefore, direct the AO to re-compute the capital gains by applying cost inflation index of 100 per cent applicable for financial year 1981-82. Hence, we uphold the order of Ld. CIT(A) on this point and this ground of Revenue s appeal is dismissed. 6.1 For the other issue of referring the matter to the DVO for the valuation of the property as on 1.4.1981, we find that the Hon ble Jurisdictional High Court has decided the issue in favour of Revenue in the case of Nirmal Kumar Ravin .....

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