TMI Blog2004 (12) TMI 29X X X X Extracts X X X X X X X X Extracts X X X X ..... l is right in law in holding that the income-tax authorities were not justified in working out the capital gains of Rs. 41,11,414 and including the same in the total income of the assessee?" The respondent-assessee is an individual. The assessment year is 1983-84 and the relevant previous year is the financial year ended on March 31, 1983. The assessee inherited property known as "Ranjit Vilas Palace" along with appurtenant and adjacent lands situated at Rajkot on the death of his father, Shri Pradumansinhji on November 9, 1973. It appears that for the assessment years 1974-75 to 1977-78 certain tax demands along with estate duty payable on the death of his father were outstanding against the assessee. To effect recovery -of these outstanding dues, the Income-tax Department attached 22059 sq. yds. of vacant land on February 1,1983. The Department divided 5727 sq. mtrs. of land out of the aforesaid acquired parcel of land and sold 33 plots by way of public auction held on March 21, 1983, and March 22, 1983. A sum of Rs. 65,50,870 was the gross realization from the auction sale. The return of income filed by the assessee was accompanied by a letter dated June 6, 1983, wherein the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Act would be applicable and the assessee was liable to be charged to capital gains tax. After permitting statutory deductions the long-term capital gains were worked out at a figure of Rs. 41,11,414. The assessee carried the matter in appeal before the Commissioner of Income-tax (Appeals), Rajkot, who, for the reasons stated in his order dated March 21, 1986, confirmed the order made by the Assessing Officer. The assessee went in second appeal before the Tribunal and the said appeal came to be registered as I.T.A. No. 1311/Ahd./1986. The Tribunal accepted the submission of the assessee that the ratio of the Supreme Court decision in the case of B.C. Srinivasa Setty [1981] 128 ITR 294 was squarely applicable to the facts of the case. The Tribunal further found that from the history of the Jadeja Rulers of the Rajkot State, which was placed before the Tribunal, it was quite clear that the property in question was never purchased by the forefathers of the assessee but was acquired by conquest. Accordingly, the Tribunal came to the conclusion that the cost of acquisition of the asset was nil, i.e., not ascertainable. According to the Tribunal, even after invoking the provisions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a) and the Explanation under the said section it was submitted that in a case where the capital asset became the property of the assessee by the mode specified in clause (iii)(a) of sub-section (1) of section 49 the cost of acquisition was to be deemed the cost for which the previous owner of the property acquired it, and as per the Explanation the expression "previous owner" meant the last previous owner of the capital asset who acquired the property by a mode of acquisition other than that referred to in any of the clauses mentioned in sub-section (1) of section 49 of the Act. That under section 55(2)(ii) of the Act an assessee was required to exercise option by adopting the cost of acquisition as specified in any one of the modes under section 49(1) of the Act or adopt the fair market value of the asset on the 1st day of January, 1964. That when sub-section (3) of section 55 of the Act was read together with these provisions, it would point out to the scheme as operating so as to arrive at the chargeable capital gains by adopting either the fair market value of the capital asset on the specified date or the fair market value to be adopted under section 55(3) of the Act. Thus, ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of any one of the sections were not fulfilled. Inviting attention to the provisions of section 49(1) it was submitted that the said section dealt with certain modes of acquisition and the cost of acquisition to be taken in the event acquisition was by any one of the specified modes; but the said provision did not permit adopting nil cost of acquisition where the cost was unascertainable. Section 55(2)(a)(i) of the Act after amendment specified that where the price was known for acquisition of the specified asset that was the price which was to be taken as cost of acquisition and it had to be taken as nil in any other case; that these provisions went to show that on a plain reading of section 55(2)(a)(ii) the Legislature has referred to an asset acquired by a mode not being any of the modes specified under section 49(1)(i) to (iv) of the Act. That even otherwise as could be seen from the said amended provision it pertains only to the specified asset and, therefore, there was no implied inclusion of any other asset where the cost was not known. That in a case where the cost of acquisition by the previous owner as well as the date of acquisition by the previous owner were not asce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Vyas in rejoinder submitted that the property which was sold was a tangible property, i.e., land. That the cost was conceivable taking into consideration the nature and character of the asset. In other words, it was not as if the land had no value. Alternatively, it was submitted that even if it was accepted that no payment was made for acquisition of the asset, in the light of section 55(3) read with section 2(22A) of the Act it was open to the Revenue authorities to work out the cost on the basis of the fair market value and in the circumstances the reference made by the Revenue was required to be allowed in favour of the Revenue. The scheme for charging capital gains to tax can be culled out from a conjoint reading of the provisions of sections 45, 48, 49 and 55 of the Act. Section 45 prescribes that on transfer of a capital asset effected in a previous year the difference arising by way of any profits or gains shall be charged to income-tax under the head "Capital gains" and shall be deemed to be the income of the previous year in which the transfer took place. The terms "capital asset" and "transfer" are defined respectively in sections 2(14) and 2(47) of the Act. For the pu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t previous owner of the capital asset acquired it by conquest, i.e., without paying any price for the acquisition. As noted hereinbefore the Tribunal has categorically found, after referring to the history of the Jadeja Rulers of the Rajkot State, that the property in question was never purchased by the assessee's forefathers but was acquired by conquest and that it had cost nothing to the last previous owner for acquiring the property in question. It is in the context of the aforesaid findings of the Tribunal that the contentions raised on behalf of the Revenue have to be examined. Section 48 of the Act specifies the mode of computation and deduction. Income chargeable under the head "Capital gains" has to be computed by deducting from the full value of the consideration received or accruing as a result of the transfer of the capital assets: (i) expenditure incurred wholly and exclusively in connection with such transfer; (ii) cost of acquisition of the capital asset and the cost of any improvement thereto. According to the Revenue if no expenditure has been incurred in connection with the transfer of an asset nothing is deductible. Therefore, clause (ii) of section 48 which per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cified items under section 48 of the Act have to be deducted, when the language used is: "The income chargeable under the head 'Capital gains' shall be computed by deducting from the full value of the consideration". It is in this context that the ratio laid down by the apex court in the case of B.C. Srinivasa Setty [1981] 128 ITR 294 is required to be applied to the facts found on record. It is necessary to briefly recapitulate the facts in the backdrop of which the controversy arose before the apex court. The assessee therein, a registered firm, came to be dissolved and at the time of dissolution the goodwill of the firm was valued. Originally when the partnership was constituted the instrument showed that the goodwill of the firm had not been valued. Upon dissolution of the assessee a new partnership came to be constituted with the same name and the new partnership took over all the assets, including the goodwill, and liabilities of the dissolved firm. According to the Revenue as the goodwill was transferred by the assessee to the newly constituted firm it was liable to be charged under the head "Capital gains". The assessee succeeded before the Tribunal and the High Court and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion provision. But the question here is whether it is possible to apply the computation provision at all if a certain interpretation is pressed on the charging provision. That pertains to the fundamental integrality of the statutory scheme provided for each head. The point to consider then is whether if the expression 'asset' in section 45 is construed as including the goodwill of a new business, it is possible to apply the computation sections for quantifying the profits and gains on its transfer. The mode of computation and deductions set forth in section 48 provide the principal basis for quantifying the income chargeable under the head 'Capital gains'. The section provides that the income chargeable under that head 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: '(ii) the cost of acquisition of the capital asset...' What is contemplated is an asset in the acquisition of which it is possible to envisage a cost. The intent goes to the nature and character of the asset, that it is an asset which possesses the inherent quality of being available on the expenditure of money to a pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of an asset where it was not possible to envisage a cost then the ratio of the decision would be applicable and not in the case of assets where it was possible to conceive a cost. Mr. Vyas, in support of the said submission, placed reliance on the observations made to the effect that "Yet there are assets which are acquired by way of production in which no cost element can be identified or envisaged." Therefore, according to him, it was only in a case where having regard to the nature of the assets it would be impossible to determine the cost of acquisition that the ratio can be invoked. That in the present case the asset in question was land and hence, it was not possible to state that it was an asset which had no cost element or for acquisition of which no cost could be envisaged. As laid down by the apex court though section 45 is a charging section for the purpose of imposing the charge the Legislature has enacted detailed provisions in order to compute the profits or gains under that head and no provision at variance with such computation provisions can be applied for determining the chargeable profits and gains. That all transactions covered by section 45 have to fall unde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he twofold contentions raised by the Revenue, viz., that the case of B.C. Srinivasa Setty [1981] 128 ITR 294 (SC) and other decisions which followed the said decision related to intangible assets and secondly where cost of acquisition could not be ascertained the fair market value had to be adopted in the following words: "It is no doubt true that none of these cases relate to the sale of immovable property as in the present case. But the gist of all these decisions has been the same that if there is no cost of acquisition, then the sale price would not attract the provisions of capital gains. Thus, it would be clear that the liability for capital gains tax would arise in respect of only those capital assets in the acquisition of which the element of cost is either actually present or is capable of being reckoned and not in respect of those assets in the acquisition of which the element of cost is altogether inconceivable, as in the present case. The circular of the Board referred to above on which learned counsel for the Revenue placed reliance-though not binding on this court-only indicates that the section does not relate to only the immediate past owner but to past owners in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red as provided under section 55 of the Act. Learned counsel says that by this process the element of cost of acquisition can be taken as present. Considered from a proper perspective, section 55 does not yield to this line of approach. The relevant subsection of section 55 is an elucidation and extension of sections 48 and 49 providing for the valuation being pegged down to the date specified therein, namely January 1, 1964, at the option of the assessee. Having in view the galloping increase in prices and abnormal low costs in the earlier years, the assessee is facilitated to opt for the date, i.e., January 1, 1964, for ascertaining the cost of acquisition. This provision presupposes the cost of acquisition but this mode of ascertaining the cost of acquisition is prescribed by shifting the date of ascertainment to January 1, 1964, from the actual date of acquisition. The effect of this section is that whatever be the cost during the period preceding January 1, 1964, the assessee may exercise the option of having the value ascertained as on January 1, 1964. This provision cannot be pressed into service where there is no cost of acquisition at all." This court in the case of Baro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e even if there is no cost of acquisition. Similarly, section 55 has been amended from time to time to enable the taxation of other assets wherein no cost of acquisition is envisaged; tenancy rights, stage carriage permits and, loom hours by the Finance Act, 1994 with effect from April 1, 1995; right to manufacture, produce or process any article or thing by the Finance Act, 1997 with effect from April 1, 1988; trademark or brand name associated with business by the Finance Act, 2001 with effect from April 1, 2002; and right to carry on any business by the Finance Act, 2002 with effect from April 1, 2003. Therefore, even if the amendment is taken into consideration section 55 can be invoked in cases of nil cost of acquisition for the purpose of bringing to tax the entire sale consideration only in relation to the specified assets. The Legislature having amended the said section from time to time has roped in only specified assets as noted hereinbefore. In the circumstances, the amendment instead of working to the advantage of the Revenue goes to indicate that the Legislature does not want to bring within the purview of the tax net all assets (except the specified assets) which do ..... X X X X Extracts X X X X X X X X Extracts X X X X
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