Court rejects market value as cost of acquisition for capital gains calculation, favors Department in landmark ruling

The court ruled against the assessee in a case concerning the computation of capital gains based on the cost of acquisition of property. The court held that the market value as of April 1, 1964, could not be considered the cost of acquisition for calculating capital gains. The court referred to a previous case involving the assessee's brother and determined that the cost as shown in the books of the firm and the parties' valuation was the actual cost, rejecting the argument for market value. The decision favored the Department, denying the assessee's claim.

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Issues:
1. Computation of capital gains based on the cost of acquisition of a property.
2. Determining the market value as the cost of acquisition for capital gains calculation.

Analysis:
The case involved a Hindu undivided family that sold vacant lands and disputed the cost to be considered for calculating capital gains. The assessee claimed the market value of the lands as of April 1, 1964, at Rs. 4,000 per ground, while the Income-tax Officer argued for the market value at the date of acquisition in 1919, estimated at Rs. 400 per ground. The dispute centered around whether the property was always owned by the family or transferred to the firm and later back to the family members. The first appellate authority referred to a similar case involving the brother of the assessee, where the Appellate Tribunal had deemed the property acquisition date as April 1, 1964, but rejected the valuation by the firm and partners. The Commissioner of Income-tax (Appeals) allowed the appeal on the acquisition date but remitted the computation of capital gains to ascertain the market value on that date.

The Tribunal upheld the Commissioner's decision, prompting a further appeal. The Department argued that the cost of acquisition should be the book value when the property was acquired, as per a previous court decision involving the assessee's brother. The court referred to the previous case and held that the cost as shown in the books of the firm and the parties' valuation was the real cost, not a notional one. The court disagreed with the Tribunal's decision to use the market value as of April 1, 1964, for computing capital gains.

The assessee's counsel relied on other court decisions to support the market value on April 1, 1964, as the cost of acquisition. However, the court, based on the precedent set in the case of the assessee's brother, maintained that the market value on that date could not be considered the cost of acquisition. Consequently, the court ruled in favor of the Department, answering the question in the negative and against the assessee. No costs were awarded in this judgment.

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