2012 (2) TMI 252 - AT - Income Tax

Tribunal rules on cost of acquisition for LTCG, remands for FMV reassessment.

The tribunal dismissed certain general grounds of appeal raised by the assessee firm. Regarding the levy of interest under sections 234B and 234C, it was ... Proprietor firm converted into partnership - Cost of acquisition - Asset acquired by succession - 'Book Value OR Fair Market Value' - Held That:- AO had not examined as to whether the cost value given by the assessee firm is correct or otherwise, We remand the matter back to AO with a specific direction to examine as to whether the value [FMV] shown by the assessee firm is correct as on 1.4.1981 and to take appropriate action in accordance with the provisions of the Act at that relevant period. - Reliance placed on Sunil Siddharthbhai vs CIT (1985 -TMI - 5909 - SUPREME Court) Issues Involved:1. General grounds of appeal.2. Levy of interest under sections 234B and 234C of the Act.3. Computation of long-term capital gains (LTCG).Issue-wise Detailed Analysis:1. General Grounds of Appeal:The first, sixth, eighth, and ninth grounds raised by the assessee firm were general in nature and required no adjudication. Therefore, these grounds were dismissed.2. Levy of Interest under Sections 234B and 234C:The ground No.7 pertained to the levy of interest under sections 234B and 234C of the Income Tax Act. The tribunal held that the levy of interest under these sections is mandatory and consequential in nature. Consequently, this ground was deemed not maintainable.3. Computation of Long-Term Capital Gains (LTCG):The remaining grounds (Nos. 2, 3, 4, and 5) focused on the issue of computation of LTCG. The assessee firm also raised an additional ground regarding the cost of acquisition under section 49(i)(iii)(a) of the Act.3.1. Background and Facts:The assessee firm, engaged in trading cement concrete blocks, filed a return of income for the AY 2007-08, declaring a total income of Rs.5,15,63,550/- (Rs.72,57,738/- as business income and Rs.4,44,09,562/- as LTCG). The AO, after scrutiny, accepted the business income but recomputed the LTCG by adopting the book value of the land as the cost of acquisition instead of the market value as on 1.4.1981.3.2. Assessee's Argument:The assessee argued that the asset was acquired by succession, not by purchase, and thus fell within the modes specified in section 49 of the Act. They contended that the cost of acquisition should be the market value as on 1.4.1981, supported by a valuation report, and indexed accordingly.3.3. AO's Stand:The AO adopted the book value of Rs.2,70,975/- as the cost of acquisition and calculated the indexed cost at Rs.14,06,360/-, resulting in an LTCG of Rs.5.83,95,652/-. The AO's reasoning was based on the asset not falling within the modes described in section 49 and the cost of acquisition being the value credited in the firm's books.3.4. CIT (A)'s Decision:The CIT (A) upheld the AO's decision, relying on the judgment of the Hon'ble Madras High Court in CIT v. Haridoss Purushothamdoss, which supported the AO's adoption of the book value as the cost of acquisition.3.5. Tribunal's Analysis:The tribunal considered the arguments and submissions, noting that there was no cost of acquisition for the firm since the asset was already in the books of the proprietary concern before conversion into a partnership firm. The tribunal distinguished the case from the Madras High Court ruling, emphasizing that the property was not revalued at the time of conversion, making the book value notional.3.6. Relevant Case Laws:The tribunal referenced the Supreme Court ruling in Sunil Siddharthbhai v. CIT, which discussed the transfer of personal assets to a partnership firm and the notional value of such assets. The tribunal also noted that section 45(3) of the Act, inserted in 1987, was not applicable to the case as the conversion occurred in 1981.3.7. Conclusion and Remand:The tribunal concluded that the AO had not properly examined the fair market value (FMV) as on 1.4.1981 and remitted the issue back to the AO for re-examination. The AO was directed to verify the FMV and take appropriate action in accordance with the Act, considering the Supreme Court ruling and the tribunal's findings.Final Order:The appeal was treated as partly allowed for statistical purposes, with the order pronounced in the open court on 6th January 2012.