1993 (1) TMI 65 - HC - Income Tax

Court rules land acquisition cost as nil on partial partition, impacting capital gain computation.

The court determined that the cost of acquisition of the land in the hands of the assessee HUF was nil, as it was received on partial partition of the ... Deemed cost of acquisition on distribution of assets on partition - Cost of acquisition in the hands of the previous owner - Fair market value as cost where previous owner's cost cannot be ascertained under section 55(3) - Computation of capital gains by reference to cost of acquisition - Receipt of property on partial partition by a Hindu undivided familyDeemed cost of acquisition on distribution of assets on partition - Fair market value as cost where previous owner's cost cannot be ascertained under section 55(3) - Cost of acquisition in the hands of the previous owner - Whether the market value of the land as on March 25, 1970 is to be taken as the cost of acquisition to the assessee-HUF for computation of capital gains under section 55(3) read with section 49. - HELD THAT: - The land in question was received by the assessee-HUF on partial partition of a larger HUF; therefore section 49(1)(i) applies and the cost of acquisition to the assessee is to be deemed to be the cost for which the previous owner acquired it. The previous owner (the larger HUF) had acquired the land without cost (by contribution into the family hotchpotch), so the cost in the hands of the previous owner is ascertainably nil. Section 55(3) operates only where the cost for which the previous owner acquired the property cannot be ascertained and, in such a case, permits adoption of fair market value as the previous owner's cost. Here the previous owner's cost is ascertainable (nil); hence section 55(3) is not attracted and the market value on March 25, 1970 cannot be adopted as the assessee's cost. Consequently the cost of acquisition to the assessee is nil and the Tribunal and Appellate Assistant Commissioner were in error in applying section 55(3) to compute cost as market value.The market value as on March 25, 1970 is not to be taken as the cost of acquisition to the assessee; the cost of acquisition is nil and section 55(3) is inapplicable.Final Conclusion: The question referred is answered in the negative: the assessee cannot take the market value on March 25, 1970 as its cost of acquisition; the cost is nil (received on partial partition) and section 55(3) does not apply. The result is in favour of the Revenue and against the assessee; no order as to costs. Issues Involved:1. Determination of the cost of acquisition of land for the purpose of computing capital gains.2. Applicability of Section 55(3) of the Income-tax Act, 1961.3. Interpretation of Section 49(1) of the Income-tax Act, 1961.4. Relevance of amendments introduced by the Taxation Laws (Amendment) Act, 1975.Detailed Analysis:1. Determination of the Cost of Acquisition of Land for the Purpose of Computing Capital Gains:The primary issue in this case is the determination of the cost of acquisition of certain land for the computation of capital gains under the Income-tax Act, 1961. The land in question was initially purchased by four brothers in Gujarat at the rate of one rupee per square yard. Subsequently, the land was impressed with the character of Hindu undivided family (HUF) property and later partially partitioned among the members of the HUF. The land was eventually acquired by the Government, and compensation was paid to the assessee HUF. The assessee computed the capital gain by taking the cost of acquisition as the fair market value on the date of acquisition by the previous owner, resulting in a capital loss.2. Applicability of Section 55(3) of the Income-tax Act, 1961:The assessee relied on Section 55(3) to determine the cost of acquisition as the fair market value on the date of acquisition by the previous owner. However, the court found that Section 55(3) applies only when the cost for which the previous owner acquired the property cannot be ascertained. In this case, the cost of acquisition in the hands of the previous owner (the bigger HUF) was nil as the property was received by throwing it into the common hotchpotch. Therefore, Section 55(3) was deemed inapplicable.3. Interpretation of Section 49(1) of the Income-tax Act, 1961:Section 49(1) deals with the computation of the cost of acquisition of assets that become the property of the assessee through specific modes, including partial partition of an HUF. The court interpreted that the cost of acquisition should be deemed to be the cost for which the previous owner acquired the property. Since the property was received by the bigger HUF without any cost (by throwing it into the common hotchpotch), the cost of acquisition in the hands of the assessee was also nil. The court referenced the decision in CIT v. Trikamlal Maneklal (HUF) to support this interpretation.4. Relevance of Amendments Introduced by the Taxation Laws (Amendment) Act, 1975:The court noted that the insertion of clause (iv) to sub-section (1) of Section 49 and the corresponding amendment to the Explanation were effective from April 1, 1976. Since the assessment year in question was 1972-73, these amendments were not applicable. The court clarified that the assessee did not acquire the property by the mode referred to in clause (iv), and thus, the amendments had no bearing on the case.Conclusion:The court concluded that the cost of acquisition of the land in the hands of the assessee HUF was nil, as it was received on partial partition of the bigger HUF, which had acquired it without any cost. Consequently, the computation of capital gain by the assessee, based on the fair market value, was not sustainable. The question referred to the court was answered in the negative, in favor of the Revenue and against the assessee. No order as to costs was made.