1983 (1) TMI 12 - HC - Income Tax

Court affirms cost of acquisition based on previous owner, rejects real property value approach

The court upheld the Income Tax Officer's decision to treat the cost of acquisition to the previous owner as the cost of acquisition to the family. The ... Capital Gains, Devolution Issues Involved:1. Determination of the cost of acquisition of property for the purpose of assessing capital gains.2. Applicability of Section 49(1)(iii)(a) of the Income Tax Act.3. Interpretation of the term 'devolution' within the context of Hindu Law and Section 49(1) of the Income Tax Act.4. Validity of the Tribunal's view on the 'real value' of the property.5. Consideration of 'nil value' for the purpose of capital gains computation.Issue-wise Detailed Analysis:1. Determination of the cost of acquisition of property for the purpose of assessing capital gains:The case revolves around the capital gains assessment of a joint family consisting of a father and son. The father purchased a house property and made improvements using his separate funds. He later threw this property into the joint family hotchpot. Upon the sale of the property by the joint family, the capital gains realized were assessed. The controversy arose regarding the cost of acquisition of the property for the family. The ITO initially observed that there was essentially no cost of acquisition for the family since the property was received for nothing when thrown into the hotchpot. However, the ITO adopted Rs. 70,535 as the cost of acquisition, representing the cost to Krishnamoorthy, the previous owner.2. Applicability of Section 49(1)(iii)(a) of the Income Tax Act:The Tribunal, on appeal, opined that Rs. 70,535 could not be the cost of acquisition for the family but only for the previous owner, Krishnamoorthy. The Tribunal suggested that the cost to the family should be the real value of the property on the date it was thrown into the hotchpot. The pertinent question was whether the real value on the date of the transfer to the hotchpot should be considered the cost of acquisition. The court examined Section 55(2)(ii) and Section 49(1) of the Income Tax Act, which state that the previous owner's cost of acquisition should be deemed the cost to the assessee in cases of succession, inheritance, or devolution.3. Interpretation of the term 'devolution' within the context of Hindu Law and Section 49(1) of the Income Tax Act:The court analyzed the term 'devolution' and its applicability to the case. It was argued that the process by which Krishnamoorthy's separate property became joint family property could be described in various ways, such as throwing into the hotchpot, blending, or impressing with the character of joint family property. The court noted that these descriptions involve metaphors rather than precise legal expressions. The process is unique and not a gift, settlement, or agreement, but a change of ownership by the operation of law. The court concluded that this process could be regarded as 'devolution' within the meaning of Section 49(1) of the Income Tax Act.4. Validity of the Tribunal's view on the 'real value' of the property:The Tribunal's view that the cost of acquisition should be based on the real value of the property on the date it was thrown into the hotchpot was rejected. The court held that the cost of acquisition must be determined according to Section 49(1)(iii)(a) of the Act, which considers the previous owner's cost. The court emphasized that there is no scope for introducing a priori theories of costing when a pertinent statutory provision applies.5. Consideration of 'nil value' for the purpose of capital gains computation:The court addressed the question of whether 'nil' value could be taken for the purpose of capital gains computation. It noted that from a realistic point of view, when a coparcener throws separate property into the joint family hotchpot, the family receives it for nothing. However, Section 49(1)(iii)(a) and other clauses were specifically legislated for such cases, ensuring that the cost of acquisition is not considered nil but is based on the previous owner's cost.Conclusion:The court upheld the ITO's action of treating the cost of acquisition to Krishnamoorthy as the cost of acquisition to the assessee family. The Tribunal's view of using the real value of the property on the date of transfer to the hotchpot was rejected. The cost of acquisition must be determined according to Section 49(1)(iii)(a) of the Income Tax Act. The assessee was directed to pay the Department's costs, with counsel's fee set at Rs. 500.