1980 (9) TMI 6 - HC - Income Tax

High Court: Written down value, not market value, determines capital gains machinery cost. Tribunal decision overturned.

The High Court held that the cost of acquisition of the machinery for computing capital gains should be the written down value in Krishna Rao's hands, not ... Deduction Of Cost Of Acquisition Issues:1. Determination of the cost of a capital asset for computing capital gains.Analysis:The primary issue in this income-tax reference was the proper method to ascertain the cost of a capital asset for computing capital gains. The case involved an individual, Krishna Rao, who owned a steel press used for bus-body-building operations. The machinery was initially his separate property but was later declared as the property of the joint family. Subsequently, the machinery was sold to a third party, and the family received Rs. 44,000 as the sale consideration, leading to a liability for capital gains tax. The dispute arose regarding how to determine the cost of the machinery in the hands of the assessee-family for quantifying the capital gains.The Income Tax Officer (ITO) initially adopted the written down value of the machinery in Krishna Rao's hands, which was Rs. 25,639, as the cost to the assessee-family. However, the Tribunal rejected this approach and considered the market value of the machinery on November 1, 1969, as the cost to the assessee-family. The market value was determined to be Rs. 44,000. The Department challenged the Tribunal's decision, leading to this reference before the High Court.The High Court analyzed the provisions of the Income Tax Act, 1961, particularly Section 49, which outlines exceptional cases where the cost of a capital asset may be based on the previous owner's cost rather than the current assessee's cost. The case under reference involved a joint family becoming the owner of an individual coparcener's separate property through blending or conversion, a scenario now specifically provided for under clause (iv) of Section 49. However, since this clause was introduced after the assessment year in question, the High Court had to rely on general principles rather than express statutory provisions to determine the cost.The Court considered arguments regarding the application of Section 50, which deals with the deduction of depreciation allowed on depreciable assets, but concluded that it was not applicable in this case. Reference was made to a Supreme Court decision regarding the treatment of assets transferred gratis in the context of working out depreciation allowance. The Court applied the principle from this decision, stating that when a depreciable asset is given over gratis, the transferee should be treated as acquiring the asset at its written down value at that time.The High Court disagreed with the Tribunal's approach of equating cost of acquisition to market value, emphasizing that in cases like these, the cost should be ascertained based on historical transactions and the asset's value in the hands of the previous owner. The Court held that the written down value in Krishna Rao's hands provided the proper basis for determining the cost in the hands of the assessee-family. The Court also addressed arguments regarding the applicability of market value as the guiding figure for ascertainment of cost under Section 55(2) but deemed it unnecessary to decide on this point in the present case.In conclusion, the High Court answered the questions referred to it by holding that the cost of acquisition should be the written down value of the asset to Krishna Rao, and the assessment of capital gains based on this cost was correct. The Tribunal's decision to the contrary was deemed incorrect, and the reference was answered in favor of the Department, with costs awarded accordingly.