1981 (10) TMI 5 - HC - Income Tax

Tribunal rules on share acquisition costs in capital gains; donation deduction remitted for reconsideration.

In the case, the Tribunal held that the cost of acquisition of shares should be deducted in computing capital gains under section 46(2) of the Income-tax ... Advance Tax Issues Involved:1. Deduction of the cost of acquisition of shares in computing capital gains under section 46(2) of the Income-tax Act, 1961.2. Eligibility for deduction under section 80G of the Income-tax Act, 1961, for a donation made to a specific trust.Issue-wise Detailed Analysis:1. Deduction of the Cost of Acquisition of Shares in Computing Capital Gains:The first issue revolves around whether the proportionate cost of acquisition of shares should be deducted in computing capital gains arising from the receipt of Rs. 15,168 from the liquidator of the United India Life Insurance Company under section 46(2) of the Income-tax Act, 1961.The assessee, a private limited company, received various amounts from the liquidator after the company went into liquidation. The Income Tax Officer (ITO) brought the entire sum of Rs. 15,168 to tax as capital gains. However, the assessee contended that this amount was not taxable. The Appellate Assistant Commissioner (AAC) upheld the ITO's decision, stating that section 46(2) clearly applied.Upon appeal, the Tribunal held that section 46(2) indeed applied but also noted that the cost of acquisition of the shares should be deducted under section 48. The Tribunal directed the ITO to recompute the capital gains accordingly. The Department then raised the question of whether the cost of acquisition should be deducted.The judgment clarifies that section 46(2) is a charging provision that mandates the inclusion of the cost of acquisition in computing capital gains. It states, 'The amount received from the liquidator as reduced by the amount assessed as dividend is taken to be the full value of the consideration for the purpose of section 48.' The judgment further explains that the deductions under section 48 include the cost of acquisition of the capital asset and any improvement thereto.The judgment emphasizes that the cost of acquisition must be deducted from the first distribution by the liquidator. If the distribution is less than the cost of acquisition, the capital loss should be set off against future distributions. The judgment concludes that the cost of the shares should be deducted from the gross capital gains computed under section 46(1).2. Eligibility for Deduction under Section 80G for Donation to a Specific Trust:The second issue pertains to whether the assessee was entitled to a deduction under section 80G for a donation of Rs. 5,000 made to the 'Tiruppani Trust.'The ITO denied the deduction, stating that the trust did not meet the conditions laid down in section 80G. However, the AAC upheld the assessee's claim, and the Tribunal affirmed this decision, following an earlier order.The judgment notes that the eligibility of the Tiruppani Trust for section 80G deductions has been considered in multiple decisions. In previous cases, the matter was remitted to the Tribunal for reconsideration due to the absence of the relevant trust deed in the statement of the case. Following this precedent, the judgment restores the matter to the Tribunal for reconsideration in light of the facts and the law.The judgment concludes by awarding costs to the assessee, as it succeeded on the main issue of the reference, with counsel's fee set at Rs. 500.Conclusion:The judgment provides a detailed analysis of the application of sections 46(2) and 48 in computing capital gains, emphasizing the necessity of deducting the cost of acquisition of shares. It also addresses the procedural aspect of determining eligibility for deductions under section 80G, remitting the matter to the Tribunal for further consideration.