2016 (11) TMI 246 - AT - Income Tax

Tribunal upholds Cost Inflation Index for LTCG, allows AO's DVO reference under Income Tax Act

The Tribunal partially allowed the Revenue's appeal, upholding the CIT(A)'s decision on adopting the Cost Inflation Index (CII) of 1981 for calculating ... Capital gain computation - taking the cost inflation index factor of 1981 i.e. 100 - disregarding the valuation report made by DVO u/s 55A - Held that:- Considering the totality of the facts and the scheme of the Act relating to taxation of capital gains, we are of the considered opinion that as per the schematic interpretation the cost of inflation index should be made applied with reference to the year in which the capital asset was first acquired by the previous owner. If only for the purpose of computing indexed cost of acquisition, the date of acquisition by the previous owner is excluded then it will lead to absurd result. Such interpretation of section 48 will be against the intent and object of the enactment and will be against the overall scheme of taxation of capital gains in case of inherited assets. The cardinal principles of interpretation of statutes is that if literal meaning of the statute leads to an absurdity then the statute should be interpreted in a manner which will result in harmonious interpretation which avoids absurdity and promote the objective of an enactment. We, therefore, direct the AO to re-compute the capital gains by applying cost inflation index of 100 per cent applicable for financial year 1981-82. Hence, we uphold the order of Ld. CIT(A) on this point and this ground of Revenue’s appeal is dismissed. Issues Involved:1. Adoption of Cost Inflation Index factor for calculating Long Term Capital Gains (LTCG).2. Reference to Department Valuation Officer (DVO) under Section 55A of the Income Tax Act, 1961.Detailed Analysis:Issue 1: Adoption of Cost Inflation Index Factor for Calculating LTCGThe Revenue contended that the Cost Inflation Index (CII) factor of the financial year (FY) 2002-03 (i.e., 447) should be used, as the property was inherited by the assessee in that year. The Assessing Officer (AO) used the DVO’s valuation report and applied the CII of FY 2002-03 to compute the taxable LTCG.The assessee argued that the valuation should be based on the Fair Market Value (FMV) as of 01.04.1981, and the CII of 1981 (i.e., 100) should be used. The Commissioner of Income Tax (Appeals) [CIT(A)] accepted the assessee’s contention, citing the jurisdictional Tribunal’s decision in Umedbhai International Ltd., which concluded that the CII of 1981 should be used when the FMV of 1981 is adopted.The Tribunal upheld the CIT(A)'s decision, stating that the cost inflation index should be applied with reference to the year in which the capital asset was first acquired by the previous owner. The Tribunal emphasized that sections 2(42A), 47(ii), 49(1)(ii)(iii), and 55(2)(b)(ii) of the Act should be read together, indicating that the period of holding by the previous owner should be considered. This interpretation aligns with the statutory objective of allowing indexation for the period of holding to account for inflation, thereby preventing an absurd result and ensuring fairness in the computation of capital gains.Issue 2: Reference to DVO under Section 55A of the Income Tax Act, 1961The AO referred the matter to the DVO for valuation of the property as of 01.04.1981, suspecting that the assessee had inflated the property’s value to avoid capital gains tax. The CIT(A) ruled that this reference was contrary to the law, as the AO could only refer to the DVO if the value claimed by the assessee was less than the market value, which was not the case here.The Tribunal, however, referred to the recent jurisdictional High Court decision in Nirmal Kumar Ravindra Kumar-HUF v. CIT, which held that the AO is empowered to make a reference to the DVO if the fair market value estimated by the assessee is not proper, even if it is higher than the DVO’s valuation. This decision was deemed binding and applicable to the present case, leading the Tribunal to set aside the CIT(A)’s order on this point and uphold the AO’s reference to the DVO.Conclusion:The Tribunal partially allowed the Revenue’s appeal. It upheld the CIT(A)’s decision regarding the adoption of the CII of 1981 for calculating LTCG, ensuring that the indexation reflects the period of holding by the previous owner. However, it reversed the CIT(A)’s decision on the reference to the DVO, aligning with the jurisdictional High Court’s ruling that the AO’s reference to the DVO was permissible under Section 55A of the Act.