2018 (7) TMI 1820 - HC - Income Tax

Court rules acquisition under will triggers capital gains tax exemption. Cost includes encumbrance discharge. Genuine claims emphasized.

Commissioner of Income Tax, Kol – X Versus Aditya Kumar Jajodia

Commissioner of Income Tax, Kol – X Versus Aditya Kumar Jajodia - [2018] 407 ITR 107 (Cal) Issues:1. Whether the sale of property by the assessee attracts short-term capital gains tax due to the conversion of perpetual lease into outright ownershipRs.2. Whether the payments made by the assessee to others asserting rights over the property qualify for deduction under Section 55(1)(b)(2)(ii) of the Income Tax Act, 1961Rs.Issue 1:The Revenue contended that the sale of property by the assessee attracted short-term capital gains tax because the full ownership of the property was acquired a few months before the transfer. The Revenue argued that payments made to the trust, DDA, and the third party did not qualify for deduction under Section 55(1)(b)(2)(ii) as they were not for the improvement of the property. The court analyzed the case and held that the acquisition of full ownership did not amount to the acquisition of the property by the assessee, as the bequest under the Will was the effective acquisition. The court considered the perfection of title from perpetual leasehold rights to complete ownership as a cost of acquisition within Sections 48 and 55 of the Act.Issue 2:Regarding the second issue, the court applied the legal principle established in a Supreme Court judgment (R.M. Arunachalam v. CIT) that the discharge of encumbrances, in this case created by the Will and the predecessor-in-interest, should be considered a part of the cost of acquisition. The court emphasized that the genuineness and validity of such encumbrances must be assessed. The court highlighted that deductions for payments to other claimants in respect of the property must be based on genuine claims and arm's length transactions. The court noted that the Commissioner (Appeals) and the Appellate Tribunal were the final fact-finding authorities in determining the veracity of transactions.In conclusion, the court dismissed the appeal, stating that the order of the Appellate Tribunal stands. The court did not delve into the genuineness of payments made to the trust and the agreement-holder, as factual matters were beyond the scope of the jurisdiction. The court emphasized the importance of assessing the validity of deductions and upheld the decision based on the principles of cost of acquisition.