High Court allocates capital gains tax to co-owners based on ownership shares

CG. Ghanshamdas Versus Commissioner Of Income-Tax, Madras I

CG. Ghanshamdas Versus Commissioner Of Income-Tax, Madras I - [1979] 116 ITR 212 Issues:
1. Tax liability on capital gain distribution among co-owners.

The High Court of Madras was presented with a question of law regarding the tax liability on a capital gain arising from the sale of a property owned by multiple co-owners. The case involved a property known as "Khushaldas Gardens" owned by seven individuals, which was subject to a partition suit. During the partition proceedings, the property was allotted to five individuals in specific shares. Subsequently, one of the co-owners acquired the interests of the other co-owners through release deeds. A portion of the property was later sold, resulting in a capital gain of Rs. 79,119. The dispute arose regarding the tax liability on this gain, with the assessee contending that only one-half of the gain should be taxed. The Income Tax Officer, the Appellate Authority, and the Tribunal had all ruled against the assessee's contention, leading to the matter being referred to the High Court for a decision.

The High Court analyzed the circumstances of the case and the legal implications of the co-owners' ownership interests. It was noted that at the time of the property transfer, the assessee had not obtained release deeds from the other co-owners, and all three co-owners were parties to the sale deed claiming their respective shares in the property. The court emphasized that legally, the capital gains belonged to all three co-owners based on their ownership interests - one-half for the assessee and one-fourth each for the other two co-owners. The court rejected the Tribunal's method of computation, which focused on the amount paid to the other co-owners, stating that the crucial factor was the legal ownership interests rather than the specific payment amounts.

Ultimately, the High Court ruled in favor of the assessee, holding that the capital gains tax liability should be distributed among the co-owners based on their respective ownership shares. The court concluded that the entire capital gains could not be assessed solely in the hands of the assessee and answered the question in the affirmative in favor of the assessee. The assessee was also awarded costs for the reference.