2012 (12) TMI 1260 - AT - Income Tax

Section 49 requires previous owner's holding be included when computing indexed cost; Section 55(2)(b)(ii) FMV election upheld

Shri Vishwanath Sharma Versus ACIT, CC, Patiala

Shri Vishwanath Sharma Versus ACIT, CC, Patiala - TMI ISSUES PRESENTED AND CONSIDERED 1. Whether, for computation of indexed cost of acquisition on transfer of a capital asset acquired by gift, the period of holding and base year for indexation are to be determined by reference to the period for which the previous owner held the asset under Explanation 1(i)(b) to section 2(42A) read with section 49(1). 2. Whether the assessee is entitled to adopt the fair market value as on 1.4.1981 (under section 55(2)(b)(ii) read with definition of 'fair market value' in section 2(22B)) for computing cost of acquisition and indexation, and whether revenue can substitute the cost shown in the gift deed when the assessee has validly exercised the statutory option. ISSUE-WISE DETAILED ANALYSIS Issue 1: Applicability of previous owner's period of holding and relevant year for indexation (sections 2(42A) Explanation 1(i)(b), section 49, section 48 Explanation (iii)) Legal framework: Explanation 1(i)(b) to section 2(42A) provides that when an asset becomes the property of the assessee under modes specified in section 49(1), the period for which the asset was held by the previous owner shall be included in determining the period of holding. Section 49 treats cost of acquisition in the hands of transferee as cost to the previous owner for specified modes of acquisition. Section 48 and its Explanation (iii) define 'indexed cost of acquisition' by reference to the Cost Inflation Index for the first year in which the asset was held by the assessee or the year beginning 1.4.1981, whichever is later. Precedent treatment: Decisions of High Courts and Tribunals cited in the judgment (construed and followed by the Court) establish that where section 49 applies, the period of holding and the base year for indexation must be determined by reference to the previous owner's holding (so that indexation may commence from the earlier year or 1.4.1981 as applicable). The Court specifically references authorities that have rejected revenue's narrower construction that would limit indexation to the period the transferee actually held the asset. Interpretation and reasoning: The Court reasons that construing 'held by the assessee' in section 48/Explanation (iii) without regard to the deeming fiction in section 2(42A) and section 49 would produce inconsistency and absurdity. If the previous owner's holding were excluded for indexation purposes while including it for determining long-term status and cost under section 49, it would disconnect indexed cost of acquisition from indexed cost of improvement and frustrate the legislative objective of taxing real gains net of inflation. The Court emphasizes that the legislative scheme aims to permit indexation reflecting the period the asset effectively has been held in the succession of owners covered by section 49. Ratio vs. Obiter: Ratio. The Court's holding on this point rests on statutory construction of sections 2(42A), 48, 49 and Explanation to section 48 and is dispositive of the main controversy. The reasoning is applied to overturn contrary findings below. Conclusion: The previous owner's period of holding must be included for determining the first year of holding for indexation. Consequently, indexation is to be applied from the year relevant to the previous owner (or 1.4.1981 where applicable), not from the year the transferee acquired the asset by gift. The lower authorities' contrary approach is set aside. Issue 2: Entitlement to adopt fair market value as on 1.4.1981 and evidentiary sufficiency (sections 55(2)(b)(ii), 2(22B), and interplay with section 49) Legal framework: Section 55(2)(b)(ii) permits an assessee, where the capital asset became property by modes in section 49(1) and the previous owner held the asset before 1.4.1981, to opt for the cost to previous owner or the fair market value of the asset on 1.4.1981. Section 2(22B) defines 'fair market value.' Precedent treatment: Tribunal authorities cited in the judgment treat 'fair market value' as a hypothetical-market determination and accept valuation evidence such as a Patwari certificate and comparable registered sales where unrebutted by revenue. Interpretation and reasoning: The Court holds that once the assessee exercises the statutory option under section 55(2)(b)(ii) to adopt fair market value as on 1.4.1981, revenue cannot arbitrarily replace that figure by the value recorded in the instrument of acquisition (gift deed) dated at the time of transfer. Determination of fair market value is a judgmental exercise involving hypothetical buyer and seller; documentary evidence (Patwari certificate and comparable registered sale) filed by the assessee was not rebutted by the CIT(A) or AO. The Court finds the lower authorities acted contrary to the express statutory option and failed to put material on record to dislodge the opted fair market value. To sustain revenue's view would render section 55(2)(b)(ii) redundant. Ratio vs. Obiter: Ratio. The holding enforces the statutory option to adopt fair market value as base cost where conditions under section 55(2)(b)(ii) are met and treats uncontroverted valuation evidence as sufficient to sustain the option. Conclusion: The assessee validly exercised the option to adopt fair market value on 1.4.1981; the Patwari certificate and comparable sale evidence were adequate and unrebutted; therefore the AO's and CIT(A)'s rejection of the opted base and the consequent reworking of cost and indexation are unsustainable. Ground allowing the statutory option succeeds. Interrelationship and final determination Cross-reference: Issues 1 and 2 are interrelated. Inclusion of the previous owner's holding period (Issue 1) determines the relevant base year and indexation span; adoption of fair market value as on 1.4.1981 (Issue 2) fixes the cost that is to be indexed from that base. Both lead to the same practical consequence: the cost/base year adopted by revenue (the year of transfer to transferee) was contrary to the statutory scheme. Court's conclusion: The Tribunal allowed the appeal on the substantive ground that the lower authorities violated the express provisions of sections 2(42A) Explanation 1(i)(b), section 49(1) and section 55(2)(b)(ii), and relevant definitions in section 2(22B). Grounds challenging admission of additional evidence and other ancillary grounds were not pressed or dismissed as not pressed.