TaxTMI 
TaxTMI 
TaxTMI 
2004 (12) TMI 29
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.... It appears that for the assessment years 1974-75 to 1977-78 certain tax demands along with estate duty payable on the death of his father were outstanding against the assessee. To effect recovery -of these outstanding dues, the Income-tax Department attached 22059 sq. yds. of vacant land on February 1,1983. The Department divided 5727 sq. mtrs. of land out of the aforesaid acquired parcel of land and sold 33 plots by way of public auction held on March 21, 1983, and March 22, 1983. A sum of Rs. 65,50,870 was the gross realization from the auction sale. The return of income filed by the assessee was accompanied by a letter dated June 6, 1983, wherein the assessee advanced reasons for showing long-term capital gains at "nil" in the return of income. The case of the assessee was that he was not liable to the charge of capital gains tax as the land in question was received by him from his forefathers by way of inheritance and no cost had been incurred by his forefathers for acquiring the land in question. The assessee in support of his stand placed reliance on the decision of the apex court in the case of CIT v. B.C. Srinivasa Setty [1981] 128 ITR 294 and stated that the assessee was ....
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....d./1986. The Tribunal accepted the submission of the assessee that the ratio of the Supreme Court decision in the case of B.C. Srinivasa Setty [1981] 128 ITR 294 was squarely applicable to the facts of the case. The Tribunal further found that from the history of the Jadeja Rulers of the Rajkot State, which was placed before the Tribunal, it was quite clear that the property in question was never purchased by the forefathers of the assessee but was acquired by conquest. Accordingly, the Tribunal came to the conclusion that the cost of acquisition of the asset was nil, i.e., not ascertainable. According to the Tribunal, even after invoking the provisions of section 49(1)(iii)(a) read with the Explanation thereto the cost of acquisition of the asset in the hands of the "previous owner" was not ascertainable, i.e., it had cost nothing to the last previous owner for acquiring the property in question. The Tribunal, therefore, applying the ratio of the Supreme Court decision in the case of B.C. Srinivasa Setty [1981] 128 ITR 294 held that there being no cost of acquisition, the computation section of income chargeable under the head "Capital gains" fails and, therefore, no capital gains....
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.... sub-section (1) of section 49 of the Act. That under section 55(2)(ii) of the Act an assessee was required to exercise option by adopting the cost of acquisition as specified in any one of the modes under section 49(1) of the Act or adopt the fair market value of the asset on the 1st day of January, 1964. That when sub-section (3) of section 55 of the Act was read together with these provisions, it would point out to the scheme as operating so as to arrive at the chargeable capital gains by adopting either the fair market value of the capital asset on the specified date or the fair market value to be adopted under section 55(3) of the Act. Thus, according to Mr. Vyas, the assessee having failed to exercise the option the cost had to be adopted under section 55(3) of the Act as the fair market value which term was defined in section 2(22A) of the Act. That accordingly the Assessing Officer had estimated the fair market value at Rs. 3,000 and worked out the chargeable capital gains. Mr. Vyas further submitted that the onus to establish the cost of acquisition was on the assessee and on failure to do so, or by showing the same at nil the Revenue was entitled to assess the capital ga....
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....s to be taken as cost of acquisition and it had to be taken as nil in any other case; that these provisions went to show that on a plain reading of section 55(2)(a)(ii) the Legislature has referred to an asset acquired by a mode not being any of the modes specified under section 49(1)(i) to (iv) of the Act. That even otherwise as could be seen from the said amended provision it pertains only to the specified asset and, therefore, there was no implied inclusion of any other asset where the cost was not known. That in a case where the cost of acquisition by the previous owner as well as the date of acquisition by the previous owner were not ascertainable, the computation provision could not come into play and in the light of the ratio of the apex court decision in the case of B.C. Srinivasa Setty [1981] 128 ITR 294, no capital gains was chargeable to tax. Mr. Trivedi further submitted that reliance on the provision of section 55(3) of the Act was unwarranted on the facts of the case. That the said section specifically requires that in a case where the date of acquisition by the previous owner is known but the cost is not known the fair market value on the date of acquisition would ....
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....nce made by the Revenue was required to be allowed in favour of the Revenue. The scheme for charging capital gains to tax can be culled out from a conjoint reading of the provisions of sections 45, 48, 49 and 55 of the Act. Section 45 prescribes that on transfer of a capital asset effected in a previous year the difference arising by way of any profits or gains shall be charged to income-tax under the head "Capital gains" and shall be deemed to be the income of the previous year in which the transfer took place. The terms "capital asset" and "transfer" are defined respectively in sections 2(14) and 2(47) of the Act. For the purpose of computing the income chargeable as specified under section 45 the mode of computation has been prescribed in section 48 of the Act. It is laid down that for the purpose of ascertaining the income which is chargeable to capital gains tax, the expenditure which is incurred wholly and exclusively in connection with the transfer and the cost of acquisition of the asset along with the cost of improvement, if any, have to be deducted from the full value of consideration received or accruing on such transfer taking place. Section 55 specifies the meaning of....
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....ue have to be examined. Section 48 of the Act specifies the mode of computation and deduction. Income chargeable under the head "Capital gains" has to be computed by deducting from the full value of the consideration received or accruing as a result of the transfer of the capital assets: (i) expenditure incurred wholly and exclusively in connection with such transfer; (ii) cost of acquisition of the capital asset and the cost of any improvement thereto. According to the Revenue if no expenditure has been incurred in connection with the transfer of an asset nothing is deductible. Therefore, clause (ii) of section 48 which permits deduction of cost of acquisition has to be read by inference as meaning that in a case where there is no cost of acquisition nothing is deductible. The Revenue seeks to derive support from the latter portion of clause (ii) which talks of cost of any improvement to the capital asset. In other words, the submission is that if there is no cost of improvement no such cost is deductible. However, even if the aforesaid reading in relation to incurring of expenditure under clause (i) as well as incurring of cost of improvement under clause (ii) is taken to be the....
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....ssolved and at the time of dissolution the goodwill of the firm was valued. Originally when the partnership was constituted the instrument showed that the goodwill of the firm had not been valued. Upon dissolution of the assessee a new partnership came to be constituted with the same name and the new partnership took over all the assets, including the goodwill, and liabilities of the dissolved firm. According to the Revenue as the goodwill was transferred by the assessee to the newly constituted firm it was liable to be charged under the head "Capital gains". The assessee succeeded before the Tribunal and the High Court and the Revenue carried the matter in appeal before the apex court. After referring to the provisions of section 2(14) of the Act and section 45 of the Act the apex court enunciated the law in the following terms: "Section 45 charges the profits or gains arising from the transfer of a capital asset to income-tax. The asset must be one which falls within the contemplation of the section. It must bear that quality which brings section 45 into play. To determine whether the goodwill of a new business is such an asset, it is permissible, as we shall presently show, to ....
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....rovide the principal basis for quantifying the income chargeable under the head 'Capital gains'. The section provides that the income chargeable under that head shall be computed by deducting from the full value of the consideration received or accruing as a result of the transfer of the capital asset: '(ii) the cost of acquisition of the capital asset...' What is contemplated is an asset in the acquisition of which it is possible to envisage a cost. The intent goes to the nature and character of the asset, that it is an asset which possesses the inherent quality of being available on the expenditure of money to a person seeking to acquire it. It is immaterial that although the asset belongs to such a class, it may, on the facts of a certain case, be acquired without the payment of money. That kind of case is covered by section 49 and its cost, for the purpose of section 48, is determined in accordance with those provisions. There are other provisions which indicate that section 48 is concerned with an asset capable of acquisition at a cost. Section 50 is one such provision. So also is sub-section (2) of section 55. None of the provisions pertaining to the head 'Capital gains' su....
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....io can be invoked. That in the present case the asset in question was land and hence, it was not possible to state that it was an asset which had no cost element or for acquisition of which no cost could be envisaged. As laid down by the apex court though section 45 is a charging section for the purpose of imposing the charge the Legislature has enacted detailed provisions in order to compute the profits or gains under that head and no provision at variance with such computation provisions can be applied for determining the chargeable profits and gains. That all transactions covered by section 45 have to fall under the governance of the computation provision and thus the said provisions have to be read and applied as an integrated code. The case of B.C. Srinivasa Setty [1981] 128 ITR 294 (SC) came to be applied by the apex court itself in a subsequent decision in the case of Sunil Siddharthbhai; Kartikeya V. Sarabhai v. CIT [1985] 156 ITR 509. The question before the apex court was: where a partner of a firm transfers personal assets held by him to a firm as his contribution towards the capital whether such contribution would amount to a transfer and, if yes, whether there was any....
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....ons of capital gains. Thus, it would be clear that the liability for capital gains tax would arise in respect of only those capital assets in the acquisition of which the element of cost is either actually present or is capable of being reckoned and not in respect of those assets in the acquisition of which the element of cost is altogether inconceivable, as in the present case. The circular of the Board referred to above on which learned counsel for the Revenue placed reliance-though not binding on this court-only indicates that the section does not relate to only the immediate past owner but to past owners in succession. Thus, we are not persuaded to agree with the submission made by learned counsel for the Revenue that in such a case as the present one, according to the provisions of section 55 of the Income-tax Act, 1961, where cost cannot be ascertained, the fair market price has to be taken into consideration because the very basis of capital gains to us appears to be that at some point of time, the person who initially acquires, acquires, the property at some cost in terms of money."-CIT v. H.H. Maharaja Sahib Shri Lakendra Singhji [1986] 162 ITR 93 at page 105 (MP). The A....
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.... opt for the date, i.e., January 1, 1964, for ascertaining the cost of acquisition. This provision presupposes the cost of acquisition but this mode of ascertaining the cost of acquisition is prescribed by shifting the date of ascertainment to January 1, 1964, from the actual date of acquisition. The effect of this section is that whatever be the cost during the period preceding January 1, 1964, the assessee may exercise the option of having the value ascertained as on January 1, 1964. This provision cannot be pressed into service where there is no cost of acquisition at all." This court in the case of Baroda Cement and Chemicals Ltd. v. CIT [1986] 158 ITR 636 (Guj) was called upon to decide as to whether the amount received by the assessee by way of damages for breach of contract of sale was chargeable to tax under the head "Capital gains". The court after referring to the case of B.C. Srinivasa Setty [1981] 128 ITR 294 (SC) and extracting the relevant portion from page 299 of the reported decision of 128 ITR held that: "The ratio of this decision is that the asset referred to in section 45 must be one in the acquisition whereof the assessee had incurred a cost. If the Revenue f....
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....fect from April 1, 2003. Therefore, even if the amendment is taken into consideration section 55 can be invoked in cases of nil cost of acquisition for the purpose of bringing to tax the entire sale consideration only in relation to the specified assets. The Legislature having amended the said section from time to time has roped in only specified assets as noted hereinbefore. In the circumstances, the amendment instead of working to the advantage of the Revenue goes to indicate that the Legislature does not want to bring within the purview of the tax net all assets (except the specified assets) which do not have cost of acquisition and the entire sale consideration cannot be treated as profits and gains chargeable under the head "Capital gains" by adopting the cost of acquisition as nil. The contention of the Revenue that the fair market value of the asset is required to be adopted by invoking the provision of section 55(3) of the Act has already been rejected by the apex court in the case of B.C. Srinivasa Setty [1981] 128 ITR 294 in the following words "Nor can sub-section (3) of section 55 be invoked, because the date of acquisition by the previous owner will remain unknown". ....