Aggrieved By The Said Order, The Assessee Preferred An Appeal To The Tribunal. The Tribunal After Hearing Both The Parties And Relying On A Judgment Of The Bomb v. Smt Daisy Devaiah

IN THE HIGH COURT OF KARNATAKA, BANGALOREDATED THIS THE 22 DAY OF JULY, 2014. PRESENT THRE HON'BLE Mr. JUSTICE N. KUMAR. AND THR HON'BLE Mr. JUSTICK =B. MANOHAR| L.T.A. No. 109/ 2014 BBRITWRE 1]The Commissioner of|Income Tax,Vidyaranyapura,Mysore. — APPRLLANT| (By Smt/Sri. E.I. Sanmathi, Advocate) AN 1): Smt. Daisy Devaiah,By Legal Representative-Sri. C.B. Madaiah, Mettacad|Estate, Uliguli-Nargane,suntikoppa-971 237. _ RESPONDENT This I.T.A. is filed umder Section 260-A of the.Income-tax Act, 1961 praying to’ decide the foregoing|question of law and/or such other questions of law as may|be formulated by Hon’ble Court as deemed fit and to set|aside the appellate order dated 11.10.2013 passed by the|Income Tax Appellate Tribunal, ‘A’ Bench, Bangalore, in >ITA No.205/Bang/2013 for the Assessment Year 2005-06. | This I.T.A. coming on for admission this day,N.,KUMAR, J.,delivered the following: JU DGMENT This appeal is preferred by the revenue against thecommon order passed by the Tribunal in respect of the|aSSECSSESsetting-asidetheorderpassedbytheCommissioner of Income Tax under Section 263 of the’Income Tax Act, 1961 (for short hereinaiter referred to as ‘The Act’) and granting relief to the assessee. 2. The assessee in this appeal is one of the legal heirsof One Mr C. B. Devaiah. Mr C. B. Devaiah, owned the.property, which had been acquired by him prior to|1.4.1981. Mr C. B. Devaiah died on 23.4.2000. His legalheirs sold the property owned by him during the previous|year relevant to 2005-06 1.e., on 18.10.2004. The assessee ©as one of the legal heirs was entitled to have 1/5[5$]share|in the property owned by Mr C. B. Devaiah. The assessee|declared his capital gain on sale of the property in his|returns of income filed for the assessment year 2005-06. |In the computation of capital gains, the assessee adopted| the fair market value(FMV) of the property as on 1.4.1981as the cost of acquisition of the property. The revenue didnot dispute this valuation. The assessee while computinghis cost of acquisition also claimed indexation on FMV ason 1.4.1981. The assessing authority while completing theassessment of the assessee, accepted the claim of theassessee in the order ot assessment dated 30.11.2009passed under Section 143(3) of the Act allowing the benefitof indexation from 1.4.1981. The Commissioner of IncomeTax exercising his power under Section 263 of the Act wasof the view that the Assessment Officer’s order in the case|of the assessee allowing the benefit of indexation from|1.4.1981 was erroneous and prejudicial to the interest of)the revenue because, as per explanation (111) to Sec.48 ofthe Act, “indexed cost of acquisition” means an amount|which bears to the cost of acquisition the same proportionas Cost Inflation Index for the year in which the asset is transferred bears to the Cost Inflation Index for the first|year in which the asset was held by the assessee or for theyear beginning on the 1[(5]day of April 1981, whichever is"later. According to the appellate authority, the asset was| held by the assessee only from 23.4.2000 when Mr. C. B.Devaiah died. Therefore, the benefit of indexation has to beallowed only from 23.4.2000 and not from 1.4.1981 asclaimed by the assessee. Accordingly, the order passed bythe Assessing authority was revised and assessingauthority was directed to allow indexation benefit fromfinancial year 2000-01 only. held by the assessee only from 23.4.2000 when Mr. C. B.Devaiah died. Therefore, the benefit of indexation has to beallowed only from 23.4.2000 and not from 1.4.1981 asclaimed by the assessee. Accordingly, the order passed bythe Assessing authority was revised and assessingauthority was directed to allow indexation benefit fromfinancial year 2000-01 only. 3. Aggrieved by the said order, the assessee preferred|an appeal to the Tribunal. The Tribunal after hearing boththe parties and relying on a judgment of the Bombay HighCourt in the case of.Commissioner of Income Tax vsManjula J Shah reported in (2012) 68 DTR 269|(Bombay)| held that the Commissioner was not justified innot following the decision of the Hon’ble Bombay HighCourt, as the ratio of the decision of the Bombay HighCourt rendered in the context of acquisition of property byway of giit will apply with greater force when propertydevolves by succession. The view taken by the assessingauthority was correct and therefore, the Commissioner ofIncome Tax was not justified in exercising his jurisdiction under Section 263 of the Act and in interfering with theorder passed by the Assessing Authority. Therefore, theappeal was allowed. The order of the Appellate Authoritywas set-aside. The order of assessment was restored.Aggrieved by the said order, the revenue is in appeal. 4. Learned counsel for the revenue assailing the|impugned order contends that, as is clear from explanation(111) to Section 48, the indexed cost of acquisition is to be.allowed for the first year in which the asset was held by theassessee or in the year beginning on the first day of April,1981, whichever is later. Therefore, the Tribunal was not|justified in interfering with the order passed by the|Commissioner of Income Tax. In fact, the revenue has|preferred a Special Leave Petition against the judgment ofthe Bombay High Court and it is pending consideration|before the Apex Court and therefore, he submits that the|order requires to be interfered with. >. Per contra, learned counsel for the assesseesubmitted that, if the cost of acquisition of the property ason 1.4.1981 is taken into consideration, then the indexed| cost of acquisition has to be calculated from that date, notfrom the day the assessee held the property by way ofsuccession. He submits that in view of Section 49, the costof acquisition of the asset shall be deemed to be the cost forwhich the previous owner of the property acquired it, asincreased by the cost of any improvement of the assetsincurred or borne by the previous owner or the assessee, asthe case may be, if the acquisition is by way of succession,inheritance or devolution. If, cost of acquisition is to becomputed as on the day the previous owner held theproperty on 1.4.1981, though the assessee acquired thesaid property by way of succession, indexed cost ofacquisition is to be allowed from the day the property wasowned by previous owner and not when the assessee heldthe property after his death and that is the ratio decided bythe Bombay High Court in the aforesaid Judgment andtherefore, he submits that no case for interference is madeOUT. 6. The appeal is admitted to consider the following|Substantial question of law: “Whether on the tacts and in the’circumstances of the case, the tribunal is rightin law in concluding that while computing thecapital gains arising on transfer of a capitalASSET|acquiredby the.aSSECESSEthroughsuccession, the indexed cost of acquisition hasto be computed with reference to the year inwhich the previous owner first held the assetand not the year in which the assessee actuallybecametheOWD?’ ot|theASSET|throughsuccession 2” 6. The appeal is admitted to consider the following|Substantial question of law: “Whether on the tacts and in the’circumstances of the case, the tribunal is rightin law in concluding that while computing thecapital gains arising on transfer of a capitalASSET|acquiredby the.aSSECESSEthroughsuccession, the indexed cost of acquisition hasto be computed with reference to the year inwhich the previous owner first held the assetand not the year in which the assessee actuallybecametheOWD?’ ot|theASSET|throughsuccession 2” 7. Section 45 of the Act provides that any profits or |gains arising from the transfer of a capital asset effected inthe previous year shall be chargeable to income tax under|the head “Capital gains”. Capital Gains is of two types. |Short-term capital gains and long term capital gains.|Depending upon the nature of capital gains the liability ofthe tax is determined. The mode and manner of computing|the capital gains is provided under Section 48 of the Act. |The income chargeable under the head capital gain shall becomputed by deducting from the full value of the|consideration received or accruing as a result of the| transfer of the capital asset, the expenditure incurredwholly and exclusively in connection with such transferand the cost of acquisition of the asset and the cost of any|improvement thereon. The 2[)/]proviso to Section 48|provides where long term capital gain arises from the|transfer of a long term capital asset, the cost of acquisition|of the asset has to be read as “indexed cost of acquisition”.Indexed cost of acquisition has been defined in the|explanation to the said Section, it means an amount whichbears to the cost of acquisition, the same proportion as|Cost Inflation Index for the year in which the asset is|transferred, bears to the Cost Inflation Index for the first.year in which the asset was held by the assessee or for theyear beginning on the 1[(5]day of April 1981, whichever is"later. 8.|Section 49 deals with the cost with reference tocertain modes of acquisition. One such mode is, if the|assessee acquires a capital asset by way of succession,|inheritance or devolution, then the cost of acquisition of theasset Shall be deemed to be the cost for which the previous owner of the property acquired it, as increased by the costof any improvement of the assets incurred or borne by theprevious owner or the assessee, as the case may be. |Therefore, when an asset is acquired by way of inheritance,the cost of acquisition of the asset should be calculated onthe basis of the cost of acquisition by the previous ownerand the said cost of acquisition of the previous owner hasto be calculated on the basis of indexed cost of acquisitionas provided in explanation (3) to Section 48. 9. Though in the definition of ‘indexed cost of|acquisition’, the word used are, “in which the asset washeld by the assessee”, a harmonious reading of Sections 48and 49 makes it clear that, for the purpose of ‘Indexed Costof Acquisition’, it has to be understood as the first year inwhich the previous owner held the said _ property.Otherwise, if the date of inheritance is taken into.consideration, then the cost of acquisition of the asset on|that date corresponding to the market value is to be taken|into consideration. Otherwise, take the cost of acquisition|on the day the previous owner acquired it and apply the| “Indexed Cost of Acquisition” and then calculate the capital gains and the tax payable. That is precisely what has beenheld by the Bombay High Court in the aforesaid Judgmentwhich in our view is the correct legal decision. 10. In that view of the matter, the Tribunal was)justified in following the Judgment of the Bombay High|Court and in setting-aside the order passed by the|Commissioner of Income Tax. Therefore, the substantial|question of law framed is answered in favour of the|assesses and against the revenue. Appeal is dismissed. No|costs. KGR* Sd/-. JUDGE | Sd/-. JUDGE.