Rohan Developers Pvt. Ltd.)A Private Limited Company, Registered Under)The Companies Act, 1956 And v. Oral Judgment:- (Per K. R. Shriram, J

IN THE HIGH COURT OF JUDICATURE AT BOMBAYORDINARY ORIGINAL CIVIL JURISDICTIONWRIT PETITION NO.339 OF 2011 Rohan Developers Pvt. Ltd.)a private limited company, registered under)the Companies Act, 1956 and having its)registered office at Gordhan Building No.II, )12/14 Dr. Parekh Street, Prathana Samaj,)Mumbai 400 004.)...Petitioner Vs. 1. Income-tax Officer (International Taxation)-3)(1), Mumbai having office at Ground Floor,)Scindia House, Narottam Morarji Marg,)Ballard Estate, Mumbai 400 038.)(1), Mumbai having office at Ground Floor,)Scindia House, Narottam Morarji Marg,)Ballard Estate, Mumbai 400 038.) 2. Director of Income-tax (International Taxation)-II Mumbai, having his office at Scindia House)Narottam Morarji Marg, Ballard Estate,)Mumbai 400 038.)-II Mumbai, having his office at Scindia House)Narottam Morarji Marg, Ballard Estate,)Mumbai 400 038.)3. Union of India through the Secretary,)Department of Revenue, Ministry of Finance, )North Block, New Delhi 110 001.)...RespondentsDepartment of Revenue, Ministry of Finance, )North Block, New Delhi 110 001.)...Respondents Mr. J. D. Mistri, Senior Advocate a/w. Mr. Nitesh Joshi i/b. Mr. Atul K.Jasani for Petitioner. Mr. Suresh Kumar for Respondents. CORAM : K. R. SHRIRAM &N. J. JAMADAR, JJ.DATE :FEBRUARY 03, 2022 ORAL JUDGMENT:- (Per K. R. Shriram, J.) 1.Petitioner is a company engaged in the business of developmentand re-development of various properties in the city of Mumbai. OneMrs. Dolly Jehangir Gazdar held an undivided ½ (one half) share in apiece of land admeasuring about 8071.64 square yards situated atDr. Ambedkar Road (Sopari Baug Road) with the buildings standingthereon in Parel Sewri Division in BMC F/South Ward, Mumbai fromthe year 1972. The other ½ (one half) share in the said property belonged to her brother one Mr. Meherwan Nadirshaw. 2.Mrs. Dolly Jehangir Gazdar expired on 10[th] June 1982 leaving herlast Will and Testament dated 20[th] June 1979. The Probate of her Willwas granted by the Bombay High Court on 5[th] November 2004. Underthe said Will, she had bequeathed her share in the said property to heraunt - Mrs. Rhoda Rustom Framjee and her brother - Mr. MeherwanNadirshaw in equal shares. Accordingly, the undivided 1/4[th] share in thesaid property vested in Mrs. Rhoda Rustom Framjee from the year 1982.Mrs. Rhoda Rustom Framjee expired on 12[th] May 1992 leaving her lastWill dated 3[rd] June 1977, whereunder she bequeathed all her estateincluding 1/4[th] share in the said property to her husband Mr. RustomFramjee. Mr. Rustom Framjee expired on 17[th] September 2006 leavingbehind two sons as his legal heirs namely, Mr. Sohrab Rustom Framjeeand Mr. Pesh Rustom Framjee. As per the Will of Mr. Rustom Framjeedated 19[th] February 2006, he bequeathed his estate including his 1/4[th]share in the said property to his two sons in equal shares. Though noprobate has been granted in respect of the Wills of Mrs. Rodha RustomFramjee and Mr. Rustom Framjee, their only sons - Mr. Sohrab RustomFramjee and Mr. Pesh Rustom Framjee have accepted the said Wills andacted upon the same. 3.Accordingly, Mr. Pesh Rustom Framjee (hereinafter referred to as“seller”) became owner of 1/8[th] share in the said property. Petitioner haddecided to buy that 1/8[th] share of seller and since Mr. Pesh RustomFramjee (seller) was a non-resident in so far as the Income Tax Act,1961 (the Act) is concerned and he had not filed his return of income forany of the earlier years as there was no taxable income in India in thoseyears in his hands, petitioner filed an application before respondent No.1under Section 195(2) of the Act requesting him to issue a LOW tax rateCertificate for Deduction of Tax at Source in respect of consideration forpurchase of immovable property from seller. 3.Accordingly, Mr. Pesh Rustom Framjee (hereinafter referred to as“seller”) became owner of 1/8[th] share in the said property. Petitioner haddecided to buy that 1/8[th] share of seller and since Mr. Pesh RustomFramjee (seller) was a non-resident in so far as the Income Tax Act,1961 (the Act) is concerned and he had not filed his return of income forany of the earlier years as there was no taxable income in India in thoseyears in his hands, petitioner filed an application before respondent No.1under Section 195(2) of the Act requesting him to issue a LOW tax rateCertificate for Deduction of Tax at Source in respect of consideration forpurchase of immovable property from seller. 4.By an order dated 21[st] December 2010, respondent No.1 directedpetitioner to deduct tax of Rs.28,74,100/-. It is this order, which isimpugned in this petition. Admittedly, petitioner has deposited thisamount of Rs.28,74,100/- with the Revenue even though it is petitioner’scase that the amount directed to be deducted as tax at source has beenincorrectly calculated and according to petitioner, only a sum ofRs.74,523/- was the tax that had to be deducted. For ease of reference,the computation, as given in the petition, is reproduced hereunder:- 5.According to petitioner, under Section 49(1)(ii) of the Act, cost ofacquisition of the said property in the hands of seller is deemed to be the cost for which the said property was acquired by late Mrs. DollyJehangir Gazdar. It is also petitioner’s case that under clauses (29A) and(42A) of Section 2, the period of holding of late Mrs. Dolly JehangirGazdar, Mrs. Rhoda Rustom Framjee and Mr. Rustom Framjee are alsoto be included in the period of holding of seller for ascertaining whetherthe said property is held by him as a short term capital asset or as a longterm capital asset. Therefore, in its application under Section 195(2) ofthe Act, petitioner annexed a copy of draft computation of long termcapital gains of the seller in respect of the transfer of the said property.Petitioner took the benefit of the option provided in the provisions ofSection 55(2)(b)(ii) of the Act, which provides that where a capital assetbecame the property of the assessee by any of the modes specified inSection 49(1) and the capital asset became the property of the previousowner before the 1[st] day of April 1981, cost of acquisition means the costof the capital asset to the previous owner or the fair market value of theasset on the 1[st] day of April 1981 at the option of the assessee. Based onthe scheme of the Act as is provided in Section 49(1)(ii), clauses (29A)and (42A) of Section 2 and Section 55(2)(b)(ii) of the Act, petitionerclaimed that indexation of the cost of acquisition under the secondproviso to Section 48 should be available from the financial year 1981-82. Transfer of the property to petitioner had taken place in the financialyear 2010-11. 6.The only point of dispute between petitioner and respondent No.1on the issue of computation of capital gains is with respect to the yearfrom which benefit of indexation is to be granted. According topetitioner, indexation should be granted from financial year 1981-82 as aprevious owner, who had acquired the property by any means other thanthose specified in Section 49 was late Mrs. Dolly Jehangir Gazdar, whohad acquired her share in the said property in the year 1972, i.e., before1981, while, respondent No.1 has granted such indexation from financialyear 1992-93. 7.According to petitioner, the view of respondent No.1 is contraryto the decision of the Special Bench of the Income Tax AppellateTribunal (ITAT) in the case of DCIT Vs. Manjula J. Shah[1]. 6.The only point of dispute between petitioner and respondent No.1on the issue of computation of capital gains is with respect to the yearfrom which benefit of indexation is to be granted. According topetitioner, indexation should be granted from financial year 1981-82 as aprevious owner, who had acquired the property by any means other thanthose specified in Section 49 was late Mrs. Dolly Jehangir Gazdar, whohad acquired her share in the said property in the year 1972, i.e., before1981, while, respondent No.1 has granted such indexation from financialyear 1992-93. 7.According to petitioner, the view of respondent No.1 is contraryto the decision of the Special Bench of the Income Tax AppellateTribunal (ITAT) in the case of DCIT Vs. Manjula J. Shah[1]. 8.Pursuant to the above, petitioner has, on or about 7[th] January 2011,paid over tax of Rs.28,74,100/- and interest thereon of Rs.43,112/-. It ispetitioner’s case that the direction in the impugned order dated 21[st]December 2010 determining the capital gains at Rs.1,39,51,463/- andconsequently tax thereon at Rs.28,74,100/- is contrary to the provisionsof the Act. Petitioner is, therefore, seeking the following two prayers inthe petition:- “a)for a Writ of Certiorari or a Writ in the nature ofCertiorari or any other appropriate writ, order or directionunder Article 226 of the Constitution of India calling for therecords of the Petitioner’s case and after examining the legalityand validity of the said impugned order dated 21[st] December,2010 (being Exhibit “F” hereto) quash and set aside the same; b)for a Writ of Mandamus or a Writ in the nature ofMandamus or any other appropriate writ, order or directionunder Article 226 of the Constitution of India directingRespondent No.1 to determine the long term capital gainsarising on account of transfer of the 1/8[th] (one eighth) share ofMr. Pesh Rustom Framjee in the said property at Rs.3,61,763/-and tax thereon at Rs.74,523/- and consequently grant a refundof the excess tax paid along with interest to the Petitioner;” 9.In the affidavit in reply, respondent is of course justifying theaction of respondent No.1 in passing the order dated 21[st] December 2010impugned in the petition. Respondent is also admitting that a Full Benchof ITAT has taken a view, which is contrary to the view taken byrespondent No.1. However, according to respondent, the department iscontesting the order of ITAT and the issue has not been settled by theHon’ble High Court. 10.Time and again, Courts have held that the principles of judicialdiscipline require that the orders of the higher appellate authorities should be followed unreservedly by the subordinate authorities. Themere fact that the order of the appellate authority is not acceptable to thedepartment or is the subject matter of an appeal cannot be a ground fornot following it unless its operation has been suspended by a competentcourt. This has been reiterated by this Court in its order dated 31[st]January, 2022 Karanja Terminal & Logistic Private Limited Vs.Principal Commissioner of Income Tax[2] (unreported). 10.Time and again, Courts have held that the principles of judicialdiscipline require that the orders of the higher appellate authorities should be followed unreservedly by the subordinate authorities. Themere fact that the order of the appellate authority is not acceptable to thedepartment or is the subject matter of an appeal cannot be a ground fornot following it unless its operation has been suspended by a competentcourt. This has been reiterated by this Court in its order dated 31[st]January, 2022 Karanja Terminal & Logistic Private Limited Vs.Principal Commissioner of Income Tax[2] (unreported). 11.In any case, the contest of the department against the order ofITAT in DCIT Vs. Manjula J. Shah has come to an end by a judgmentof this Court in Commissioner of Income Tax Vs. Manjula J. Shah[3].This Court confirmed the findings of the Full Bench of ITAT and whiledismissing the appeal held, (i) that when the Legislature by introducingthe deeming fiction seeks to tax the gains arising on transfer of a capitalasset acquired under a gift or will the capital gains under section 48have to be computed applying the deemed fiction. Therefore, the fictioncontained in Explanation 1(i)(b) to section 2(42A) has to be applied indetermining the indexed cost of acquisition under section 48; (ii) that byapplying the deeming provision contained in Explanation 1(i)(b) tosection 2(42A) the assessee was deemed to have held the asset fromJanuary 29, 1993 to June 30, 2003, by including the period for whichthe asset was held by the previous owner and, accordingly, held liablefor long-term capital gains tax. While computing the capital gains, theindexed cost of acquisition had to be computed with reference to theyear in which the previous owner first held the asset and not the year inwhich the assessee became the owner of the asset. 12.It will be useful to reproduce the relevant portion of thejudgment:- “It is the contention of the Revenue that since the indexed17cost of acquisition as per clause (iii) of the Explanation tosection 48 of the Act has to be determined with reference to the 2Writ Petition No.1397 of 20203[2013] 355 ITR 474 (Bom)3[2013] 355 ITR 474 (Bom) cost inflation index for the first year in which the asset washeld by the assessee and, in the present case, as the assesseeheld the asset with effect from February 1, 2003, the first yearof holding the asset would be the financial year 2002-03 and,accordingly, the cost inflation index for 2002-03 would beapplicable in determining the indexed cost of acquisition. We see no merit in the above contention. As rightlycontended by Mr. Rai, learned counsel for the assessee, theindexed cost of acquisition has to be determined with referenceto the cost inflation index for the first year in which the capitalasset was “held by the assessee”. Since the expression “heldby the assessee” is not defined under section 48 of the Act, thatexpression has to be understood as defined under section 2 ofthe Act. Explanation 1(i)(b) to section 2(42A) of the Actprovides that in determining the period for which an asset isheld by an assessee under a gift, the period for which the saidasset was held by the previous owner shall be included. As perthe previous owner held the capital asset from January 29,1993, as per Explanation 1(i)(b) to section 2(42A) of the Act,the assessee is deemed to have held the capital asset fromJanuary 29, 1993. By reasons of the deemed holding of theasset from January 29, 1993, the assessee is deemed to haveheld the asset as a long-term capital asset. If the long-termcapital gains liability has to be computed under section 48 ofthe Act by treating that the assessee held the capital asset fromJanuary 29, 1993, then, naturally in determining the indexedcost of acquisition under section 48 of the Act, the assesseemust be treated to have held the asset from January 29, 1993,and , accordingly the cost inflation index for 1992-93 would beapplicable in determining the indexed cost of acquisition. If the argument of the Revenue that the deeming fictioncontained in Explanation 1(i)(b) to section 2(42A) of the Actcannot be applied in computing the capital gains under section48 of the Act is accepted, then, the assessee would not be liablefor long-term capital gains tax because it is only by applyingthe deemed fiction contained in Explanation 1(i)(b) to section2(42A) and section 49(1)(ii) of the Act, the assessee is deemedto have held the asset from January 29, 1993, and deemed tohave incurred the cost of acquisition and, accordingly, madeliable for the long-term capital gains tax. Therefore, when theLegislature by introducing the deeming fiction seeks to tax thegains arising on transfer of a capital asset acquired under agift or will and the capital gains under section 48 of the Acthas to be computed by applying the deemed fiction, it is notpossible to accept the contention of Revenue that the fictioncontained in Explanation 1(i)(b) to section 2(42A) of the Actcannot be applied in determining the indexed cost ofacquisition under section 48 of the Act. It is true that the words of a statute are to be understood 18 19 in their natural and ordinary sense unless the object of thestatute suggests to the contrary. Thus, in construing the words“asset was held by the assessee” in clause (iii) of Explanationto section 48 of the Act, one has to see the object with whichthe said words are used in the statute. If one reads Explanation1(i)(b) to section 2(42A) together with sections 48 and 49 ofthe Act, it becomes absolutely clear that the object of thestatute is not merely to tax the capital gains arising on transferof a capital asset acquired by an assessee by incurring the costof acquisition, but also to tax the gains arising on transfer of acapital asset, inter alia, acquired by an assessee under a gift orwill as provided under section 49 of the Act where the assesseeis deemed to have incurred the cost of acquisition. Therefore,if the object of the Legislature is to tax the gains arising ontransfer of a capital acquired under a gift or will by includingthe period for which the said asset was held by the previousowner in determining the period for which the said asset washeld by the assessee, then that object cannot be defeated byexcluding the period for which the said asset was held by theprevious owner while determining the indexed cost ofacquisition of that asset to assessee. In other words, in theabsence of any indication in clause (iii) of the Explanation tosection 48 of the Act that the words “asset was held by theassessee” has to be construed differently, the said words shouldbe construed in accordance with the object of the statute, thatis, in the manner set out in Explanation 1(i)(b) to section2(42A) of the Act. 21To accept the contention of the Revenue that the wordsused in clause (iii) of the Explanation to section 48 of the Acthas to be read by ignoring the provisions contained in section 2of the Act runs counter to the entire scheme of the Act. Section2 of the Act expressly provides that unless the context otherwiserequires, the provisions of the Act have to be construed asprovided under section 2 of the Act. In section 48 of the Act, theexpression “asset held by the assessee” is not defined and,therefore, in the absence of any intention to the contrary theexpression “asset held by the assessee” in clause (iii) of theExplanation to section 48 of the Act has to be construed inconsonance with the meaning given in section 2(42A) of theAct. If the meaning given in section 2(42A) is not adopted inconstruing the words used in section 48 of the Ac, then thegains arising on transfer of a capital asset acquired under agift or will be outside the purview of the capital asset acquiredunder a gift or will be outside the purview of the capital gainstax which is not intended by the Legislature. Therefore, theargument of the Revenue which runs counter to the legislativeintent cannot be accepted.used in clause (iii) of the Explanation to section 48 of the Acthas to be read by ignoring the provisions contained in section 2of the Act runs counter to the entire scheme of the Act. Section2 of the Act expressly provides that unless the context otherwiserequires, the provisions of the Act have to be construed asprovided under section 2 of the Act. In section 48 of the Act, theexpression “asset held by the assessee” is not defined and,therefore, in the absence of any intention to the contrary theexpression “asset held by the assessee” in clause (iii) of theExplanation to section 48 of the Act has to be construed inconsonance with the meaning given in section 2(42A) of theAct. If the meaning given in section 2(42A) is not adopted inconstruing the words used in section 48 of the Ac, then thegains arising on transfer of a capital asset acquired under agift or will be outside the purview of the capital asset acquiredunder a gift or will be outside the purview of the capital gainstax which is not intended by the Legislature. Therefore, theargument of the Revenue which runs counter to the legislativeintent cannot be accepted. Apart from the above, section 55(1)(b)(2)(ii) of the Actprovides that where the capital asset became the property ofthe assessee by any of the modes specified under section 49(1) 22 of the Act, not only the cost of improvement incurred by theassessee but also the cost of improvement incurred by theprevious owner shall be deducted from the total considerationreceived by the assessee while computing the capital gainsunder section 48 of the Act. The question of deducting the costof improvement incurred by the previous owner in the case ofan assessee covered under section 49(1) of the Act would ariseonly if the period for which the asset was held by the previousowner is included in determining the period for which the assetwas held by the assessee. Therefore, it is reasonable to holdthat in the case of an assessee covered under section 49(1) ofthe Act, the capital gains liability has to be computed byconsidering that the assessee held the said asset from the dateit was held by the previous owner and the same analogy hasalso to be applied in determining the indexed cost ofacquisition. The object of giving relief to an assessee by allowingindexation is with a view to offset the effect of inflation. As perCBDT Circular No. 636, dated August 31, 1992 (see [1992]198 ITR (St.)1) a fair method of allowing relief by way ofindexation is to link it to the period of holding the asset. Thesaid circular further provides that the cost of acquisition andthe cost of improvement have to be inflated to arrive at theindexed cost of acquisition and the indexed cost ofimprovement and then deduct the same from the saleconsideration to arrive at the long-term capital gains. Ifindexation is linked to the period of holding the asset and in thecase of an assessee covered under section 49(1) of the Act, theperiod of holding the asset has to be determined by includingthe period for which the said asset was held by the previousowner, then obviously in arriving at the indexation, the firstyear in which the said asset was held by the previous ownerwould be the first year for which the said asset was held by theassessee. Since the assessee, in the present case, is held liable forlong-term capital gains tax by treating the period for which thecapital asset in question was held by the previous owner as theperiod for which the said asset was held by the assessee, theindexed cost of acquisition has also to be determined on thevery same basis. In the result, we hold that the Income-tax AppellateTribunal was justified in holding that while computing thecapital gains arising on transfer of a capital asset acquired bythe assessee under a gift, the indexed cost of acquisition has tobe computed with reference to the year in which the previousowner first held the asset and not the year in which theassessee became the owner of the asset.” 23 24 25 13.Therefore, the cost of acquisition of the said property in the handsof seller is deemed to be the cost for which the said property wasacquired by late Mrs. Dolly Jehangir Gazdar and the period of holding oflate Mrs. Dolly Jehangir Gazdar, Mrs. Rhoda Rustom Framjee and Mr.Rustom Framjee are also to be included in the period of holding of sellerfor ascertaining the period for which the property was held by the seller.Based on the Scheme of the Act, as provided in Section 49(1)(ii), clauses(29A) and (42A) of Section 2 and Section 55(2)(b)(ii) of the Act,indexation of the cost of acquisition under the second proviso to Section48 should be available from the financial year 1981-1982. Therefore, onthis ground alone, we will have to grant prayer clause (a) as quotedearlier. 14.As regards prayer clause (b) quoted earlier i.e., refund of excesstax paid, an affidavit in rejoinder has been filed by petitioner throughone Rohan J. Mehta, affirmed on 13[th] December 2017 to which isannexed a copy of Form 26AS of seller, a copy of the computation ofincome of seller for Assessment Year 2011-12 and a copy of anassessment order dated 24[th] February, 2014 in the case of seller forAssessment Year 2011-12 along with notice of demand and computationform. 15.From the documents annexed to the rejoinder, it appears thatseller has taken the indexed cost of acquisition at Rs.2,46,15,367/- forthe said property and accordingly determined the capital gains atRs.53,84,633/- (Consideration of Rs.3,00,00,000 – Rs.2,46,15,367). Hehas not offered to tax any capital gains as he has investedRs.1,00,00,000/- in investments covered by Section 54EC of the Act.Seller has also not claimed any credit in respect of the TDS ofRs.28,74,100/- paid by petitioner. In his computation of income, theseller has claimed TDS credit of Rs.31,787/- only, which relates to taxdeducted in respect of interest earned by him from bank. 15.From the documents annexed to the rejoinder, it appears thatseller has taken the indexed cost of acquisition at Rs.2,46,15,367/- forthe said property and accordingly determined the capital gains atRs.53,84,633/- (Consideration of Rs.3,00,00,000 – Rs.2,46,15,367). Hehas not offered to tax any capital gains as he has investedRs.1,00,00,000/- in investments covered by Section 54EC of the Act.Seller has also not claimed any credit in respect of the TDS ofRs.28,74,100/- paid by petitioner. In his computation of income, theseller has claimed TDS credit of Rs.31,787/- only, which relates to taxdeducted in respect of interest earned by him from bank. 16.From the assessment order annexed to the affidavit in rejoinder, itdoes appear that the Revenue had selected the return of the seller forscrutiny and an assessment order dated 24[th] February 2014 under Section143(3) of the Act has been passed. In the said order, department hasaccepted the capital gains at Rs.3,85,613/-, and in the absence of anyclaim of TDS of Rs.28,74,100/-, has not allowed any credit or refund ofthe same. In fact, the department has raised the demand of Rs.91,360/-as seller’s tax along with interest under Section 234B of the Act. There isno sur-rejoinder filed by department to this affidavit in rejoinder,denying any of the averments in the affidavit though more than fouryears have passed since rejoinder was filed in the Court on 15[th]December, 2017 when time was granted on that date to respondents toconsider the affidavit in rejoinder. 17.At the same time, it is not clear whether the seller has paid the taxamount of Rs.91,360/- demanded from him pursuant to the assessmentorder dated 24[th] February, 2014. 18.At this point of time, we would, therefore, permit the departmentto retain this amount (Rs.91,360/-) and return the balance out ofRs.28,74,100/-. The department will also refund the proportionateinterest of Rs.43,112/- after recalculating, by taking capital gains thatshould have been deposited at Rs.3,85,613/- and not Rs.1,39,51,463/-. 19.The next point which has to be given attention to is the interest onrefund and the date from which the interest has to be paid. A similarpoint has been considered by the Apex Court in Union of India Vs. TataChemicals Limited[4], where paragraph 39 reads as under:- “39.In the present case, it is not in doubt that the payment oftax made by resident/ depositor is in excess and thedepartment chooses to refund the excess payment of tax to thedepositor. We have held the interest requires to be paid on suchrefunds. The catechize is from what date interest is payable, since the present case does not fall either under clause (a) or(b) of Section 244A of the Act. In the absence of an expressprovision as contained in clause (a), it cannot be said that theinterest is payable from the 1st of April of the assessment year.Simultaneously, since the said payment is not made pursuantto a notice issued under Section 156 of the Act, Explanation toclause (b) has no application. In such cases, as the openingwords of clause (b) specifically referred to “as in any othercase”, the interest is payable from the date of payment of tax.The sequel of our discussion is the resident/deductor is entitlednot only the refund of tax deposited under Section 195(2) ofthe Act, but has to be refunded with interest from the date ofpayment of such tax.” 20.Therefore, interest shall be paid at the rate prescribed underSection 244A(1)(b) for the period from the date of payment of tax, i.e.,7[th] January, 2011. 21.Petition disposed accordingly. (N. J. JAMADAR, J.) (K. R. SHRIRAM, J.) Minal Parab