The Commissioner Of Income Tax, Patiala v. Raja Malwinder Singh, Patiala

IN THE HIGH COURT OF PUNAJB AND HARYANA ATCHANDIGARH ITR Nos.578 & 579 of 1995Date of decision: 28.1.2011 The Commissioner of Income Tax, Patiala ……..Applicant Vs. Raja Malwinder Singh, Patiala ……..Respondent HON’BLE MR. JUSTICE ADARSH KUMAR GOELHON’BLE MR. JUSTICE RAJESH BINDALHON’BLE MR. JUSTICE ALOK SINGH Present: Mr. T.K.Joshi, Advocate for the petitioner/Revenue. Mr. Akshay Bhan, Advocate for the respondent/assessee. Adarsh Kumar Goel,J. 1. This matter has been placed before this Bench in pursuance oforder of reference dated October 1, 2010 as under:- “1. Following question of law has been referred foropinion of this Court by the Income Tax AppellateTribunal, Chandigarh, arising out of its order dated19.12.1994 in ITA Nos.301/Chd/90 and 404/Chd/92 forthe assessment years 1977-78 and 1979-80:- ‘Whether on the facts and in the circumstances ofthe case, the Appellate Tribunal was right in lawin holding that the assets which were the subjectmatter of capital gains were acquired by theassessee for nothing and that the same could notbe subjected to capital gains?’ 2. The assessee sold certain plots for consideration andthe income derived therefrom was sought to be taxed as‘capital gains’. The CIT(A) reversed the view taken by the Assessing Officer, holding that cost of acquisition ofproperty in question was nil and thus, no capital gain wasattracted. The Tribunal upheld the said view, inter-alia,relying upon judgment of the Hon’ble Supreme Court inCIT v. B.C.Srinivasa Setty, (1981) 128 ITR 294. 3. We have heard learned counsel for the parties. 4. Learned counsel for the revenue submitted that theprinciple of excluding taxability of capital gains whereasset is not capable of being valued, such as goodwill,cannot extend to capital assets like land which arecapable of being valued. Judgment of the Hon’bleSupreme Court in B.C.Srinivasa Setty was notapplicable to such a situation. Reliance has been placedon judgment of the Hon’ble Supreme Court in CIT v.D.P.Sandu Bros. Chembur P.Limited, (2005) 273 ITR1, wherein the judgment in B.C.Srinivasa Setty wasdistinguished in its applicability to an asset which wascapable of acquisition at a cost. The observations thereinare as under:- ‘In other words, an asset which is capable ofacquisition at a cost would be included within theprovisions pertaining to the head ‘capital gains’ asopposed to assets in the acquisition of which nocost at all can be conceived….’ 5. Learned counsel for the assessee, on the other hand,submits that even in respect of land acquired withoutcost, no capital gain was attracted on the principleapplied by the Hon’ble Supreme Court in B.C.SrinivasaSetty. He relies on a judgment of this Court in CIT(A) v.Amrik Singh, (2008) 299 ITR 14 and a judgment ofMadhya Pradesh High Court in CIT v. H.H MaharajaSahib Shri Lokendra Singhji (1986) 162 ITR 93. 6. We are of the view that the principle applied to assetlike goodwill for excluding taxability of capital gaincannot be applied to assets like land which are clearlycapable of being valued. View taken by Madhya PradeshHigh Curt and by this Crut on the basis of principle laid down in B.C.Srinivasa Setty may need reconsiderationby a larger Bench in the light of judgment in D.P.SanduBros. Chembur P.Limited. 7. Accordingly, let the matter be placed before Hon’blethe Chief Justice for constitution of an appropriateBench.” 6. We are of the view that the principle applied to assetlike goodwill for excluding taxability of capital gaincannot be applied to assets like land which are clearlycapable of being valued. View taken by Madhya PradeshHigh Curt and by this Crut on the basis of principle laid down in B.C.Srinivasa Setty may need reconsiderationby a larger Bench in the light of judgment in D.P.SanduBros. Chembur P.Limited. 7. Accordingly, let the matter be placed before Hon’blethe Chief Justice for constitution of an appropriateBench.” 2. The assessee is an individual. For the assessment years inquestion i.e. 1977-78 and 1979-80, the assessee sold plots of land forconsideration on which tax under the head of “capital gains” was sought tobe levied. The assessee contested the levy by submitting that cost ofacquisition by the previous owner was incapable of being ascertained. Theprevious owner was an ex-ruler of Pepsu State and the asset was acquiredunder the Instrument of Annexation and thus, its cost of acquisition couldnot be ascertained. Capital gain was attracted only when cost of acquisitionwas capable of being ascertained. This plea was rejected and the AssessingOfficer proceeded to assess capital gain taking the cost of acquisition equalto the market value as on 1.1.1954/1.1.1964 depending on the datesspecified under section 55(2) of the Act as applicable to the year ofassessment. On appeal, the CIT(A) rejected the plea of the assessee that thecost of acquisition being incapable of ascertainment, no capital gain wasattracted. However, the Tribunal reversed the said view following thejudgment of the Hon’ble Supreme Court in B.C.Srinivasa Setty’s case(supra) and also earlier orders passed by the Tribunal in the cases ofAmrinder Singh and Shiv Dev Inder . 3.Since at the time of hearing of the references before theDivision Bench, reliance was placed upon a judgment of this Court inAmrik Singh’s case (supra), prima facie, differing with the view takentherein, the matter was referred to be heard by a larger Bench. 4. Learned counsel for the revenue submits that the plea of theassessee that no capital gain was attracted, is untenable in the face ofSection 55(2) & (3) read with sections 48 and 49 of the Act. The saidprovisions as existed on 1.4.1978 are as under:- “Mode of computation and deductions: 48. The income chargeable under the head “Capital gains” shallbe computed by deducting from the full value of theconsideration received or accruing as a result of the transfer ofthe capital asset the following amounts, namely:- i)expenditure incurred wholly and exclusively in connectionwith such transfer;with such transfer; ii)the cost of acquisition of the capital asset and the cost ofany improvement thereto.any improvement thereto. Cost with reference to certain modes of acquisition: 49. 1) Where the capital asset became the property of theassessee- i) on any distribution of assets on the total or partial partition of aHindu undivided family;Hindu undivided family; ii) under a gift or will; iii)a) by succession, inheritance or devolution, or b) on any distribution of assets on the dissolution of afirm, body of individuals or other association of persons,orfirm, body of individuals or other association of persons,or c) on any distribution of assets on the liquidation of acompany, orcompany, or d) under a transfer to a revocable or an irrevocable trust, ore) under any such transfer as is referred to in clause (iv) orclause (v) or clause (vi) of section 47;e) under any such transfer as is referred to in clause (iv) orclause (v) or clause (vi) of section 47; 49. 1) Where the capital asset became the property of theassessee- i) on any distribution of assets on the total or partial partition of aHindu undivided family;Hindu undivided family; ii) under a gift or will; iii)a) by succession, inheritance or devolution, or b) on any distribution of assets on the dissolution of afirm, body of individuals or other association of persons,orfirm, body of individuals or other association of persons,or c) on any distribution of assets on the liquidation of acompany, orcompany, or d) under a transfer to a revocable or an irrevocable trust, ore) under any such transfer as is referred to in clause (iv) orclause (v) or clause (vi) of section 47;e) under any such transfer as is referred to in clause (iv) orclause (v) or clause (vi) of section 47; iv)such assessee being a Hindu undivided family, by themode referred to in sub section (2) of section 64 at anytime after the 31[st] day of December, 1969 the cost ofacquisition of the assets shall be deemed to be the cost forwhich the previous owner of the property acquired it, asmode referred to in sub section (2) of section 64 at anytime after the 31[st] day of December, 1969 the cost ofacquisition of the assets shall be deemed to be the cost forwhich the previous owner of the property acquired it, as increased by the cost of any improvement of the assetsincurred or borne by the previous owner or the assessee, asthe case may be. Explanation: In this sub section the expression “previousowner of the property” in relation to any capital assetowned by an assessee means the last previous owner of thecapital asset who acquired it by a mode of acquisitionother than that referred to in clause (i) or clause (ii) orclause (iii) or clause (iv) of this sub section. (2) Where the capital asset being a share or shares in anamalgamated company which is an Indian companybecame the property of the assessee in consideration of atransfer referred to in clause (vii) of section 47, the cost ofacquisition of the asset shall be deemed to be the cost ofacquisition to him of the share or shares in theamalgamating company. xxxxxxxxxx 55(1) For the purposes of sections 48, 49 and 50 – a) ‘adjusted’ in relation to written down value or fairmarket value, means diminished by any loss deductedor increased by any profits assessed, under theprovisions of clause (iii) of sub section (1), or clause(ii) of sub section (1A) of section 32 or sub section (2)or sub section (2A) of section 41, as the case may be,the computation for this purpose being made withreference to the period commencing from the Ist day ofJanuary 1954, in cases to which clause (2) of section 50applies;market value, means diminished by any loss deductedor increased by any profits assessed, under theprovisions of clause (iii) of sub section (1), or clause(ii) of sub section (1A) of section 32 or sub section (2)or sub section (2A) of section 41, as the case may be,the computation for this purpose being made withreference to the period commencing from the Ist day ofJanuary 1954, in cases to which clause (2) of section 50applies; b) ‘cost of any improvement’, in relation to a capitalasset –asset – i)where the capital asset became the property of theprevious owner or the assessee before the Ist day ofJanuary 1954 and the fair market value of the asseton that day is taken as the cost of acquisition at theoption of the assessee, means all expenditure of acapital nature incurred in making any additions orprevious owner or the assessee before the Ist day ofJanuary 1954 and the fair market value of the asseton that day is taken as the cost of acquisition at theoption of the assessee, means all expenditure of acapital nature incurred in making any additions or alterations to the capital asset on or after the saiddate by the previous owner or the assessee, and b) ‘cost of any improvement’, in relation to a capitalasset –asset – i)where the capital asset became the property of theprevious owner or the assessee before the Ist day ofJanuary 1954 and the fair market value of the asseton that day is taken as the cost of acquisition at theoption of the assessee, means all expenditure of acapital nature incurred in making any additions orprevious owner or the assessee before the Ist day ofJanuary 1954 and the fair market value of the asseton that day is taken as the cost of acquisition at theoption of the assessee, means all expenditure of acapital nature incurred in making any additions or alterations to the capital asset on or after the saiddate by the previous owner or the assessee, and ii)in any other case, means all expenditure of a capitalnature incurred in making any additions oralterations to the capital asset by the assessee after itbecame his property, and, where the capital assetbecame the property of the assessee by any of themodes specified in sub section (1) of section 49, bythe previous owner, but does not include anyexpenditure which is deductible in computing theincome chargeable under the head ‘interest onsecurities’, ‘income from house property’, Profitsand gains of business or profession’, or ‘incomefrom other sources’, and the expression‘improvement’ shall be construed accordingly. (2) For the purposes of sections 48 and 49, ‘cost ofacquisition’, in relation to a capital asset- i) where the capital asset became the property of theassessee before the Ist day of January 1954 means the costof acquisition of the asset to the assessee or the fair marketvalue of the asset on the Ist day of January 1954, at theoption of the assessee; ii) where the capital asset became the property of theassessee by any of the modes specified in sub section (1)of section 49, and the capital asset became the property ofthe previous owner before the Ist day of January 1954,means the cost of the capital asset to the previous owner orthe fair market value of the asset on the Ist day of January1954, at the option of the assessee; iii)where the capital asset became the property of theassessee on the distribution of the capital assets of acompany on its liquidation and the assessee hasbeen assessed to income tax under the head ‘capitalgains’ in respect of that asset under section 46,means the fair market value of the asset on the dateof distribution;assessee on the distribution of the capital assets of acompany on its liquidation and the assessee hasbeen assessed to income tax under the head ‘capitalgains’ in respect of that asset under section 46,means the fair market value of the asset on the dateof distribution; iv)(omitted by Finance Act, 1966, w.e.f 1.4.1966); v)Where the capital asset, being a share or a stock of acompany, became the property of the assessee on –company, became the property of the assessee on – a) the consolidation and division of all or any of the sharecapital of the company into shares of larger amountthan its existing shares,capital of the company into shares of larger amountthan its existing shares, b) the conversion of any shares of the company into stock,c) the re-conversion of any stock of the company intoshares,c) the re-conversion of any stock of the company intoshares, d) the sub division of any of the shares of the companyinto shares of smaller amount, orinto shares of smaller amount, or e) the conversion of one kind of shares of the companyinto another kind means the cost of acquisition of theasset calculated with reference to the cost ofacquisition of the shares or stock from which such assetis derived.into another kind means the cost of acquisition of theasset calculated with reference to the cost ofacquisition of the shares or stock from which such assetis derived. b) the conversion of any shares of the company into stock,c) the re-conversion of any stock of the company intoshares,c) the re-conversion of any stock of the company intoshares, d) the sub division of any of the shares of the companyinto shares of smaller amount, orinto shares of smaller amount, or e) the conversion of one kind of shares of the companyinto another kind means the cost of acquisition of theasset calculated with reference to the cost ofacquisition of the shares or stock from which such assetis derived.into another kind means the cost of acquisition of theasset calculated with reference to the cost ofacquisition of the shares or stock from which such assetis derived. (3) Where the cost for which the previous owner acquiredthe property cannot be ascertained, the cost of acquisitionto the previous owner means the fair market value on thedate on which the capital asset became the property of theprevious owner.” 5. It is pointed out that judgment in CIT, Bangalore v. B.C.Srinivasa Setty’s case (supra), is distinguishable. It was observedtherein that in a newly started business the value of goodwill was notascertainable, and on sale of goodwill, capital gain was not attracted. It issubmitted that in case of acquisition of land, the same is either acquired atsome cost or without cost and under the scheme of the Act, there can be nosituation when the cost is incapable of ascertainment. Section 55(2)provides for taking the cost either equal to the market value as on 1.1.1954or at the option of the assessee equal to the cost of acquisition of theprevious owner. Section 55(3) provides that where cost of acquisition of the previous owner cannot be ascertained, it has to be taken to be equal tothe market value on the date the asset was acquired by the previous owner.Explanation to section 49 provides that previous owner is the person notcovered by the clauses mentioned in section 49(2) i.e. who acquiresproperty otherwise than by way of gift, will or by succession. 6.In the present case, the assessee acquired the property bysuccession from previous owner. According to the stand of the assessee,cost of acquisition by the previous owner could not be ascertained.However, he failed to exercise the option of going either by the date ofmarket value on the date of acquisition or by the cost of the previousowner in which case only option available to the Assessing Officer was toproceed to compute capital gain by taking the cost of the asset to be fairmarket value on the specified date i.e. 1.1.1954 as per applicable provisionfor assessment year 1977-78 and as on 1.1.1964 for assessment year 1978-79. Even in a case where cost of acquisition cannot be ascertained, section55(3) statutorily prescribes the cost to be equal to the market value on thedate of acquisition. This being the position, capital gain is not excludedeven on the plea that value of the asset in respect of which capital gain is tobe charged was incapable of being ascertained. The view taken in AmrikSingh’s case (supra) based on the assumption that where market valuecannot be ascertained, capital gain cannot be applied, is not correct beingagainst the statutory scheme. Similarly, the view taken by the MadhyaPradesh High Court in CIT v. H.H.Maharaja Sahib Shri LokendraSinghji’s case (supra) cannot be accepted. The said judgment also does notgive effect to the mandate of section 55(3) which provides for a situationwhere value of the asset acquired could not be ascertained. If market valuecan be ascertained, it has to be taken to be equal thereto and if the value cannot be ascertained, it has to be equal to market value on a specified dateat the option of the assessee. It is not the case of the assessee that land hadno market value at all on the date of its acquisition. Contention that valuewas incapable of being ascertained, as already observed, the value in suchcase has to be taken as being equal to market value on a specified date. cannot be ascertained, it has to be equal to market value on a specified dateat the option of the assessee. It is not the case of the assessee that land hadno market value at all on the date of its acquisition. Contention that valuewas incapable of being ascertained, as already observed, the value in suchcase has to be taken as being equal to market value on a specified date. 7. We, thus, hold that even where cost of acquisition of capitalasset cannot be ascertained but the asset has market value, capital gain willbe attracted by taking the cost of acquisition to be fair market value as on1.1.1954 or on date statutorily specified or at the option by assesse, marketvalue on the date of acquisition. 8.The question will stand answered accordingly in favour of therevenue and against the assessee. (Adarsh Kumar Goel) Judge (Rajesh Bindal) Judge January 28, 2011‘gs’ (Alok Singh) Judge