Bombay High Court
Commissioner Of Income-Tax vs Trikamlal Maneklal (H.U.F.) on 12 March, 1987
Equivalent citations: [1987]168ITR733(BOM)
JUDGMENT Bharucha, J.
1. The question we are called upon to answer in this reference made at the instance of the Revenue under section 256(1) of the Income-tax Act, 1961, reads thus :
"Whether, on the facts and in the circumstances of the case, the market value of the shares at the time of acquisition by the assessee Hindu undivided family is to be taken as the cost thereof to the assessee for the purpose of computation of the capital gains ?"
2. We are concerned with the assessment years 1966-67 and 1968-69. The assessee is a Hindu undivided family. Its karta, one T. Maneklal, had in 1954 acquired shares of M/s. T. Maneklal Manufacturing Co. Ltd. at their face value of Rs. 100 a share. In the previous year relevant to the assessment year 1962-63, the said Maneklal threw these shares into the hotchpot of the Hindu undivided family. In the previous year relevant to the assessment year 1966-67, two hundred and fifty of these shares were sold by the Hindu undivided family for a sum of Rs. 86,250. In the previous year relevant to the assessment year 1968-69, seven hundred and fifty of these shares were sold by the Hindu undivided family for a sum of Rs. 2,37,375.
3. The 250 shares sold by the Hindu undivided family in the previous year relevant to the assessment year 1966-67 had been originally purchased by the said Maneklal for Rs. 25,000. Their market value on the date on which they were thrown into the hotchpot of the Hindu undivided family was Rs. 1,57,342. The seven hundred and fifty shares which were sold by the Hindu undivided family in the previous year relevant to the assessment year 1968-69 had been originally purchased by the said Maneklal for Rs. 75,000. Their market value on the date on which they were thrown into the hotchpot of the Hindu undivided family was Rs. 2,41,890.
4. The Hindu undivided family contended before the Income-tax Officer that for the purposes of computing the capital gains under section 48 of the Income-tax Act, 1961, in respect of the aforesaid sales, there should be deducted from the sale price, the market value of the shares on the date on which they had been thrown into its hotchpot. Accordingly, the Hindu undivided family claimed a loss on the sale of the shares in the assessment year 1966-67 in the sum of Rs. 61,250 and in the assessment year 1968-69 in the sum of Rs. 1,62,375. The Income-tax Officer took the view that the cost of acquisition of the shares by the Hindu undivided family was nil and he treated the entire sale proceeds as capital gains and assessed accordingly.
5. In appeal, the Appellate Assistant Commissioner took the view that the cost of acquisition of the shares in the hands of the said Maneklal ought to be taken as the cost of their acquisition by the Hindu undivided family and he directed the assessment of capital gains to be so made.
Both the Hindu undivided family and the Revenue appealed to the Income-tax Appellate Tribunal. The Tribunal took the view that the most rational way of computing the capital gains would be to take the most market value of the shares at the time they were thrown into the hotchpot of the Hindu undivided family as the cost of acquisition thereof by the Hindu undivided family. It, therefore, directed that the capital gains be so computed.
6. The question posed to us arises out of this findings of the Tribunal. The question is limited to the aspect of the cost of acquisition of the shares by the Hindu undivided family and we must confine ourselves thereto. We do not accept the contention of Mr. Dastoor, learned counsel for the Hindu undivided family, that the aspect, whether capital gains are at all chargeable is inherent in the question posed to us. Whether or not capital gains tax is chargeable is an altogether different question. We are exercising a reference jurisdiction and must confine ourselves to answering the question referred. Mr. Dastoor placed reliance upon the words "for the purpose of computation of the capital gains" in the question and submitted that, by using them, the Tribunal intended that this court should consider and decide whether capital gains was chargeable. These words have been used only to indicate the purpose for which the cost of acquisition has to be determined. The question whether or not capital gains tax is chargeable must be left to be considered by the Tribunal in the light of this judgment and the answer we give to the question posed.
7. It was contended on behalf of the Hindu undivided family that its cost of acquisition of the shares was their market value on the date on which they were thrown into the hotchpot of the Hindu undivided family. It was contended by Mr. Jetly, learned counsel for the Revenue, that the cost of their acquisition was the price at which the said Maneklal had acquired the shares. In the alternative, Mr. Jetly advanced the contention that was raised by the Revenue before the Tribunal, namely, that the cost of their acquisition was nil.
8. Section 45 of the Income-tax Act, 1961, charges to income-tax under the head of "Capital gains" any profits or gains arising from the transfer of a capital asset effected in the previous year". section 48 of the said Act lays down the mode of computation of the income chargeable under the head "Capital gains". It requires that "from the full value of the consideration received or accruing as a result of the transfer of the capital asset", there shall be deducted the expenditure incurred in connection with such transfer and "the cost of acquisition of the capital asset and the cost of any improvement thereto". Section 49 of the said Act sets out of the cost of any improvement with reference to certain modes of acquisition, for example, where the capital asset has become the property of the assessee on any distribution of assets on the total or partial partition of a Hindu undivided family. The cost of acquisition of the asset when the provisions of section 49 are applicable is deemed to be the cost of any improvement. Section 55(2) of the said Act lays down the meaning to be ascribed to the phrase "cost of acquisition" in relation to a capital asset for the purposes of sections 48 and 49 in the circumstances therein set out. Clause (1) thereof refers to a capital asset which became the property of the assessee before a stated date. The phrase is defined as "the cost of acquisition of the asset to the assessee" or the fair market value on the stated date, at the assessee's option.
9. Capital gains tax is thus levied on the profit or gain that arises on the transfer of a capital asset. This, ordinarily, is the actual profit or gain. It is to be computed by deducting from the consideration received on the sale of the capital asset, inter alia, the cost of its acquisition. Ordinarily, it is the actual cost of acquisition that has to be taken into account. It is only in the specific cases that section 49 of the Income-tax Act, 1961, provides that such cost is deemed to be the cost at which the previous owner acquired it. The legal fiction created by section 49 applies only to the situations set out therein. If the situation is not contemplated in terms of section 49 or 55, the actual cost of acquisition alone can be taken into account. If the actual cost of acquisition is nil, it is that nil figure that must be taken into account.
10. Upon a plain reading of sections 45, 48 and 49 of the Income-tax Act, 1961, we take the view that the cost of acquisition of the shares by the Hindu undivided family in the instant case must be taken to be nil.
11. We are fortified in the view by the observations of the Supreme Court in CIT v. B. C. Srinivasa Setty [1981] 128 ITR 294. The Supreme Court observed that all transactions encompassed by section 45 of the Income-tax Act, 1961, had to fall within the governance of its computation provisions. The charging section and the computation provisions. The charging section and the computation provisions constituted an integrated code. What they contemplated was an asset in the acquisition of which it was possible to envisage a cost. The intent went to the nature and character of the asset, that it was an asset which possessed the inherent quality of being available on the expenditure of money to a person seeking to acquire it. It was immaterial that although the asset belonged to such a class, it might, on the facts of a certain case, be acquired without the payment of money. That kind of a case was covered by section 49 of the Income-tax Act, 1961, and its cost for the purpose of section 48 of the Income-tax Act was determined in accordance with those provisions. None of the provisions pertaining to capital gains suggested that they included an asset in the acquisition of which no cost at all could be conceived. Accordingly, the Supreme Court held that the goodwill generated in a newly commenced business could not be described as an asset within the meaning of section 45 and its transfer was not subject to tax under the head "capital gains".
12. Mr. Jetly, in support of his submission that the cost of acquisition of the shares by the Hindu undivided family was the price which the said Maneklal had paid for them, relied upon the judgments of the Delhi and Madras High Courts.
13. In Addl. CIT v. Madan Lal Jain & Sons [1983] 140 ITR 200 (Delhi), the facts were similar to the facts before us. The Delhi High Court was impressed by the fact that the words "in the hands of" or "to the assessee" did not find place in section 48 of the Income-tax Act, 1961. Therefore, in its view, the cost of acquisition contemplated by section 48 had to be the cost of acquisition of the capital asset in someone else's hands, not necessarily in the hands of the assessee. Section 45 of the Income-tax Act, 1961, spoke, it said, of profits or gains arising from the transfer of a capital asset, which was in contradistinction to any loss occurring when a capital asset was transferred. A profit or gain, it observed, could accrue only when there was a cost of acquisition and not otherwise and the crucial question was cost of acquisition to whom. The court read section 48 in the manner that if the asset was such that it was possible to acquire it by spending money, then what could be spent or what was actually spent by the coparcener would be the cost of acquisition within the meaning of section 48.
As we have observed, the cost of acquisition referred to in section 48 of the Income-tax Act, 1961, appears to be the cost of acquisition by the assessee, and it may be that in a given case that cost of acquisition is nil. We find it difficult, with respect, to subscribe to the view that there has to be an expenditure for the purpose of acquisition of the capital asset and it may be reckoned in someone else's hands and not necessarily in the hands of the assessee. What is required to be ascertained in the context of the determination of the profit or gain arising to an assessee upon the transfer of a capital asset is the actual cost of acquisition of the capital asset to the assessee himself.
14. The Madras High Court in CIT v. N. S. Krishna Rao [1983] 144 ITR 347, took the view that where a depreciable asset in the hands of one was given over gratis to another, the gratuitous transferee must be treated as having acquired that asset at its then written down value. The court took the view that the decision of the Supreme Court in Bist & Sons v. CIT [1979] 116 ITR 131, though it did not raise any question of ascertainment of cost in the context of capital gains, laid down a principle which could reasonably be applied in the context. The principle was that where a depreciable asset in the hands of one was given over gratis to another, the gratuitous transferee must be treated as having acquired that asset at its then written down value. Following that principle, the Madras High Court held that the written down value of the machinery at the time when the assessee got it gratis was its cost of acquisition thereof.
As we have stated, we find it difficult, with respect, to take the view that section 48 of the Income-tax Act, 1961, provides for the taking into account of anything other than the actual cost of acquisition of the asset by the assessee, though that cost may, in a given case, be nil. The only legal fiction in this behalf is created by section 49 of the said Act and the fiction operates only in the circumstances set out therein. There is no warrant, we think, with respect, for a deemed cost of acquisition in the circumstances not comprehended in section 49 or section 55 of the said Act.
15. In CIT v. S. Krishnamurthy [1985] 152 ITR 669, in circumstances similar to those before us, the Madras High Court relied upon the word "devolution" in section 49(1)(iii)(a) of the Income-tax Act, 1961, and held that it did not denote merely succession on death but included also a change of ownership from one living being to another. Consequently, it said, the act of throwing a coparcener's property into the joint family hotchpot could be considered to be an act of devolution within the meaning of that provision.
16. It is nobody's case that section 49 of the Income-tax Act, 1961, as such, applies in our case. In any event, it is, with respect, difficult for us to agree with the wide meaning given to the word "devolution" by the Madras High Court.
17. We are, therefore, not inclined to accept the submission of Mr. Jetly that the cost of acquisition of the shares by the Hindu undivided family was the cost at which the said Maneklal acquired them.
18. This brings us to the judgment of the Gujarat High Court upon which strong reliance was placed on behalf of the Hindu undivided family. This is the judgment in CIT v. Ashwin M. Patel [1983] 144 ITR 566. Here also the facts were similar to the facts before us. The assessee claimed that for the purposes of working out capital gains, the cost of acquisition of the shares should be taken to be their market value as on the date on which they were thrown into its hotchpot. The Gujarat High Court found no direct authority which covered the controversy. However, it found that the decisions of the Supreme Court and Rangoon and Madras High Court rendered in the context of claims for depreciation provided a guide. In working out depreciation, the question often arose as to what the original or actual cost of an asset was to an assessee who claimed depreciation. Such a question had arisen in cases where the assessee himself had not purchased the asset but had acquired it by inheritance, partition, or the like. In the court's opinion, the expression "cost of acquisition" could not have one meaning for the purposes of depreciation and another for working out capital gains. For both purposes, the cost of acquisition had to be worked out on the same principles. Therefore, for the purpose of working out capital gains on the transfer of capital asset which the assessee himself had not purchased, the correct method of finding out the cost of acquisition to the assessee was of ascertaining its real value at the time he acquired it, and the real value of the capital asset to the assessee was its market value on the date of its acquisition.
19. In the context of sections 45 and 48 of the Income-tax Act, 1961, what, in our view, is required to be considered is the actual cost of acquisition of the capital asset by the assessee. It cannot, with respect, be calculated on any notional basis, except in the circumstances mentioned in sections 49 and 55 of the said Act. The notional basis which is employed for the purposes of calculating the cost of acquisition for the purposes of a claim for depreciation has no application in the context of the computation of capital gains.
20. In the result, we answer the question in the negative and in favour of the Revenue.
21. No order as to costs.