Madras High Court
M. Nachiappan vs Commissioner Of Income-Tax on 6 November, 1996
Equivalent citations: [1998]230ITR98(MAD)
JUDGMENT Thanikkachalam, J.
1. In pursuance of the direction given by this Court in TCP Nos. 325 and 316 of 1981 dt. 23rd August, 1982 the Tribunal referred the following question for the opinion of this Court for the asst. yrs. 1972-73 and 1973-74 under s. 256(2) of the IT Act, 1961 :
"Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the principle in CIT vs. Bai Shirinbai K. Kooka , would not apply ?"
2. The assessee is an individual and the assessment years involved in this reference are 1972-73 and 1973-74 for which two previous years ended on 30th June, 1972 respectively. The assessee is a divided member of an HUF of which M.L.M. Mahalingam Chettiar was the Karta. The Karta of the Joint family purchased certain lands in Kodambakkam, Madras prior to 1954. They were then agricultural lands. These agricultural lands were converted into house sites during the asst. yr. 1961-62. For the purpose of wealth-tax for that year the value offered was Rs. 2,341 per ground. The family was partitioned in 1960 and part of those house sites fell to the share of the assessee. In the account year relating to 1972-73 the assessee sold five grounds and 1320 sq. ft. for a sum of Rs. 55,500. For the purpose of computing the capital gains, the assessee adopted the value of these lands as on 1st January, 1954 at Rs. 6,500 per ground on the basis of a valuer's report. The ITO determined the value as on 1st January, 1954 at Rs. 2,000 per ground and accordingly determined the capital gains.
3. In the year 1973-74 the assessee sold 7 grounds and 800 sq. ft. for a total sum of Rs. 73,334. In this assessment year also the ITO adopted the value as on 1st January, 1954 at Rs. 2000 per ground as against Rs. 6,500 claimed by the assessee. The capital gain was computed on the basis of the value as on 1st January, 1954 at Rs. 2000.
4. Aggrieved, the assessee filed appeals before the AAC. The AAC agreed with the ITO's view in adopting the value of the land per ground at Rs. 2,000 as on 1st January, 1954. Accordingly, the appeals were dismissed. The AAC also decided the validity of the assessments made under s. 147 in favour of the Revenue. We are not concerned with this aspect.
5. Not satisfied with the orders passed by the AAC, the assessee filed second appeals before the Tribunal. The assessee submitted before the Tribunal that there was no basis for the ITO to take the value of the land at Rs. 2,000 per ground as on 1st January, 1954 while the assessee's basis was supported by a valuer's certificate. The Department contended that in the wealth-tax proceedings for the year 1961-62 the value of the land was taken at Rs. 2,341 per ground and reckoning on that basis the value adopted as on 1st January, 1954 at Rs. 2,000 per ground could not be said to be unreasonable or without basis.
6. In support of the assessee's contention reliance was placed upon the decision of the Supreme Court in the case of CIT vs. Bai Shirinbai K. Kooka (supra). The Tribunal however, held that the above cited decision of the Supreme Court would not be applicable to the facts of these cases. Relying upon the decision of the Gujarat High Court in the case of Ranchhodbhai Bhaijibhai Patel vs. CIT (1971) 81 ITR 446 (Guj) TC 20R.514, the Tribunal held that the principle laid down in , cited above would not be applicable to the facts of the present case. Accordingly the Tribunal held that the price fixed at Rs. 2,000 per ground as on 1st January, 1954 was reasonable. Accordingly, the appeal was dismissed.
7. Before this Court the learned counsel for the assessee submitted that there was no basis to take the value of the land at Rs. 2,000 per ground as on 1st January, 1954 while the assessee supported his version on the basis of a report filed by the assessee's valuer. Learned counsel further submitted that originally when the return was filed, the assessee claimed that the value per ground as on 1st January, 1954 would be Rs. 10,000 and that was accepted. Subsequently the ITO refused (rectified) the assessment under s. 154 in another case adopting the value at Rs. 6,500. Later, in the assessee's own case it was further reduced to Rs. 2,000. The contention was that there could not be such wide fluctuations and in any case the estimate made by the valuer should have been accepted. Learned counsel further submitted that the asset when it was bought by the erstwhile family was agricultural land. It was converted into house sites in the asst. yr. 1961-62. The capital asset became a taxable asset only from that year onwards. The cost of acquisition would, therefore, be taken at the time when it was converted into capital asset. For this purpose reliance was placed on the decision of the Supreme Court in CIT vs. Bai Shirinbhai K. Kooka (supra).
Reliance was also placed upon a decision of the Supreme Court in CIT vs. Groz-Beckert Saboo Ltd. . According to learned counsel, the decision of the Gujarat High Court in the case of Ranchhodbhai Bhaijibhai Patel vs. CIT (supra) would not be applicable to the facts of this case. For these reasons it was submitted that the Tribunal was not correct in adopting the value of the land at Rs. 2,000 per ground as on 1st January, 1954.
8. On the other hand, learned standing counsel for the Department submitted that in the wealth-tax proceedings for the year 1961-62 the value of the land was taken at Rs. 2,341 per ground and calculating on that basis the value adopted as on 1st January, 1954 at Rs. 2,000 per ground would not be said to be unreasonable or without any basis. Learned Standing counsel further pointed out that there is no conversion of capital asset into stock-in-trade for the purpose of adopting the value prevalent on the date of conversion. What is capital asset and what is cost of acquisition are governed by the statutory provisions contained in ss. 45, 48, 49 and 55 of the Act. The land was acquired before 1954 and it was converted into house sites in the year 1961-62. While ascertaining the capital gain the cost of acquisition has got to be determined by taking into consideration the cost in the hands of the previous owner. According to learned standing counsel, several High Courts in their decisions held that when the capital asset was acquired prior to the year 1954, the cost of acquisition has got to be ascertained as on 1st January, 1954 for the purpose of determining capital gain, the statutory provisions cannot be ignored and adopted the valuation of the land on the date of conversion as contended by learned counsel for the assessee. According to learned standing counsel, the decisions reported in CIT vs. Bai Shirinbhai K. Kooka (supra) and Groz-Beckert Saboo Ltd. (supra) would not be applicable to the facts of these cases where the capital assets were converted into stock-in-trade. For these reasons it was submitted that the Tribunal was correct in adopting the value of the lands in question at Rs. 2,000 per ground as on 1st January, 1954.
9. We have heard both learned counsel for the assessee as well as learned standing counsel for the Department.
10. The point for consideration is whether the principle in CIT vs. Bai Shirin Bhai K. Kooka (supra) would be applicable to the facts of these cases.
11. The lands in question were acquired by the Karta of the joint family prior to 1954. In a partition a portion of the land fell to the share of the assessee herein. The agricultural lands which were purchased by the Karta of the joint family were converted into house sites during the asst. yr. 1961-62. For the purpose of wealth-tax for the year, the value offered was Rs. 2,000 per ground. The family partition took place in the year 1968. In the accounting year relevant to the asst. yr. 1972-73 the assessee sold 5 grounds and 1320 sq. ft. for Rs. 55,500. For the purpose of computing the capital gains the assessee adopted the value to those lands as on 1st January, 1954 at Rs. 6,500 per ground on the basis of the valuer's report. In the asst. yr. 1973-74 the assessee sold 7 grounds and 800 sq. ft. for a sum of Rs. 73,334. The assessee submitted the value per ground at Rs. 6,500 for the purpose of determining the capital gain. However, the ITO computed the capital gain on the basis of the value as on 1st January, 1954 at Rs. 2,000 for both the assessment years under consideration. The case of the assessee was that inasmuch as the agricultural lands were converted into house sites in the asst. yr. 1961-62, the value as in year 1961 should be taken into consideration. It means the value of the land should be taken into consideration when there was conversion of agricultural lands into house sites. The assessee filed a valuation report stating that the value of the land would be Rs. 6,500 per ground and not Rs. 2,000 per ground as adopted by the Department as on 1st January, 1954. In order to support this contention the assessee drew support to the decision of the Supreme Court in CIT vs. Bai Shirin Bhai K. Kooka (supra). According to the facts arising in that case the assessee who held by way of investment several shares in companies commenced a business in shares converting the shares into stock-in-trade of the business, and subsequently sold those shares at a profit. On these facts a question arises whether the assessee's assessable profits on the sale of shares is the difference between the sale price and the cost price or the difference between the sale price and the market price prevailing on 1st April, 1945. While answering this question by a majority of view, the Supreme Court held "that the assessee's assessable profits on the sale of these shares was the difference between the sale price of the shares and the market price of the shares prevailing on the date when the shares were converted into stock-in-trade of the business in shares and not the difference between the sale price and the price at which the shares were originally purchased by the assessee". So also support was drawn from another decision of the Supreme Court in (cited supra) wherein the Supreme Court held "that it is now well settled that where an assessee converts his capital asset into stock-in-trade and starts dealing in them, the taxable profit on the sale must be determined by deducting from the sale price the market value at the date of their conversion into stock-in-trade (since this would be the cost to the business) and not the original cost to the assessee". According to the facts arising in the abovesaid two decisions of the Supreme Court, the capital assets were converted into stock-in-trade and for the purpose of computation of business income, the Supreme Court held that the taxable profit on the sale must be determined by deducting from the sale price the market value as on the date of conversion of the capital asset into the stock-in-trade. That was not the case here. The Karta of the joint family in which the assessee is a member converted the agricultural lands into house sites in the year 1961 and it was not for doing any business. The issue in the present case is also not for ascertaining the business income of the assessee. The issue involved in the present case is to ascertain the capital gains as per the provisions contained in ss. 45, 48, 49 and 55 of the Act. Under such circumstances it is not possible to apply the principle laid down by the Supreme Court in the above mentioned two cases to the facts of the present case. Learned counsel for the assessee also relied on the provisions contained in sub-cl. (2) of s. 45 of the Act. Sub-cl. (2) was not in force during the assessment years under consideration, and it was a later introduction in the statute book. Further, sub-cl. (2) also is concerned with profits and gains arising from the transfer by way of conversion by the owner of the capital asset into or its treatment by him as stock-in-trade of a business carried on by him. Therefore, this provision, even though according to learned counsel for the assessee is procedural in nature, would not be applicable to the facts of these cases.
12. On the other hand, learned standing counsel in order to support his contention that the capital gains should be ascertained as per the provisions contained in ss. 45, 48, 49 and 55 of the Act, relied on the following decisions of various High Courts :
13. In the case of M. Venkatesan vs. CIT (1983) 144 ITR 886 (Mad) : TC 20R.581, this Court, while considering the provisions of s. 2(14)(iii) of the IT Act, 1961 held "that the basic conception of capital gain is that property which involves a certain cost of acquisition to the owner gains an increment in its value over a period of time during which it is being retained by the owner and yields a profit when he disposes it and realises the proceeds. The unearned increment is realised at the time of sale or disposal. Accordingly, in order to determine the capital gains it becomes necessary to reckon not only the amount of realisation at the point of sale but also the cost of the property at the time of its acquisition or at any other point of time taken as the standard for measuring the increment in value. Before the amendment of s. 2(14)(iii) all agricultural lands were non-capital assets. Consequent on the amendment to s. 2(14)(iii) of the Act, 1961 by the Finance Act, 1970 profits arising out of the sale of agricultural lands are amenable to capital gains tax".
14. In the case of Ranchhodbhai Bhaijibhai Patel vs. CIT (supra) the assessee acquired certain agricultural lands and was using them as such. Subsequently the assessee ceased cultivation in order to render the lands fit for use as house sites. The profit was brought to charge as capital gains. The Gujarat High Court upheld the assessment, rejecting the contention that since the lands were non-capital assets at the time of their acquisition no tax can be levied on the gains arising from sale after they became capital assets. The Gujarat High Court observed that where the property transferred was not a capital asset on the date of its acquisition but became one subsequently only its character has changed but the property remains the same.
The High Court held that to have regard for the previous different character of what is indebutably a capital asset at the time of transfer would be contrary to the terms of s. 45 and they relied on the provisions of the Act.
15. In the case of CIT vs. M. Ramaiah Reddy (1986) 158 ITR 611 (Kar) : TC 20R.786, the Karnataka High Court held that though the agricultural land became a capital asset from 1st April, 1970, that did not mean that the cost of acquisition of the land had to be taken as on 1st April, 1970 itself. The cost of acquisition of every capital asset had to be determined in accordance with s. 48 or upon option being exercised by the assessee under s. 55(2) of the IT Act, 1961. The Karnataka High Court further held that determination of the cost of acquisition by taking fair market value as on 1st January, 1954 is perfectly justified.
16. In the case of CIT vs. M. Subaida Beevi , the Kerala High Court held that the cost of acquisition of a capital asset within the meaning of s. 48 of the IT Act, 1961 is the cost on the date on which the asset transferred became the capital asset. The incidence of levy under s. 45 is on the capital gains to be computed in the manner provided for in s. 48 r/w s. 55(2) of the Act. The deduction permissible under s. 48 is the cost of acquisition of the capital asset transferred for consideration, whether or not it was a capital asset on the date of its acquisition. What is taxable under s. 45 are the "profits or gains arising from the transfer of a capital asset" and the charge of Income-tax on the capital gains is on income of the previous year in which the transfer took place. The only condition which must be satisfied in order to attract the charge to tax under s. 45 is that the property transferred must be a capital asset on the date of transfer and that it is not necessary that it should have been capital asset also on the date of its acquisition by the assessee.
17. In the case of CIT vs. Vishwanath , the Allahabad High Court while considering the provisions of ss. 45, 48, 49 and 55 of the Act held as under :
"The exigibility of capital gains to tax under s. 45 r/w s. 48 is not on the basis that what was transferred was a capital asset on the basis on the date of its acquisition, but on the basis that the subject-matter of transfer is a capital asset within the meaning of the Act. Sec. 49, inter alia, provides that, when an HUF is partitioned and thereafter the erstwhile members come to hold the assets obtained on such partition, the cost of acquisition to the members shall be the cost of acquisition to the family i.e., the previous owner. It is relevant to observe that s. 49 does not contemplate any precondition for its application that the asset which was sold has to be a capital asset within the meaning of s. 2(14) at the time it was acquired by the previous owner. Under cl. (iii) of sub-s. (2) of s. 55, it is provided that where the capital asset becomes the property of the assessee by any of the modes specified in s. 49 and the capital asset becomes the property of the previous owner before 1st January, 1954, the "cost of acquisition" means the cost of the capital asset to the previous owner or the fair market value of the asset on 1st January, 1954, at the option of the assessee. An analysis of these provisions makes it clear that the incidence of tax on the capital gains contemplated under s. 45 is to be computed in the manner provided for in s. 48 or upon the option being exercised by the assessee in accordance with s. 55. The meaning assigned to the phrase "cost of acquisition" under s. 55(2) is exhaustive and the language used is peremptory. Once it is found that s. 45 which is the charging section is attracted, the profits or gains must be computed in the manner prescribed by the Act and in no other fashion. There is nothing in the provisions to suggest that the cost of acquisition of an asset could be reckoned in a manner different from that provided in s. 48 r/w s. 55(2)".
18. In the case of Keshavji Karsondas vs. CIT (1994) 207 ITR 737 (Bom) : TC 22R.490, the Bombay High Court while considering the provisions of s. 2(14)(iii), 48, 49(1) and 52(2) of the IT Act, 1961, held as follows :
"That what was relevant was the "cost of acquisition" and not the date on which the asset became a capital asset for the purpose of levy of capital gains tax. The cost of acquisition did not change. It was the cost on the date when the asset was actually acquired by the assessee or by his grandfather. The property which was transferred could become the property of the assessee only at one point of time. It would not become the property of the assessee as a non-capital asset at one point of time and as a capital asset at another point of time. The date of acquisition of the land for the purpose of s. 48 r/w s. 49(2) of the Act was the date when the land in question was acquired by the grandfather of the assessee prior to 1941. The assessee, therefore, had the option, either to take the original cost of acquisition or its fair market value as on 1st January, 1954. Therefore, for the purpose of determining capital gains, the cost of acquisition of the agricultural land belonging to the assessee had to be taken as on 1st January, 1954, and not as on 1st January, 1970".
19. Thus, considering the facts arising in this case in the light if the judicial pronouncements cited supra we hold that the assessee is not correct in asking to determine the cost of acquisition when the assessee's father converted the agricultural lands into house sites in the year 1961. On the other hand, in a matter like this, capital gains has got to be ascertained as per the provisions contained in ss. 45, 48, 49 and 55 of the Act. The Tribunal ascertained and determined the capital gains in accordance with the provisions contained in the IT Act, 1961. Therefore, it cannot be said that there is any infirmity in the order passed by the Tribunal in ascertaining the capital gains in the present case. Therefore, the decision of the Supreme Court in CIT vs. Bai Shirinbai K. Kooka (supra) would not be applicable to the facts of the present case. Accordingly, we answer the question referred to us in the affirmative and against the assessee. No costs.