Delhi High Court
Arun Shungloo Trust vs Cit on 13 February, 2012
Author: Sanjiv Khanna
Bench: Sanjiv Khanna, R.V. Easwar
* IN THE HIGH COURT OF DELHI AT NEW DELHI
+ ITA No.116/2011
% Date of Decision : 13th February, 2012.
ARUN SHUNGLOO TRUST ..... Appellant
Through: Mr.S.Krishanan, Advocate
versus
CIT ..... Respondent
Through: Mr.Kamal Sawhney,Advocate
CORAM:
HON'BLE MR. JUSTICE SANJIV KHANNA
HON'BLE MR. JUSTICE R.V. EASWAR
SANJIV KHANNA,J: (ORAL)
By the order dated 2nd August, 2011, the following substantial
question of law was framed.
"Whether Explanation (iii) to Section 48 of the Act
can be interpreted without considering the effect of
Section 49(1) Explanation and Explanation 1(i)(b) of
Section 2 (42A), when all three sections relate to the
same subject matter of computation of capital gains
on the sale of a capital asset, description of the
previous owner and the period of holding of the asset
by the assessee."
2. We have heard the counsel for the parties and thus, proceed to
pronounce our decision on the aforesaid substantial question of law.
3. Facts are undisputed and may be noticed.
ITA No.116/2011 Page 1 of 15
4. One Mr.Arun Shungloo acquired property No.D-11, Maharani
Bagh, New Delhi, sometime before 1st April, 1981. On 5th January, 1996,
Mr.Arun Shungloo transferred the property to the trust managed by the
appellant, i.e., Arun Shungloo Trust.
5. During the period relevant to the assessment year 2001-02, the
appellant Trust sold and transferred the acquired property to a third party.
The substantial question of law mentioned above relates to the
computation of long term capital gains. The contention of the Revenue
which has been accepted by the Tribunal is that appellant is entitled to
indexed cost of acquisition for the period on or after 5th January, 1996,
i.e., the date on which the appellant-Trust had acquired the property upto
the date of sale. The contention of the appellant assessee is that it is
entitled to the benefit of indexed cost of acquisition from 1.4.1981, i.e. for
the period during which Mr. Arun Shungloo also held the property before
it was transferred to the appellant-Trust on 5.1.1996.
6. In order to appreciate the controversy, the provisions of Section 45,
48 and 49 of the Income Tax Act, 1961 („Act‟, for short) may be noticed.
The relevant portions of the said sections read as under:-
"Section 45:(1) Any profits or gains arising from the
transfer of a capital asset effected in the previous
year shall, save as otherwise provided in sections 54,
54B, 54D, 54E, 54EA, 54EB, 54F, 54G and 54H, be
chargeable to income-tax under the head "Capital
gains", and shall be deemed to be the income of the
previous year in which the transfer took place.
...........
ITA No.116/2011 Page 2 of 15
..........
Section 48: The income chargeable under the head
"Capital gains" shall be computed, by deducting from
the full value of the consideration received or
accruing as a result of the transfer of the capital asset
the following amounts, namely :-
(i) Expenditure incurred wholly and exclusively in
connection with such transfer;
(ii) The cost of acquisition of the asset and the cost of
any improvement thereto:
Provided that in the case of an assessee, who is a
non-resident, capital gains arising from the transfer
of a capital asset being shares in, or debentures of, an
Indian company shall be computed by converting the
cost of acquisition, expenditure incurred wholly and
exclusively in connection with such transfer and the
full value of the consideration received or accruing as
a result of the transfer of the capital asset into the
same foreign currency as was initially utilised in the
purchase of the shares or debentures, and the capital
gains so computed in such foreign currency shall be
reconverted into Indian currency, so however, that
the aforesaid manner of computation of capital gains
shall be applicable in respect of capital gains
accruing or arising from every reinvestment
thereafter in, and sale of, shares in, or debentures of,
an Indian company :
Provided further that where long-term capital gain
arises from the transfer of a long-term capital asset,
other than capital gain arising to a non-resident from
ITA No.116/2011 Page 3 of 15
the transfer of shares in, or debentures of, an Indian
company referred to in the first proviso, the
provisions of clause (ii) shall have effect as if for the
words "cost of acquisition" and "cost of any
improvement", the words "indexed cost of
acquisition" and "indexed cost of any improvement"
had respectively been substituted.
Explanation : For the purposes of this section, --
(i) ............;
(ii) ............;
(iii) "Indexed cost of acquisition" means an amount
which bears 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 the year beginning on
the 1st day of April, 1981, whichever is later;
(iv) "Indexed cost of any improvement" means an
amount which bears to the cost of improvement the
same proportion as Cost Inflation Index for the year
in which the asset is transferred bears to the Cost
Inflation Index for the year in which the improvement
to the asset took place;
(v)............
xxxx xxxx xxxx
Section 49 (1) Where the capital asset became the
property of the assessee - (i) On any distribution of
assets on the total or partial partition of a Hindu
undivided family;
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(ii) Under a gift or will;
(iii) (a) By succession, inheritance or devolution, or
(b) On any distribution of assets on the
dissolution of a firm, body of individuals, or other
association of persons, where such dissolution
had taken place at any time before the 1st day of
April, 1987,
(c) On any distribution of assets on the
liquidation of a company, or
(d) Under a transfer to a revocable or an
irrevocable trust, or
(e) Under any such transfer as is referred to in
clause (iv) [or clause (v)] [or clause (vi)] [or
clause (via)] [or clause (viaa)] [or caluse (vica)]
or [clause (vicb)] or clause (xiiib) of section 47];
[ (iv) Such assessee being a Hindu undivided family,
by the mode referred to in sub-section (2) of section
64 at any time after the 31st day of December, 1969,]
the cost of the acquisition of the assets shall be
deemed to be the cost for which the previous owner of
the property acquired it, as increased by the cost of
any improvement of the assets incurred or borne by
the previous owner or the assessee, as the case may
be.
[ Explanation : In this [sub-section] the expression
"previous owner of the property" in relation to any
capital asset owned by an assessee means the last
previous owner of the capital asset who acquired it by
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a mode of acquisition other than that referred to in
clause (i) or clause (ii) or clause (iii) [or clause
(iv)] of this [sub-section].]
....
....."
8. Section 45 of the Act stipulates that profits and gains arising from
transfer of a capital asset affected in the previous year is chargeable to
income tax under the heading "Capital gains" and shall be deemed to be
the income of the previous year in which the said transfer took place.
This is the charging section. Sections 48 and 49 prescribe the mode of
computation and cost of acquisition, improvement normally and with
reference to certain modes of acquisition and indexation of the cost of
acquisition/ improvement.
9. Section 48 of the Act stipulates that while computing capital gains,
the cost of acquisition of an asset and the cost of improvement thereto, has
to be deducted from the full value of the consideration received or
accruing as a result of the transfer of the capital asset. The second proviso
to Section 48 stipulates that the expression "cost of acquisition" and "cost
of improvement" shall mean "indexed cost of acquisition" and "indexed
cost of improvement" in case of long term capital gains (except in case of
sale of shares, etc. by a non-resident).
10. Section 49 of the Act stipulates that in case of acquisition of a
capital asset under gift or will, by succession, inheritance or devolution,
creation of trust, etc., the cost of acquisition shall be deemed to be the cost
ITA No.116/2011 Page 6 of 15
at which the previous owner of the property has acquired the capital asset
as increased by the cost of improvement, if any, of the assets, as may be
incurred or borne by the previous owner or the assessee, as the case may
be. Thus, as per Section 49, the cost of acquisition in the hands of an
assessee is treated as the cost of acquisition by the previous owner.
Similar benefit/ advantage is given in respect of cost of improvement.
Sections 48 and 49 have to be read harmoniously to give full effect to the
legislative intent.
11. This brings us to the Explanation to Section 48 which defines, for
the purpose of the said Section, the "indexed cost of acquisition" and
"indexed of any improvement".
12. Learned counsel for the Revenue has emphasized and submitted
that in Clause (iii) of Explanation to Section 48, indexed cost of
acquisition has to be computed from the first year in which the capital
asset was held by the assessee. He states and submits that the scope of the
term "income" has been widened to bring capital gains to tax. It is,
accordingly, submitted that the word/expression "held by the assessee"
used in Clause (iii) of Explanation refers to the "first year in which the
asset was held by the assessee" and not the date on which the previous
owner had acquired the capital asset. The legislature has deliberately
withheld benefit/ advantage mentioned in Section 49. He submits that
Section 49 has a limited application, as it only makes reference to the
computation of cost of acquisition and the same cannot be taken into
account for computing "indexed cost of acquisition", a specific expression
ITA No.116/2011 Page 7 of 15
defined and used in Section 48.
13. We find it difficult to accept the said contention. Section 48 uses
two expressions "cost of acquisition" and "cost of any improvement".
The second proviso states that the said expressions will mean "indexed
cost of acquisition" and "indexed cost of any improvement" in all cases of
long term capital gains except in case of sale of shares, debentures, etc. by
a non-resident. As far as "indexed cost of improvement" is concerned, it is
stipulated in clasue (iv) to the Explanation that the cost of improvement
would be in the same proportion, as to the cost inflation index for the year
in which the capital asset was transferred bears to the cost inflation index
for the year in which the improvement of the capital asset took place.
Clause (iv) of the Explanation to Section 48 does not refer to the date on
which the asset was held by the assessee. On reading of Clause (iv) of
Explanation to Section 48 of the Act, it is apparent that the term "cost of
improvement‟ would include the cost of improvement(s) made by the
previous owner. The benefit of indexed cost of improvement would be
available even if the capital asset is acquired by the assessee under any
gift, will or succession, trust etc. and improvement was made by the
previous owner.
14. If the contention of the Revenue is accepted, then benefit of
indexed cost of acquisition, will not available to an assessee in a case
covered by Section 49 from the date on which the asset was held by the
previous owner but only from the date the capital asset was transferred to
the assessee. This will lead to a disconnect and contradiction between
ITA No.116/2011 Page 8 of 15
"indexed cost of acquisition" and "indexed cost of improvement" in the
case of capital assets where Section 49 applies. This cannot be the
intention behind the enactment of Section 49 and its Explanation to
Section 48. There is no reason or ground why the legislative would want
to deny or deprive an assessee benefit/advantage of the previous holding
for computing "indexed cost of acquisition" while allowing the said
benefit for computing "indexed cost of improvement".
15. Normally literal rule of construction is applied and the words of the
statute are to be understood in their ordinary and popular sense, but this is
subject to the rider that this should not lead to absurdity, contradiction or
stultification of the statutory objective. Literal construction should be
avoided, if it leads to unwarranted repugnances or inconsistencies. In
such circumstances the expression/words can be interpreted by the courts
to avoid absurdities and inconsistencies between the provisions. In the
present case, as noticed above, the construction placed by the Revenue
will lead to inconsistency and incongruities, when we refer to Section 49
and clause (iv) to Explanation (1) to Section 48. This will result in
absurdities because the holding of predecessor has to be accounted for the
purpose of computing the cost of acquisition, cost of improvement and
indexed cost of improvement but as per the Revenue not for the purpose
of indexed cost of acquisition. As noticed below, even for the purpose of
deciding whether the transaction is a short term capital gain or long term
capital gain, the holding by the predecessor is to be taken into
consideration.
ITA No.116/2011 Page 9 of 15
16. Benefit of indexed cost of inflation is given to ensure that the
taxpayer pays capital gain tax on the "real" or actual „gain‟ and not on the
increase in the capital value of the property due to inflation. This is the
object or purpose in allowing benefit of indexed cost of improvement,
even if the improvement was by the previous owner in cases covered by
Section 49. Accordingly there is no justification or reason to not allow
the benefit of indexation to the cost of acquisition in cases covered by
Section 49. This is not the legislative intent behind clause (iii) to
Explanation to Section 48 of the Act.
17. There is no reason and justification to hold that clause (iii) of the
Explanation intents to reduce or restrict the "indexed cost of acquisition"
to the period during which the assessee has held the property and not the
period during which the property was held by the previous owner. The
interpretation relied by the assessee is reasonable and in consonance with
the object and purpose behind Sections 48 and 49 of the Act.
18. The expression "held by the assessee" used in Explanation (iii) to
Section 48 has to be understood in the context and harmoniously with
other Sections. The cost of acquisition stipulated in Section 49 means the
cost for which the previous owner had acquired the property. The term
"held by the assessee" should be interpreted to include the period during
which the property was held by the previous owner.
19. We may notice that the term "held by the assessee" has been
defined in Explanation 1(i)(b) to Section 2(42A) of the Act. Section
2(42A) defines the expression "short term capital gains". The said
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Explanation provides as under:-
"[Explanation1].-- (i) In determining the period for
which any capital asset is held by the assessee--
(a) ......
(b) in the case of a capital asset which becomes the
property of the assessee in the circumstances
mentioned in [sub-section(1) ] of section 49, there
shall be included the period for which the asset was
held by the previous owner referred to in the said
section."
20. Clause (iii) to Explanation to Section 48 is applicable when the
transfer is a long term capital gain and not a short term capital gains. The
legislature was conscious of definition of the expression "held by the
assessee" in Explanation 1(i)(b) of Section 2(42A) and, therefore, has
used the same expression in Explanation (iii) to Section 48 of the Act.
The aforesaid Explanation to Section 2(42A) was referred to by the
Bombay High Court in CIT v. Manjula J.Shah (Mumbai), (2011) 16
Taxman 42 (Bom), wherein a similar controversy/question was examined
and it was held as under:
"17. We see no merit in the above contention. As
rightly contended by Mr. Rai, learned counsel for the
assessee, the indexed cost of acquisition has to be
determined with reference to the cost inflation index
for the first year in which the capital asset was „held
by the assessee‟. Since the expression „held by the
assessee‟ is not defined under Section 48 of the Act,
that expression has to be understood as defined under
Section 2 of the Act. Explanation 1(i)(b) to Section 2
ITA No.116/2011 Page 11 of 15
(42A) of the Act provides that in determining the
period for which an asset is held by an assessee under
a gift, the period for which the said asset was held by
the previous owner shall be included. As the previous
owner held the capital asset from 29/1/1993, as per
Explanation 1(i)(b) to Section 2(42A) of the Act, the
assessee is deemed to have held the capital asset from
29/1/1993. By reason of the deemed holding of the
asset from 29/1/1993, the assessee is deemed to have
held the asset as a long term capital asset. If the long
term capital gains liability has to be computed under
Section 48 of the Act by treating that the assessee
held the capital asset from 29/1/1993, then, naturally
in determining the indexed cost of acquisition under
Section 48 of the Act, the assessee must be treated to
have held the asset from 29/1/1993 and accordingly
the cost inflation index for 1992-93 would be
applicable in determining the indexed cost of
acquisition.
18. If the argument of the revenue that the deeming
fiction contained in Explanation 1(i)(b) to Section
2(42A) of the Act cannot be applied in computing the
capital gains under Section 48 of the Act is accepted,
then, the assessee would not be liable for long term
capital gains tax, because, it is only by applying the
deemed fiction contained in Explanation 1(i)(b) to
Section 2 (42A) and Section 49(1)(ii) of the Act, the
assessee is deemed to have held the asset from
29/1/1993 and deemd to have incurred the cost of
acquisition and accordingly made liable for the long
ITA No.116/2011 Page 12 of 15
term capital gains tax. Therefore, when the
legislature by introducing the deeming fiction seeks to
tax the gains arising on transfer of a capital asset
acquired under a gift or will and the capital gains
under Section 48 of the Act has to be computed by
applying the deemed fiction, it is not possible to
accept the contention of revenue that the fiction
contained in Explanation 1(i)(b) to Section 2(42A) of
the Act cannot be applied in determining the indexed
cost of acquisition under Section 48 of the Act.
19. It is true that the words of a statute are to be
understood in their natural and ordinary sense unless
the object of the statute suggests to the contrary.
Thus, in construing the words „asset was held by the
assessee‟ in clause (iii) of Explanation to Section 48
of the Act, one has to see the object with which the
said words are used in the statute. If one reads
Explanation 1(i)(b) to Section 2(42A) together with
Section 48 and 49 of the Act, it becomes absolutely
clear that the object of the statute is not merely to tax
the capital gains arising on transfer of a capital asset
acquired by an assessee by incurring the cost of
acquisition, but also to tax the gains arising on
transfer of a capital asset inter alia acquired by an
assessee under a gift or will as provided under
Section 49 of the Act where the assessee is deemed to
have incurred the cost of acquisition. Therefore, if
the object of the legislature is to tax the gains arising
on transfer of a capital acquired under a gift or will
by including the period for which the said asset was
ITA No.116/2011 Page 13 of 15
held by the assessee, then that object cannot be
defeated by excluding the period for which the said
asset was held by the previous owner in determining
the period for which the said asset was held by the
assessee, then that object cannot be defeated by
excluding the period for which the said asset was held
by the previous owner while determining the indexed
cost of acquisition of that asset to the assessee. In
other words, in the absence of any indication in
clause (iii) of the Explanation to Section 48 of the Act
that the words „asset was held by the assessee‟ has to
be construed differently, the said words should be
construed in accordance with the object of the statute,
that is, in the manner set out in Explanation 1(i)(b) to
section 2(42A) of the Act.
20. To accept the contention of the revenue that the
words used in clause (iii) of the Explanation to
Section 48 of the Act has to be read by ignoring the
provisions contained in Section 2 of the Act runs
counter to the entire scheme of the Act. Section 2 of
the Act expressly provides that unless the context
otherwise requires, the provisions of the Act have to
be construed as provided under Section 2 of the Act.
In Section 48 of the Act, the expression „asset held by
the assessee‟ is not defined and, therefore, in the
absence of any intention to the contrary the
expression „asset held by the assessee‟ in clause (iii)
of the Explanation to Section 48 of the Act has to be
construed in consonance with the meaning given in
Section 2(42A) of the Act. If the meaning given in
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Section 2(42A) is not adopted in construing the words
used in Section 48 of the Act, then the gains arising
on transfer of a capital asset acquired under a gift or
will be outside the purview of the capital gains tax
which is not intended by the legislature. Therefore,
the argument of the revenue which runs counter to the
legislative intent cannot be accepted."
21. We are entirely in agreement with the findings/ ratio recorded by
the Bombay High Court in the case of Manjula J. Shah (supra).
22. In view of the aforesaid discussion, the question of law is hereby
answered in negative and in favour of the appellant-assessee and against
the respondent-Revenue. No costs.
SANJIV KHANNA, J.
R.V. EASWAR, J. FEBRUARY 13, 2012 sv ITA No.116/2011 Page 15 of 15