Income Tax Appellate Tribunal - Ahmedabad
Manohersinhji P. Jadeja vs Income-Tax Officer on 6 November, 1986
Equivalent citations: [1987]20ITD121(AHD)
ORDER
U.T. Shah, Judicial Member
1. The only point involved in this appeal pertains to capital gains of Rs. 41,11,414 included in the total income of the assessee.
2. The assessee is an individual. The assessment year is 1983-84 and the relevant previous year ended on 31-3-1983.
3. On the death of his father Shri Pradumnasinhji on 9-1-1973, the assessee inherited a property situated at Rajkot known as 'Ranjit Villas Palace' along with vast plot of land. As certain tax demands against the assessee were outstanding for the assessment years 1974-75 to 1977-78 as well as estate duty on the death of his father, the Income-tax Department initiated recovery proceedings against the assessee. The Income-tax Department attached 22,059 sq. yds. of vacant land on 1-2-1983. Out of this, the Income-tax Department sold 5,727.31 sq. mts. of land divided into 33 plots on 21-3-1983 and 22-3-1983 by way of public auction. Rs. 65,50,870 was the gross realisation of 33 plots.
4. On the aforesaid facts, during the assessment proceedings, it was submitted on behalf of the assessee that no capital gains could be worked out and included in his total income. The assessee took up this stand as the land was not purchased by any of his predecessors but was acquired by conquest. Relying on the decision of the Hon'ble Supreme Court in the case of CIT v. B.C. Srinivasa Setty [1981] 128 ITR 294, the assessee took up a stand before the ITO that since there was no cost of acquisition of the land in question, the computation provisions for working out chargeable capital gains cannot apply at all and, therefore, there was no question of including any capital gains in his total income. In this connection, the assessee gave written submissions to the ITO dated 6-6-1983 and 7-11-1985. Alternatively, the assessee took up a stand before the ITO that if at all capital gains were to be included in his total income then, the tax liabilities and estate duty payable by him should be deducted from the sales realisation of Rs. 65,60,870. The ITO, however, did not accept the assessee's contentions as according to him, the ratio laid down in the case of B.C. Srinivasa Setty (supra) would not be applicable to the facts and circumstances obtaining in the case of the assessee. In his order, the ITO has accepted the fact that the land in question was acquired by the forefathers of the assessee about 300 years back. In this view of the matter, he estimated the cost of 5,727 sq. mts. of land at Rs. 3,000 samvat year 1877. The ITO did not accept the assessee's alternative submissions that the tax/estate duty liabilities amounting to over Rs. 51 lakhs should be deducted from the sale proceeds of Rs. 65,50,870. He, however, accepted the assessee's contention that the expenditure of Rs. 8,32,570 incurred in connection with the sale of 33 plots should be deducted from the sale realisation of Rs. 65,50,870. Deducting Rs. 3,000 and Rs. 8,32,574 from the sale proceeds of Rs. 65,50,870, the ITO worked out a figure of Rs. 57,15,296. From this amount, the ITO deducted certain amount as contemplated under Section 80T of the Income-tax Act, 1961 ('the Act') and finally, worked out chargeable capital gains of Rs. 41,11,414, which was included in the total income of the assessee determined at Rs. 41,30,100.
5. In appeal before the Commissioner (Appeals), the assessee once again reiterated the submissions which were made before the ITO and urged that the ITO was not justified in including capital gains of Rs. 41,11,414 in the total income of the assessee. Before the Commissioner (Appeals) also the assessee had filed written submissions dated 17-3-1986. The assessee had also relied on the decision of the Hon'ble Madhya Pradesh High Court in the case of CIT v. H.H. Maharaja Sahib Shri Lokendra-singhji, wherein, on almost similar facts, the Hon'ble High Court was pleased to hold that no capital gains should be worked out which could be included in the total income of the assessee. The Commissioner (Appeals), however, for the reasons stated in paragraph 2 of his appellate order, upheld the action of the ITO.
6. Being aggrieved by the order of the Commissioner (Appeals), the assessee has come up in appeal before the Tribunal. Inviting the attention of the Tribunal to paper book containing various written submissions filed before the income-tax authorities, the learned counsel for the assessee vehemently argued that since the ratio laid down in the case of B.C. Srinivasa Setty (supra) was clearly applicable in the instant case, the Commissioner (Appeals) was not justified in confirming the action of the ITO. In this connection, the attention of the Tribunai was drawn to the provisions of Section 48 of the Act which contains 'Mode of computation and deductions' and Section 49 of the Act which contains 'Cost with reference to certain modes of acquisition', the learned counsel for the assessee submitted that the cost of acquisition of the property in question has to be determined as per the provisions of Section 49(1)(iii)(a). The Explanation to Sub-section (1) of Section 49, defines the expression 'previous owner of the property'. As the assessee had inherited the property in question, the cost of acquisition of the said property has to be traced to the first owner who had acquired the same. Inviting the attention of the Tribunal to pages 29 and 30 of his paper book containing the history of the Ruler of Rajkot State from samvat year 1608, the learned counsel for the assessee highlighted the fact that the land in question was acquired by the forefathers of the assessee, by conquest for which no payment was made. In other words, he wanted to impress upon the Tribunal that the cost of acquisition of the property in question in the hands of 'previous' owner' was nil. At page 31 of his paper book, the assessee has given chronology of dynasty of Jadeja Ruler of the Rajkot State right from current year 1608 till the time the assessee inherited the same in November 1973. It is observed from this material that Rajkot was a small village in current year 1608 which was acquired by the then Ruler by conquest. In between, Rajkot village was lost to Masumkhan who was under the domain of Mughal empire. After the death of Masumkhan, Ranmalji Jadeja (one of the forefathers of the assessee) reconquered Rajkot in current year 1844. The learned counsel for the assessee, therefore, submitted that since there was no cost of acquisition of the property in question, the income-tax authorities were not justified in working out capital gains in the manner they did. Inviting the attention of the Tribunal to the decision in the case of H.H. Maharaja Sahib Shri Lokendrasinghji (supra), the learned counsel for the assessee stated that in that case also a land was sold by the assessee where there was no cost of acquisition, Mughal emperor Sahajan had gifted the entire Ratlam State to Shri Ratansinhji, one of the forefathers of the assessee, in that case. The assessee had sold lands situated within the compound of the palace and the question was whether the assessee in that case, would be liable to pay capital gains. The Hon'ble High Court was pleased to hold that as the cost of acquisition of the land in question was nil, no capital gains should be worked out which could be included in the total income of the assessee. He, therefore, urged that since the facts and circumstances obtaining in the instant case are inpari materia with the facts and circumstances considered by the Hon'ble Madhya Pradesh High Court, the capital gains of Rs. 41,11,414 included in the total income of the assessee, should be deleted.
6.1 Alternatively, the learned counsel for the assessee, relying on the order of the Tribunal in the case of Attili Narayana Rao v. ITO, submitted that the tax liabilities which were recovered by the revenue out of the sale proceeds of Rs. 65,50,870 should be deducted and only on the balance, the chargeable capital gains could be worked out. The learned counsel for the assessee was fair enough to state that in the said order, the Tribunal had not allowed deduction in respect of estate duty liability but had allowed deduction in respect of income-tax and wealth-tax liabilities. He, therefore, urged that the wealth-tax liabilities in respect of the assessment years 1974-75 to 1977-78 amounting to Rs. 34,13,906 should be deducted from the sale proceeds of Rs. 65,50,870.
7. The learned representative for the department, on the other hand, supported the action of the income-tax authorities. According to him, prior to the merger of Rajkot State with the Indian Union, the entire property owned by the Raja of Rajkot was sovereign property of the Rajkot State. On the merger of Rajkot with the Union of India, the assessee was given option to select one or two palaces for his personal purpose. Ranjit Villas Palace at Rajkot was one of such palaces. Therefore, according to him, the cost of acquisition of the property in question should be as on the date on which the palace became the personal property of the assessee. He, therefore, wanted to impress upon the Tribunal that the cost of acquisition could be little more than that adopted by the ITO at Rs. 3,000. However, we did not allow him to make any further submissions in this regard as this was never the case of the department. In this connection, his attention was invited to paragraph 14 of the order of the ITO. Thereafter, he did not make any submissions in this regard. Relying on the decision of the Hon'ble Madhya Pradesh High Court in the cases of Smt. Maharani Ushadevi v. CIT [1981] 131 ITR 445 and Raja Ajitsingh of Jhabua v. CIT[ 1981] 132 ITR 412, he submitted that the exemption granted under Paragraph B of the Taxation Concession Order, 1950 did not extend to the capital gains. We fail to appreciate why these two decisions are cited as it is not the assessee's case that capital gains arising out of sale proceeds of the property in question were exempt from taxation. It appears to us that the learned representative for the department has not properly appreciated the assessee's case. Regarding alternative submission made on behalf of the assessee, the learned representative for the department relied on the orders of the income-tax authorities and submitted that since the tax liabilities arose subsequent to the inheritance of the property in question, no deduction could be allowed as claimed by the assessee.
8. We have carefully considered the rival submissions of the parties as well as the material already brought on record and are of the view that the stand taken on behalf of the assessee is unassailable in view of the aforesaid decision of the Hon'ble Supreme Court in the case of B.C. Srinivasa Setty (supra). From the history of the Jadeja Rulers of the Rajkot State (pages 29 to 31), it is quite clear that the property in question was never purchased by the assessee's forefathers but was acquired by conquest. In other words, so far as the provisions of capital gains are concerned, we have to hold that 'the cost of acquisition of the asset' was nil. Since the property in question was inherited by the assessee on the death of his father in November 1973, we have to determine the cost of acquisition of the asset as per the provisions of Section 49(1)(iii)(a) read with Explanation thereto. In other words, the cost of acquisition of the asset in the hands of the assessee has to be taken as was in the case of'previous owner'. Now from the history of the Rajkot State, as already stated earlier, we find that it had cost nothing to the previous owner for acquiring the property in question. Section 48 stipulates the mode of computation of income chargeable under the head 'Capital gains'. From the full value of the consideration received on the transfer of the capital asset, the cost of acquisition of the capital asset plus cost of any improvement thereto has to be deducted. The balance amount is brought to tax as capital gains under Section 45 of the Act. In the case of B.C. Srinivasa Setty (supra), the Hon'ble Supreme Court has held that where there is no cost of acquisition of the capital asset, the computation Section of income chargeable under the head 'Capital gains' fails and, therefore, the capital gains cannot be brought to tax. It is no doubt true that in the reported case, the Hon'ble Supreme Court was dealing with goodwill which was a self-generating asset. But the ratio laid down in that case, according to us, is fully applicable to the facts and circumstances obtaining in the instant case. In fact, the decision in the case of H.H. Maharaja Sahib Shri Lokendrasinghji (supra) clearly supports the stand taken on behalf of the assessee. Respectfully following the said decision as well as the decision in the case of B.C. Srinivasa Setty (supra), we hold that the income-tax authorities were not justified in working out capital gains of Rs. 41,11,414 and including the same in the total income of the assessee. We would, therefore, delete Rs. 41,11,414 from the total income of the assessee. In view of our aforesaid decision on the main issue, it is not necessary to discuss in detail the alternative submissions made on behalf of the assessee. However, suffice it to state that the aforesaid order of the Tribunal in the case of Attili Narayana Rao (supra) supports the alternative submission made on behalf of the assessee.
9. In the result, the appeal is allowed.