Karnataka High Court
Commissioner Of Income Tax vs Smt Daisy Devaiah on 22 July, 2014
Bench: N.Kumar, B.Manohar
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IN THE HIGH COURT OF KARNATAKA, BANGALORE
DATED THIS THE 22ND DAY OF JULY, 2014
PRESENT
THE HON'BLE Mr. JUSTICE N. KUMAR
AND
THE HON'BLE Mr. JUSTICE B. MANOHAR
I.T.A. No. 109/ 2014
BETWEEN:
1. The Commissioner of
Income Tax,
Vidyaranyapura,
Mysore.
.... APPELLANT
(By Smt/Sri. E.I. Sanmathi, Advocate)
A N D:
Smt. Daisy Devaiah,
By Legal Representative-
Sri. C.B. Madaiah, Mettacad
Estate, Uliguli-Nargane,
Suntikoppa-571 237.
....RESPONDENT
This I.T.A. is filed under Section 260-A of the
Income-tax Act, 1961 praying to decide the foregoing
question of law and/or such other questions of law as may
be formulated by Hon'ble Court as deemed fit and to set
aside the appellate order dated 11.10.2013 passed by the
Income Tax Appellate Tribunal, 'A' Bench, Bangalore, in
ITA No.205/Bang/2013 for the Assessment Year 2005-06.
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This I.T.A. coming on for admission this day, N.
KUMAR, J., delivered the following:
JUDGMENT
This appeal is preferred by the revenue against the common order passed by the Tribunal in respect of the assesses setting-aside the order passed by the Commissioner of Income Tax under Section 263 of the Income Tax Act, 1961 (for short hereinafter referred to as 'The Act') and granting relief to the assessee.
2. The assessee in this appeal is one of the legal heirs of One Mr C. B. Devaiah. Mr C. B. Devaiah, owned the property, which had been acquired by him prior to 1.4.1981. Mr C. B. Devaiah died on 23.4.2000. His legal heirs sold the property owned by him during the previous year relevant to 2005-06 i.e., on 18.10.2004. The assessee as one of the legal heirs was entitled to have 1/5th share in the property owned by Mr C. B. Devaiah. The assessee declared his capital gain on sale of the property in his returns of income filed for the assessment year 2005-06. In the computation of capital gains, the assessee adopted 3 the fair market value(FMV) of the property as on 1.4.1981 as the cost of acquisition of the property. The revenue did not dispute this valuation. The assessee while computing his cost of acquisition also claimed indexation on FMV as on 1.4.1981. The assessing authority while completing the assessment of the assessee, accepted the claim of the assessee in the order of assessment dated 30.11.2009 passed under Section 143(3) of the Act allowing the benefit of indexation from 1.4.1981. The Commissioner of Income Tax exercising his power under Section 263 of the Act was of the view that the Assessment Officer's order in the case of the assessee allowing the benefit of indexation from 1.4.1981 was erroneous and prejudicial to the interest of the revenue because, as per explanation (iii) to Sec.48 of the Act, "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. According to the appellate authority, the asset was 4 held by the assessee only from 23.4.2000 when Mr. C. B. Devaiah died. Therefore, the benefit of indexation has to be allowed only from 23.4.2000 and not from 1.4.1981 as claimed by the assessee. Accordingly, the order passed by the Assessing authority was revised and assessing authority was directed to allow indexation benefit from financial year 2000-01 only.
3. Aggrieved by the said order, the assessee preferred an appeal to the Tribunal. The Tribunal after hearing both the parties and relying on a judgment of the Bombay High Court in the case of Commissioner of Income Tax vs Manjula J Shah reported in (2012) 68 DTR 269 (Bombay) held that the Commissioner was not justified in not following the decision of the Hon'ble Bombay High Court, as the ratio of the decision of the Bombay High Court rendered in the context of acquisition of property by way of gift will apply with greater force when property devolves by succession. The view taken by the assessing authority was correct and therefore, the Commissioner of Income Tax was not justified in exercising his jurisdiction 5 under Section 263 of the Act and in interfering with the order passed by the Assessing Authority. Therefore, the appeal was allowed. The order of the Appellate Authority was set-aside. The order of assessment was restored. Aggrieved by the said order, the revenue is in appeal.
4. Learned counsel for the revenue assailing the impugned order contends that, as is clear from explanation
(iii) to Section 48, the indexed cost of acquisition is to be allowed for the first year in which the asset was held by the assessee or in the year beginning on the first day of April, 1981, whichever is later. Therefore, the Tribunal was not justified in interfering with the order passed by the Commissioner of Income Tax. In fact, the revenue has preferred a Special Leave Petition against the judgment of the Bombay High Court and it is pending consideration before the Apex Court and therefore, he submits that the order requires to be interfered with.
5. Per contra, learned counsel for the assessee submitted that, if the cost of acquisition of the property as on 1.4.1981 is taken into consideration, then the indexed 6 cost of acquisition has to be calculated from that date, not from the day the assessee held the property by way of succession. He submits that in view of Section 49, the cost of acquisition of the asset 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, if the acquisition is by way of succession, inheritance or devolution. If, cost of acquisition is to be computed as on the day the previous owner held the property on 1.4.1981, though the assessee acquired the said property by way of succession, indexed cost of acquisition is to be allowed from the day the property was owned by previous owner and not when the assessee held the property after his death and that is the ratio decided by the Bombay High Court in the aforesaid Judgment and therefore, he submits that no case for interference is made out.
6. The appeal is admitted to consider the following Substantial question of law:
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"Whether on the facts and in the circumstances of the case, the tribunal is right in law in concluding that while computing the capital gains arising on transfer of a capital asset acquired by the assessee through succession, the indexed cost of acquisition has to be computed with reference to the year in which the previous owner first held the asset and not the year in which the assessee actually became the owner of the asset through succession?"
7. Section 45 of the Act provides that any profits or gains arising from the transfer of a capital asset effected in the previous year shall be chargeable to income tax under the head "Capital gains". Capital Gains is of two types. Short-term capital gains and long term capital gains. Depending upon the nature of capital gains the liability of the tax is determined. The mode and manner of computing the capital gains is provided under Section 48 of the Act. The income chargeable under the head capital gain shall be computed by deducting from the full value of the consideration received or accruing as a result of the 8 transfer of the capital asset, the expenditure incurred wholly and exclusively in connection with such transfer and the cost of acquisition of the asset and the cost of any improvement thereon. The 2nd proviso to Section 48 provides where long term capital gain arises from the transfer of a long term capital asset, the cost of acquisition of the asset has to be read as "indexed cost of acquisition". Indexed cost of acquisition has been defined in the explanation to the said Section, it 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.
8. Section 49 deals with the cost with reference to certain modes of acquisition. One such mode is, if the assessee acquires a capital asset by way of succession, inheritance or devolution, then the cost of acquisition of the asset shall be deemed to be the cost for which the previous 9 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. Therefore, when an asset is acquired by way of inheritance, the cost of acquisition of the asset should be calculated on the basis of the cost of acquisition by the previous owner and the said cost of acquisition of the previous owner has to be calculated on the basis of indexed cost of acquisition as provided in explanation (3) to Section 48.
9. Though in the definition of 'indexed cost of acquisition', the word used are, "in which the asset was held by the assessee", a harmonious reading of Sections 48 and 49 makes it clear that, for the purpose of 'Indexed Cost of Acquisition', it has to be understood as the first year in which the previous owner held the said property. Otherwise, if the date of inheritance is taken into consideration, then the cost of acquisition of the asset on that date corresponding to the market value is to be taken into consideration. Otherwise, take the cost of acquisition on the day the previous owner acquired it and apply the 10 "Indexed Cost of Acquisition" and then calculate the capital gains and the tax payable. That is precisely what has been held by the Bombay High Court in the aforesaid Judgment which in our view is the correct legal decision.
10. In that view of the matter, the Tribunal was justified in following the Judgment of the Bombay High Court and in setting-aside the order passed by the Commissioner of Income Tax. Therefore, the substantial question of law framed is answered in favour of the assesses and against the revenue. Appeal is dismissed. No costs.
Sd/-
JUDGE Sd/-
JUDGE KGR*