DEPUTY COMMISSIONER OF INCOME TAX vs. SUSHIL KUMAR & ORS

This order shall dispose of ITA Nos.152 and 153 of 2014 as according to the learned counsel for the appellant, the facts and the issue involved in both the appeals are similar. However, the facts are being extracted from ITA No.152 of 2014. 2. ITA No.152 of 2014 has been preferred by the revenue under section 260A of the Income Tax Act, 1961 (in short, “the Act”) against the order dated 19.8.2013, Annexure A.3 passed by the Income Tax Appellate Tribunal, Amritsar Bench Amritsar (in short, “the Tribunal”) in ITA No.86 (Asr)/2013 and C.O. No.09(Asr)/2013 for the assessment year 2009-10, claiming following substantial questions of law:- GURBAX SINGH 2014.10.28 11:55 integrity of this document High Court Chandigarh i) Whether on the facts and circumstances of the case, the first year in which the asset was held by the respondent/assessee as appearing in the explanation to section 48 (mode of computation) of the Income Tax Act, 1961, should be the year in which the final partition of the HUF was actually effected and decreed by the District Court on 19.5.1998 or whether it can be construed to be earlier than 1.4.1981? ii)Whether in facts and circumstances of the case, the impugned orders of the Appeal Court's at Annexure A 2 and A. 3 are legally sustainable in the eyes of law?

A few facts relevant for the decision of the controversy involved as narrated in ITA No.152 of 2014 may be noticed. The respondent-assessee filed his return for the assessment year 2009-10 at an income of ` 46,11,493/- including Long Term Capital Gain (LTCG) of ` 35,53,500/-. The assessment was completed under Section 143(3) of the Act at an income of ` 11,38,960/- plus LTCG of ` 1,11,48,931/- respectively. The respondent became the owner of two properties namely a hotel and a plot on 19.5.1998 in pursuance of the Hindu Undivided Family partition vide order of the then Additional District Judge, Bathinda. Accordingly, the indexed cost of inflation had to be taken by taking the Cost Inflation Index for the year 1998-99 and not for the year 1981-82. Accordingly, notice under section 143(2) of the Act was issued to the assessee on 30.9.2010. Subsequently, notice under section 142(1) was issued to the assessee on 18.10.2010 calling for books of account, bill and vouchers and final statements. In response to the notice, the representative of the assessee appeared and produced the relevant documents. Vide order dated 16.9.2011, Annexure A.1, the assessment was completed at total income of `11,38,960/- and LTCG of ` 1,11,48,931/-. Aggrieved by the order, the GURBAX SINGH 2014.10.28 11:55 integrity of this document High Court Chandigarh assessee filed appeal before the Commissioner of Income Tax (appeals) [CIT(A)]. Vide order dated 27.11.2012,Annexure A.2, the CIT(A) allowed

We have heard learned counsel for the appellant and perused the record.

It was urged on behalf of learned counsel for the appellant revenue that the property in dispute was finally partitioned by virtue of decree of the District Court on 19.5.1998 and therefore, for purposes of cost of indexation, the date of acquisition by the assessee would be 19.5.1998 and not 1.4.1981. 6. We do not find any substance in the aforesaid submission.

The core or the primary issue that has arisen in the present appeals is when the asset becomes the property of the assessee in any one of the modes specified in Section 47 after 1.4.1981 but was acquired by the previous owner prior to 1.4.1981, whether the Cost Inflation Index would be taken for the financial year 1981-82 in terms of Section 48 of the Act or for the financial year 1998-99, i.e., the year in which the asset became the property of the assessee.

Section 47 of the Act stipulates that the transactions of the nature specified therein are not regarded as transfer and the provisions of GURBAX SINGH 2014.10.28 11:55 integrity of this document High Court Chandigarh Section 45 would not apply to them. The relevant portion of Section 47 reads thus:- “47. Nothing contained in section 45 shall apply to the following transfers :— (i) any distribution of capital assets on the total or partial partition of a Hindu undivided family; (ii) xxxx xx xx xx xx xx xxx xxx xxx xxx xxx” Clause (i) of this sub section deals with a case where the capital asset which the assessee has sold has come to him on the distribution of the assets of a Hindu undivided family on its total or partial partition. Under Section 47(i), no capital gains is attracted where a Hindu undivided family disrupts and its assets are distributed among its members.

The 'mode of computation' of capital gains has been specified under Section 48 of the Act. The provision which is relevant for the purposes of present appeal is in the following terms:- “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 xx xx xx xx xx xx xx 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 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 GURBAX SINGH 2014.10.28 11:55 integrity of this document High Court Chandigarh “cost of acquisition” and “cost of any improvement”, the words “indexed cost of acquisition” and “indexed cost of any improvement” had respectively been substituted: xx xx xx xx xx xx xx xx xx Explanation.—For the purposes of this section,— (i) and (ii) xx xx xx xx xx xx (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) “Cost Inflation Index”, in relation to a previous year, means such Index as the Central Government may, having regard to seventy-five per cent of average rise in the Consumer Price Index for urban non-manual employees for the immediately preceding previous year to such previous year, by notification in the Official Gazette, specify, in this behalf.”

Under Section 49 of the Act, the events have been enumerated where the cost of acquisition of an asset shall be deemed to be the cost for which the previous owner of the property had acquired it which shall be increased by the cost of improvement of the assets incurred or borne by the previous owner or the assessee. The relevant portion is as under:- “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 GURBAX SINGH 2014.10.28 11:55 integrity of this document High Court Chandigarh a Hindu undivided family; (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, or (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 clause (vica) or clause (vicb) 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 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. 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 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. xx xx xxx xx xxx xxx xx”

On conjoint reading of sections 47, 48 and 49, what emerges is that where there is any distribution of capital asset on total or partial partition of a Hindu undivided family, there is no transfer and therefore, no capital gains tax under section 45 of the Act is exigible thereon. Further, the GURBAX SINGH 2014.10.28 11:55 integrity of this document High Court Chandigarh cost of acquisition in such cases would be the cost for which the previous owner of the property had acquired which shall be increased by any cost of improvement in the capital asset incurred or borne by the previous owner or the assessee as the case may be. The cost of acquisition of the asset by the Hindu undivided family augmented by the costs of improvement made by it to the asset will be taken as the cost of its acquisition in the hands of the assessee. Once the cost of acquisition of the previous owner is taken as the cost of acquisition of the assessee, necessarily, the fiction is to be carried to its logical conclusion. In such a situation, by deeming fiction, the assessee shall for all intents and purposes be deemed to be the owner of the capital asset on the date when the previous owner had the title to it for the purposes of computation of capital gains under section 45 read with sections 47, 48 and 49 of the Act. For calculating the quantum of capital gains, in clause (ii) of Section 48 of the Act, for the words “cost of acquisition” and “cost of any improvement”, the words “Indexed cost of acquisition” and “Indexed cost of improvement” respectively had been substituted. Thus, the indexed cost of acquisition of such capital asset shall be computed by taking the Cost Inflation Index of the year in which the previous owner first held the asset.

Adverting to the factual matrix herein, the capital asset was the property of the Hindu undivided family prior to 1.4.1981. The assessee acquired absolute ownership by way of Civil Court decree on 19.5.1998 after partition of the Hindu Undivided Family property. In such circumstances, the date of acquisition of the property by the Hindu Undivided Family being prior to 1.4.1981 would entitle the assessee to calculate capital gains tax by taking the Cost Inflation Index for the GURBAX SINGH 2014.10.28 11:55 integrity of this document High Court Chandigarh financial year 1981-82 in terms of section 48 of the Act and not for the financial year 1998-99 as had been done by the Assessing Officer.

The Tribunal while repelling the contention of the revenue had noticed as under:- “The second issue relates to the addition of ` 75,95,431/- on account of Long Term Capital Gains on the sale of Hotel and plot of land for ` 1,41,75,000/- during the previous year relevant to the assessment year 2009-10. It is a fact that the bigger HUF of the respondent/assessee owns the property before 01.04.1981 which is clear from the various partial partitions made by the bigger HUF on 30.01.1964, 05.02.1964 and 12.04.1971 which were duly accepted by the department u/s 171 (3) on 14.01.1966, 12.04.1971 and 21.12.1974 respectively. The full partition was made on 20.02.1995 which was accepted by the A.O. on 19.02.1998. However, the respondent/ assessee also got it made Rule of Court of Law from Additional District Judge on 19.05.1988. The A.O. has himself accepted the claim of the respondent/assessee u/s 49(1) (i) of the Act taking the cost of the previous owner as on 01.04.1981. However, the A.O. has applied the Cost of Inflation Index for the year 1998-99 instead of 1981-82. The respondent/ assessee has pointed out that this very A.O. has accepted the cost of Inflation Index of 1981-82 instead of 1998-99 in the case of other co-owners who have sold the property during the previous year relevant to the assessment year 2009-10. The A.O. could not give a satisfactory reply in his Remand Report dated 29.10.2012 filed during the course of appellate proceedings. There should be consistency in the application of law while dealing with the various assesses placed similarly. The respondent/ assessee heavily relied on the judgment of Hon'ble juri ictional High Court reported at 2014.10.28 11:55 integrity of this document High Court Chandigarh valuation is subject to low rate of taxation in one co-owner then it would look highly improper to burden a similarly situated co-sharer with a higher rate of tax. If such an action on the part of the A.O. is sanctioned it would clearly militate against the principle of equalities of law enriched in Article 14 of the Constitution of India. This judgment of the Hon'ble Juri ictional High Court is clearly applicable to the facts of the case and the learned A.O. erred in making discrimination in applying the Cost of Inflation Index of 1998- 99 in the case of respondent/ assessee whereas he applied the Cost of Inflation Index of 1981-82 in the case of other co-owners. Even on merits, the case of the respondent/ assessee is liable to be accepted which is based on the interpretation of section 49(1) (i) and its Explanation and definition of Short Term Capital Asset in section 2(42A) and its Explanation 1(i)(b) read with section 48 with Explanation (iii) which are reproduced below:- Section 49 (1)(i):-

The findings recorded by the Tribunal have not been shown to be illegal or perverse in any manner. Consequently, no substantial question of law arises. The appeals stand dismissed. Since the appeal bearing ITA No.152 of 2014 has been dismissed on merits, no order is required to be passed on the application for condonation of delay which is left open. (Ajay Kumar Mittal) Judge September 01, 2014 (Fateh Deep Singh) Judge ‘gs' GURBAX SINGH 2014.10.28 11:55 integrity of this document High Court Chandigarh