MANDAR S. PHADKE,MUMBAI vs. INCOME TAX OFFICER, WARD-32(2)(3), MUMBAI

This is an appeal filed by the assessee against the order of CIT(A)- 44, Mumbai dated 26/04/2017 for A.Y.2011-12 in the matter of penalty imposed u/s.271(1)(c) of the IT Act.

At the outset, learned AR placed the quantum order of the Tribunal in assessee’s own case dated 01/02/2017 wherein the additions with respect to which penalty has been levied has been restored by the Tribunal to the AO with certain directions. Learned AR also placed on Shri Mandar S. Phadke record the order passed by the AO giving effect to the order of the Tribunal wherein income returned was equal to the income assessed.

We have carefully gone through the orders of the authorities below as well as the order passed by the Tribunal in the quantum appeal filed by assessee wherein the Tribunal observed as under:- “We have heard the rival contentions and perused the material available on record including the cited case laws. So far as regarding the sale consideration is concerned, we find that the same has correctly been computed by the AO. The declared sale consideration comprised partly of cash component and partly by way of exchange of asset. Hence, the FMV of the proposed three new flats acquired by assessee as on the date of transfer i.e. 16/05/2010 would form part of sale consideration irrespective of its declared value in the agreement. The assessee also acquiesced to the same before lower authorities. Going further, upon perusal of valuation report of the property as on 06/12/2010, we find that the FMV of property as on 01/04/1981 has been calculated as Rs.6,56,080/- as against Rs.4;26,000/- taken by the AO. We also notice that the benefit of cost of improvement being Rs.1,23,040/-as per the valuation report, though available to the assessee, has not been granted to the assessee. With these observations, we further find that our jurisdictional Hon'ble Bombay High Court in the case of CIT Vs. Manjula J.Shah 355 ITR 474, in similar facts and circumstances, have made the following observations:- " 16) It is the contention of the revenue that since the indexed cost of acquisition as per clause (Hi) of the Explanation to Section 48 of the Act has to be determined with reference to the Cost Inflation Index for the first year in which the asset was held by the assessee and in the present case, as the assessee held the asset with effect from 1/2/2003, the first year of holding the asset would be FY 2002-03 and accordingly, the cost inflation index for 2002-03 would be applicable in determining the indexed cost of acquisition. 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 assesses'. 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 Shri Mandar S. Phadke the Act. Explanation I (i)(b) to Section 2(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 l(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 as a long term capital asset. If the long term capital gains liability has to be computed 48 of the Act by treating that the assessee held the capital asset from 29/1/l 993 in determining the indexed cost of acquisition under Section 48 of the Act, the f 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 l(i)(b) to of the Act cannot be applied in computing the capital gains under Section 48 of then, the assessee would not be liable for long term capital gains tax, it is only by applying the deemed fiction contained in Explanation l(i)(b) to Section 2(42A) and Section 49(l)(ii) of the Act, the assessee is deemed to have held the asset from 29/1/1993 and deemed to have incurred the cost of acquisition and accordingly made liable for the long 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 n ii is not possible to accept the contention of revenue that (he fiction contained in Explanation l(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.

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 Shri Mandar S. Phadke 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 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 (42 A) of the Act.

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 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 $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) Apart from the above, Section 55(l)(b)(2)(ii) of the Act provides that where the capital asset became the property of the assessee by any of the modes specified under Section 49(1) of the Act, not only the cost of improvement incurred by the assessee but also the cost of improvement incurred by the previous owner shall be deducted from the total consideration received by the assessee while computing the capital - gains under Section 48 of the Act, The question of deducting the cost of improvement incurred by the previous owner in the case of an assessee covered under Section 49(1) of the Act -would arise only if the period for which the asset was held by the previous owner is included in determining the period for which the asset was held Shri Mandar S. Phadke by the assessee. Therefore, it is reasonable to hold that in the case of an assessee covered under: Section 49(1) of the Act, the capital gains liability has to be computed by considering that the assessee held the said asset from the date it was held by the previous owner and the same analogy has also to be applied in determining the indexed cost of acquisition. We find that in the above case the benefit of indexation as available to the previous owner has been advanced to the assessee in certain specific situation of succession of property by way of gift /will and other prescribed modes of transfer. As of today, the ruling of our jurisdictional High Court squarely applies to us and hence respectfully following the same; we held that the assessee would be entitled for same indexation benefit as they were available to the previous owner. Resultantly, FMV of the property as on 01/04/1981 would be indexed with CII of financial year 1981-82 and indexation of cost of improvement done in the financial year 1986-87 would be done with CII of financial year 1986-87. As already observed, these values shall be correctly picked up from the valuation report. AO is directed to re- compute the correct capital gains earned by the assessee in terms of our above directions.”