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IN THE INCOME-TAX APPELLATE TRIBUNAL “A” BENCH MUMBAI BEFORE SHRI PAWAN SINGH, JUDICIAL MEMBER AND SHRI N.K. PRADHAN, ACCOUNTANT MEMBER (Assessment Year 2011-12) ITO (IT)-3(2)(1), Smt. Nita Narendra Mulani R. No. 104, Scindia House, C/o Hajeetsingh Bubber, Ballard Pier, Vs. CCI Project Pvt. Ltd. 6, Mumbai-38. Shoorji Vallabhdas Marg, Laxmi Building, Ballard Estate, Mumbai-400001. PAN: ATQPM0689Q Appellant Respondent Appellant by : Shri N.S. Jangpangi (CIT-DR) Respondent by : Shri Hitesh Trivedi (AR) Date of Hearing : 16.07.2018 Date of Pronouncement : 25.07.2018 ORDER UNDER SECTION 254(1)OF INCOME TAX ACT PER PAWAN SINGH, JUDICIAL MEMBER;
This appeal by Revenue is directed against the order of ld. Commissioner of Income-tax-57, Mumbai [ld. CIT] passed under section 143(3) dated 23.11.2015 for Assessment Year 2011-12. The Revenue has raised the following grounds of appeal:
l. Whether in facts and circumstances of the case and in law, the learned CIT(A) is correct in directing to grant indexation benefit for the period and during which property was held by earlier owner, whereas Explanation (iii) to Section 48 categorically restricts Indexation benefit from the first year in which the asset was held by the assessee. 2. The appellant prays that the order of the Ld. CIT(A) on the ground(s) be set aside and that of the Assessing Officer be restored.
Brief facts and of the case are that the assessee filed return of income declaring taxable income of Rs. 14,31,06,210/- for Assessment Year 2011- Mum 2016-Smt. Nita Narendra Mulani
12. The assessment was completed on 07.03.2014 under section 143(3).
The Assessing Officer while passing the assessment order made the addition of Long Term Capital Gain (LTCG) of Rs. 15,98,01,636/- on account of income earned on sale of share in land at Plot No. 91, Nepean Sea Road, Mumbai. On appeal before the ld. CIT (A), the entire addition was deleted. The ld. CIT (A) while allowing appeal of the assessee held that the assessee be allowed benefit of indexed cost of acquisition with reference to the year in which the previous owner first held the asset.
Therefore, aggrieved by the order of ld. CIT(A), the Revenue has filed the present appeal before us. 3. We have heard the ld. Authorized Representative (AR) of the assessee and ld. Departmental Representative (DR) for the Revenue and perused the material available on record. The ld. AR of the assessee submits the grounds of appeal raised by the Revenue in the present appeal is covered in favour of assessee and against the Revenue by the decision of CIT vs. Manjula J. Shah 16 taxmann.com 42(Bom). The ld. AR of the assessee further submits that the Assessing Officer while passing the assessment order denied the benefit of indexation cost of acquisition from the previous owner and allowed indexation from the previous year in which asset was devolved on the assessee and determined the index cost of acquisition at Rs. 40,91,845/- against the cost of Rs. 2,38,14,538/- and worked out the LTCG at Rs. 15,98,01,636/- against Rs. 14,00,78,943/-. The ld. AR of the 2. Mum 2016-Smt. Nita Narendra Mulani assessee further submits that the issue raised in the present appeal is therefore, fully covered in favour of assessee by the decision of jurisdictional High Court in case of CIT vs. Manjula J. Shah (supra) and the orders of authorities below and fairly conceded that the ground of appeal raised by Revenue is covered in favour of assessee.
We have considered the rival submission of the parties and have gone through the orders of authorities below. The Hon’ble jurisdictional High Court in case of CIT vs. Manjula J. Shah (supra) while considering the similar question of law as held that capital gains arising on transfer of a capital asset acquired by assessee under a gift or will, indexed cost of acquisition has to be computed with reference to year in which previous owner first held asset and not year in which assessee became owner of asset, the relevant part of the order is extracted below;
“10. ----- we may refer to the relevant provisions of the Act relating to the taxability of the gains arising on transfer of the capital assets under the head 'capital gains'. Section 45 of the Act provides that any profits or gains arising from the transfer of a capital in the previous year shall be chargeable to income tax under the head 'capital gains'. Where the gains arise on transfer of a short term capital asset as defined under Section 2(42A) of the Act, the gains are taxed as short term capital gains. Where the gains arise on transfer of long term capital asset, as defined under Section 2(29A) of the Act, the said gains are taxed as long term capital gains. Section 47(iii) of the Act provides that where a capital asset is transferred under a gift or will, then, such transaction shall not be regarded as transfer and in such a 3 Mum 2016-Smt. Nita Narendra Mulani case the liability to pay capital gains tax would not arise. Liability to pay capital gains tax, however, would arise when the assessee transfers the capital asset acquired under a gift or will for valuable consideration.
The mode and the manner of computing the capital gains is provided under Section 48 of the Act. As per Section 48, the income chargeable under the head "capital gains" is liable to be computed by deducting from the full value of the consideration received on transfer of the capital asset, the amount of expenditure incurred wholly and exclusively in connection with such transfer and the cost of acquisition of the asset and the cost of any improvement thereto. Where the assessee acquires any capital asset under a gift or will without incurring any cost of acquisition, there would be no capital gains liability. However, Section 49(1)(ii) of the Act provides that in the case of an assessee acquiring an asset under a gift or will, 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 asset incurred or borne by the previous owner or the assessee as the case may be. Thus, on account of the deeming fiction contained in Section 49(1)(ii) of the Act, gains arising on transfer of a capital asset acquired by the assessee under a gift or will would arise. In such a case, the capital gains under Section 48 of the Act would have to be determined by deducting from the total consideration received by the assessee,inter alia the deemed cost of acquisition.
Where the gains are long term capital gains (other than long term capital gains arising to a non resident from the transfer of shares in, debentures of an Indian Company), then, as per the second proviso to Section 48 of the Act, the capital gains have to be computed by deducting from the full value of consideration the 'indexed cost of acquisition' and the 'indexed cost of any improvement' instead of deducting the 'cost of acquisition' and 'cost of improvement'.
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In the present case, the capital asset in question (Flat No. 1202-A) was originally acquired by the previous owner (daughter) on 29/1/1993 and the same was acquired by the assessee under a gift deed dated 2/1/2003 without incurring any cost. The assessee sold the said capital asset on 30/6/2003 for Rs. 1,10,00,000/-. Since the assessee held the capital asset for less than thirty six months (2/1/2003 to 30/6/2003) in the ordinary course, as per Section 2(42A) of the Act the assessee would have held the asset as a short term capital asset and accordingly liable for short term capital gains tax. However, in view of Explanation 1(i)(b) to Section 2(42A) of the Act which provides that in determining the period for which any 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, the assessee is deemed to have held the asset as a long term capital asset and accordingly, liable for long term capital gains tax. Thus, by applying the deeming provision contained in the Explanation 1(i)(b) to Section 2(42A) of the Act, the assessee is deemed to have held the asset from 29/1/1993 to 30/6/2003 (by including the period for which the said asset was held by the previous owner) and accordingly held liable for long term capital gains tax.
It is not disputed by the revenue that the assessee must be deemed to have held the capital asset from 29/1/1993 (though actually held from 1/2/2003) by applying the Explanation 1(i)(b) to Section 2(42A) of the Act and hence liable for long term capital gains tax. However, the revenue disputes the applicability of the deemed date of holding the asset from 29/1/1993 while determining the indexed cost of acquisition under clause (iii) of the Explanation to Section 48 of the Act.
For better appreciation of the dispute, we quote the relevant part of Section 48 herein :-
" Mode of Computation.
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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 result of the transfer of the capital asset the following amounts, namely:-
expenditure incurred wholly and exclusively in connection with such transfer; the cost of acquisition of the asset and the cost of any improvement thereto;
Provided that ..........
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 "cost of acquisition" and "cost of any improvement", the words "indexed cost of acquisition" and "indexed cost of any improvement" had respectively been substituted:
Provided also .......... Provided also .......... [Provided also ..........] Explanation - For the purposes of this Section, - (i) and (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; Mum 2016-Smt. Nita Narendra Mulani
(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 asst 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. "
It is the contention of the revenue that since the indexed cost of acquisition as per clause (iii) 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.
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(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 7 Mum 2016-Smt. Nita Narendra Mulani
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.
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 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 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.
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 8 Mum 2016-Smt. Nita Narendra Mulani
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 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.
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 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.
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Apart from the above, Section 55(1)(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 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.
The object of giving relief to an assessee by allowing indexation is with a view to offset the effect of inflation. As per the CBDT Circular No. 636 dated 31/8/1992 [see 198 ITR 1 (St)] a fair method of allowing relief by way of indexation is to link it to the period of holding the asset. The said circular further provides that the cost of acquisition and the cost of improvement have to be inflated to arrive at the indexed cost of acquisition and the indexed cost of improvement and then deduct the same from the sale consideration to arrive at the long term capital gains. If indexation is linked to the period of holding the asset and in the case of an assessee covered under Section 49(1) of the Act, the period of holding the asset has to be determined by including the period for which the said asset was held by the previous owner, then obviously in arriving at the indexation, the first year in which the said asset was held by the previous owner would be the first year for which the said asset was held by the assessee.
Mum 2016-Smt. Nita Narendra Mulani
Since the assessee in the present case is held liable for long term capital gains tax by treating the period for which the capital asset in question was held by the previous owner as the period for which the said asset was held by the assessee, the indexed cost of acquisition has also to be determined on the very same basis.
In the result, we hold that the ITAT was justified in holding that while computing the capital gains arising on transfer of a capital asset acquired by the assessee under a gift, 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 became the owner of the asset.” 5. Considering the decision of jurisdictional High Court, the ground of appeal raised by Revenue is dismissed.
In the result the appeal of the Revenue is dismissed.
Order pronounced in the open court on 25.07.2018.