ACIT, BANGALORE vs. SMT. MEENAKSHI BHOOTE, BANGALORE

The dispute in both these appeals is with regard to the computation of long term capital gain on sale of a property at Koramangala, Bangalore by the assessee.

The assessee is an individual. During the previous year she sold a property at Koramangala for a sale consideration of Rs. 6,15,00,000/-. The property at Koramangala which was sold by the assessee measured about 25,343 sq.ft. Out of the above an extent of 19,200 sq.ft. was purchased by the assessee’s husband in the year 1958. The remaining land of 6,143 sq.ft. was purchased by assessee from BDA. There were disputes with regard to the property as the same was subject matter of acquisition by the BDA. Besides the above, the property was originally an industrial site on which the assessee’s husband had constructed structures. The structures were let out to one Smt. Rudramma and her legal heirs. There were disputes with the tenant also. It is in this state of affairs that the property in question was sold by the Assessee after settling all the litigations.

The Assessee computed long term capital gain on sale of the property. The computation of capital gain as made and given by the Assessee and the computation of capital gains done by the AO was as follows.

It can be seen from the above table that there was a dispute between the Assessee and the AO with regard to allowing certain deduction while computing capital gain of expenses incurred in relation to transfer. The Assessee had claimed brokerage fees and legal fees paid of Rs. 85 lakhs whereas the AO allowed deduction of only a sum of Rs. 25,61,492/-. Another dispute was with regard to the claim of the assessee for deduction, while computing capital gains, of payments made to agreement holders for getting clear and better title to the property of a sum of Rs. 1,96,25,000/-. The claim of the assessee for deduction of the aforesaid sum was not allowed by the AO. Another area of dispute was with regard to the computation of cost of acquisition of the property by the assessee and indexed cost of acquisition. As far as the disputes with regard to cost of acquisition is concerned, we have already seen that the property was acquired by the assessee’s husband in the year 1958. The assessee’s husband died in the year 1994 and the assessee inherited the property from her husband by way of intestate succession. Under the provisions of section 55(2)(b)(i) of the Income Tax Act, 1961 (Act), where the capital asset became property of the assessee before 01.04.1981, the cost of acquisition of the asset to the assessee shall, at the option of the assessee, be taken as the Fair Market Value (FMV) as on 01.04.1981. The assessee claimed the FMV as on 01.04.1981 at Rs. 100/sq.ft. The AO determined the FMV as on 01.04.1981 at Rs. 10/sq.ft. On appeal by the assessee the CIT(A) fixed the FMV as on 01.04.1981 at Rs. 50/- per sq.ft. In the appeal by the assessee the assessee has challenged the order of CIT(A) fixing the FMV as on 01.04.1981 at Rs. 50/sq.ft. and has claimed that the same should be fixed at Rs. 100/sq.ft. as claimed by the assessee. The revenue in its appeal has challenged the order of CIT(A) whereby CIT(A) fixed the FMV as on 01.04.1981 at Rs. 50/sq.ft. According to the revenue the FMV as on 01.04.1981 should have been fixed at Rs. 10/sq.ft. as done by the AO.

We have already seen that the assessee acquired the property by way of succession as legal heir of her husband. Under the second proviso to section 48 the assessee can claim indexed cost of acquisition as a deduction. The assessee claimed indexed cost from 01.04.1981. According to the AO indexed cost of acquisition can be allowed only from the year 1994 when the Assessee succeeded to the properties of her husband on intestate succession. According to the AO indexed cost of acquisition has to be computed for the period for which asset is held by the assessee. Since the assessee got the property by way of succession only in the year 1994, the AO gave indexed cost of acquisition from 1994. The CIT(A) held that the indexed cost of acquisition has to be given from the date on which the property was acquired by the previous owner, because the assessee did not acquire the property and got the same by way of succession and therefore cost of acquisition to the previous owner should be adopted. Since the previous owner acquired the property prior to 1.4.1981, the Assessee was entitled to adopt the indexed cost of acquisition from 1.4.1981. The revenue in its appeal has challenged the order of CIT(A) allowing indexation benefit from 01.04.1981. With this background we will now consider the issues raised by the revenue and assessee in their respective appeals.

The common issue that arises for consideration in both the appeal of the assessee and revenue is with regard to the determination of FMV as on 01.04.1981. It is not in dispute that the assessee filed the report of registered valuer to substantiate her claim of FMV as on 01.04.1981 at Rs. 100/sq.ft. The AO summoned the approved valuer and examined him and confronted him with regard to the guideline values prevailing in the vicinity of Koramangala in the year 1981. The registered valuer on a query by the AO submitted that his valuation was based on the rates prevalent in 1985 and since he is now being confronted with some market rates prevalent in the year 1982 it would be appropriate to apply those rates as those dates are nearer to 01.04.1981. The following were the questions and the answers put to the registered valuer by the AO and the answers given by the registered valuer.

Based on the above replies the AO held that the FMV as on 01.04.1981 of the property should be adopted at Rs. 10/sq.ft. On appeal by the assessee the CIT(A) held that the FMV has to be adopted at Rs. 50/sq.ft. The following were the observations of the CIT(A).

Aggrieved by the aforesaid order of the CIT(A) both the assessee and the revenue are in appeal before the Tribunal. We have heard the rival submissions. The ld. DR has reiterated the stand of the AO as contained in the order of assessment. The ld. Counsel for the assessee reiterated the submissions as were made before the CIT(A). We have heard the rival submissions. In the matter of dispute with regard to the FMV as on 01.04.1981, the law provides for an option to the AO to seek the opinion on the question of valuation to the Departmental Valuation Officer (DVO). The AO has not chosen to adopt such a course of making a reference to the DVO. As we have already seen, the report of the registered valuer giving the value of property in question i.e. (FMV as on 01.04.1981) at Rs. 175/sq.ft. is based on the guidelines value given by the State Government as on 07.08.1985. The AO confronted the approved valuer that a circular dated 10.11.1982 issued by the State Government wherein certain valuation was given in respect of the properties in the vicinity of Koramangala. It is when this circular was confronted to the approved valuer, he gave an opinion that based on the said circular the valuation of the assessee’s property (FMV as on 01.04.1981) would be Rs. 28/sq.ft. It appears to us that the reply given by the approved valuer to the query of AO cannot be conclusive with regard to the FMV as on 01.04.1981. The approved valuer has not compared the several factors which would go to determine the FMV of a property. As to whether the properties referred to in the circular confronted to the registered valuer by the AO and the properties of the assessee have same location advantage and advantage of size etc.,is not spelt out in the statement of the registered valuer. In answer to question no. 6 the approved valuer has said that his valuation is based on material available with him namely the circular of 1985. It is not clear as to whether the guidelines value of properties referred to in the answer given to question no. 5 of the approved valuer is located in the same place or in the vicinity of the assessee’s property. In other words we find lot of loose ends in the statement given by the approved valuer before the AO. In this regard the Assessee has in her submissions dated 30.9.2013 specifically pointed out that the AO did not afford opportunity of cross-examination of the Registered Valuer and therefore the evidence in the form of statement of the Registered valuer has to be ignored. The Assessee has in this regard relied on the decision of the Hon’ble Madras and M.P.High Court in the case of CIT Vs. A.N.Dynaneswaram 297 ITR 1235 (Mad) and Prakashchand Natha Vs. CIT 301 ITR 134 (MP). Apart from the above, in arriving at the value on the basis of statement of Registered Valuer, the AO has not taken cognizance of the existence of the building and the cost to be attributed to the value of building as on 1.4.1981. Keeping these facts in mind and also taking note of the fact that the AO has not chosen to make a reference to the valuation officer u/s. 55A of the Act and also keeping in mind the fact that estimation of FMV as on 01.04.1981, in the absence of a good comparative sale instance, would be only an approximation, we deem it proper to conclude that the FMV as on 01.04.1981 should be fixed at Rs. 75/sq.ft. We hold and direct accordingly. The relevant grounds of appeal of the revenue are accordingly dismissed while that of the assessee is partly allowed.

According to the CIT, the Asset was held by the Assessee only from 19.4.2007 when partition deed was executed and therefore the benefit of indexation ought not to have been allowed as on the very same date i.e., 19.42007, the Assessee sold the share in the property.

The mode of computation of capital gain is given is Sec.48 of the Act. The provisions of Sec.48 of the Act, in so far as it is necessary for a decision in the present case, reads thus: “Sec.48. Mode of computation.

The controversy in the present case relates to interpretation of Explanation (iii) to Sec.48 of the Act, which defines the expression “Indexed Cost of Acquisition”. We find that the issue of allowing indexation on identical facts had come for consideration before the Hon’ble Bombay High Court in the case of CIT Vs. Manjula J.Shah (2012) 204 TAXMAN 691 (Bombay). The question before the Hon’ble Bombay High Court was "While computing the capital gains arising on transfer of a capital asset acquired by the assessee under a gift, whether the indexed cost of acquisition has to be computed with reference to the year in which the previous owner first held the asset or the year in which the assessee became the owner of the asset ?". The facts of the case before the Hon’be Bombay High Court was that in AY 04-05, the assessee had declared total income of Rs. 20,92,400. The said return of income included long-term capital gains arising from the sale of a residential flat bearing No. 1202-A (‘capital asset’ for short) at Chaitanya Towers, Prabhadevi, Mumbai. The said flat was originally purchased by the daughter of the assessee (‘previous owner’ for easy reference) on 29th Jan., 1993 at a cost of Rs. 50,48,350.

The Hon’ble Bombay High Court held 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 s. 48, that expression has to be understood as defined under s. 2. Explanation 1(i)(b) to s. 2(42A) 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 29th Jan., 1993, as per Expln. 1(i)(b) to s. 2(42A), the assessee is deemed to have held the capital asset from 29th Jan., 1993. By reason of the deemed holding of the asset from 29th Jan., 1993, the assessee is deemed to have held the asset as a long-term capital asset. If the long-term capital gains liability has to be computed under s. 48 by treating that the assessee held the capital asset from 29th Jan., 1993, then, naturally in determining the indexed cost of acquisition under s. 48, the assessee must be treated to have held the asset from 29th Jan., 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 Expln. 1(i)(b) to s. 2(42A) cannot be applied in computing the capital gains under s. 48 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 Expln. 1(i)(b) to s. 2(42A) and s. 49(1)(ii), the assessee is deemed to have held the asset from 29th Jan., 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 s. 48 has to be computed by applying the deemed fiction, it is not possible to accept the contention of Revenue that the fiction contained in Expln. 1(i)(b) to s. 2(42A) cannot be applied in determining the indexed cost of acquisition under s. 48.

The Hon’ble Court further observed that 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 cl. (iii) of Expln. to s. 48, one has to see the object with which the said words are used in the statute. If one reads Expln. 1(i)(b) to s. 2(42A) together with ss. 48 and 49, 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 s. 49 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 asset 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 cl. (iii) of the Explanation to s. 48 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 Expln. 1(i)(b) to s. 2(42A). If the meaning given in s. 2(42A) is not adopted in construing the words used in s. 48, then the gains arising on transfer of a capital asset acquired under a gift or will 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.

The Hon’ble Court further held that apart from the above, s. 55(1)(b)(2)(ii) provides that where the capital asset became the property of the assessee by any of the modes specified under s. 49(1), 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 s. 48. The question of deducting the cost of improvement incurred by the previous owner in the case of an assessee covered under s. 49(1) 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 s. 49(1), 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 Hon’ble Court explained that 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 dt. 31st Aug., 1992 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 s. 49(1), 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. & 14/Bang/2014 Page 15 of 15 18. The Hon’ble Court finally concluded 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.

In view of the aforesaid decision of the Hon’ble Bombay High Court, we are of the view that the CIT(A) was fully justified in allowing the benefit of indexation on FMV as on 1.4.1981 from 1.4.1981. We confirm the order of the CIT(A) and dismiss the relevant grounds of appeal of the Revenue.

In the result, the appeal filed by the revenue is dismissed and the appeal filed by the assessee is partly allowed.