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Income Tax Appellate Tribunal, “G” BENCH, MUMBAI
Before: SHRI JOGINDER SINGH, JM & SHRI MANOJ KUMAR AGGARWAL, AM
Per Manoj Kumar Aggarwal (Accountant Member)
The captioned appeal by assessee for Assessment Year 2011-12 is directed against the order of Ld. Commissioner of Income Tax (Appeals)-44 [CIT(A)], Mumbai dated 05/07/2016 qua computation of certain capital gains earned by the assessee. The assessee has raised five grounds of appeal
out of which Ground No. 5 is general in nature. Further, the assessee has filed an additional grounds of appeal vide its letter dated 14/01/2017. Since, all the grounds are inter-related and spring out of one common transaction of sale of property situated at Kastubh, Plot No.6, CTS No.239/6, Seven Bungalows, Gorai Road, Borivali, Mumbai [Property], we proceed to decided the same in the succeeding paragraphs.
2. Briefly stated, the assessee was resident salaried individual and co-owner of the property to the extent of 1/3rd share and earned certain capital gains upon its sale on 16/05/2010. The said property was originally acquired by the assessee’s father on 04/11/1970 and subsequently, upon his death on 06/06/2001 the same got inherited by way of succession by the assessee, his mother and his sister in three equal shares. As the stamp duty value [SDV] of the property being Rs.1,47,34,500/- was higher than the declared sale value of Rs.1,15,00,000/-, the assessee adopted the SDV as the sale consideration for the purpose of computation of capital gains and after indexing the fair market value [FMV] of the property as on 01/04/1981 with cost inflation index [CII] of Financial Year 1981-82 and improvement on property done in the year 1986-87 with CII of Financial Year 1986-87, computed the capital gains which came to Rs.‘Nil’ after claiming exemption u/s 54. The Ld. Assessing Officer [AO] noted that sale consideration as per deed of conveyance dated 16/05/2010 was fixed as Rs.115.00 Lacs including the value of three flats to be acquired by the assessee in the new proposed building to be constructed by the said purchaser on the said Shri Mandar S.Phadke Assessment Year 2011-2012 property. Hence, the sale consideration was comprised of consideration in cash of Rs.47,12,500/- as well as in kind by way of three flats, the cost of which as per government ready reckoner came to Rs.67,87,500/-. But after considering the cost of three flats as per respective agreements of the three flats, AO arrived at sale consideration of Rs.165.91 Lacs in the following manner:-
No. Particulars Amount (in Rs.) 1. Consideration in cash 47,12,500/- 2. Cost of three flats as per respective agreements of three flats 1,18,78,500/- Total 1,65,91,000/- AO also noted that the fair market value of the property as on 01/04/1981 was Rs.4,26,000/- as per the government approve valuer’s valuation report dated 06/12/2010 and the assessee acquired the property by way of inheritance covered by the provisions of Section 49(1) and hence capital gain on the same was to be worked out in accordance with Section 48. Thereafter, applying the provisions of explanation (iii) to Section 48, AO concluded that the indexation was to be applied from the year in which the asset was ‘first held by the assessee’ and accordingly, the assessee was entitled for indexation only from the financial year 2001- 2002, being the year in which he first acquired the property by way of inheritance and not from earlier years as claimed by the assessee. Thereafter, adopting the sale value as Rs.165.91 Lacs and cost of acquisition of Rs.4.26 lacs, AO indexed the same by adopting CII of financial year 2001-2002 and denied the benefit of improvement altogether and arrived at assessee’s share in Long Term Capital Gain at Rs.13,33,833/- vide order dated 22/01/2014. Aggrieved, the assessee assailed the same before First Appellate authority but remained unsuccessful vide order dated 23/06/2016. CIT(A), similarly, after analyzing explanation (iii) to Section 48 concluded that the benefit of indexation could be given only from the year in which the asset was ‘first held by the assessee’ and not from earlier years and affirmed the stand of the AO. The decision of CIT(A) has been assailed before us.
Shri Mandar S.Phadke Assessment Year 2011-2012 3. The Ld. Counsel for Assessee [AR] by drawing our attention to various papers placed in the paper-book, contended that the SDV of the property was Rs. 1,47,34,500/- as against declared sale value of Rs.1,15,00,000/- and hence, SDV was correctly adopted by the assessee as per Section 50C to compute capital gains. Further, the assessee was entitled for the benefit of indexation as available to the previous owner as per the various provisions of Section 2(42A), 49(1) & Section 48 explanation (iii). As per the Ld. AR, the assessee was entitled for all such benefits which were available to the previous owner and the assessee steps into the shoes of previous owner for all purposes for the purpose of computation of capital gains. Reliance was placed on the judgment of Hon’ble Bombay High Court in the case of CIT Vs. Manjula J.Shah 355 ITR 474. The Ld. AR further brought to our notice the error committed by AO in picking correct FMV of the property as per the valuation report dated 06/12/2010. Per contra, Ld. DR supported the stand of lower authorities and contended that capital gains have rightly been computed as per the express provisions of the act. The explanation (iii) to Section 48 uses the expression ‘Cost inflation index for the first year in which the asset was held by the assessee’ and hence the same leaves no scope for ambiguity in any manner. Moreover, reliance placed by Ld. AR on the above cited decision of Bombay High Court has been contested by the revenue before apex court and the same has been admitted and pending for decision and hence, the same is not yet conclusive. Moreover, the assessee never disputed the FMV of the property as on 01/04/1981 and Sale Value as adopted by the AO before lower authority.
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 Shri Mandar S.Phadke Assessment Year 2011-2012 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 the 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 (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. 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 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 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. 18) 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 Shri Mandar S.Phadke Assessment Year 2011-2012 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. 19) 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 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. 21) 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