BHARATHAN ANAND,CHENNAI vs. ITO, CHENNAI

आदेश / O R D E R PER D.S.SUNDER SINGH, ACCOUNTANT MEMBER

This is an appeal filed by the assessee against an Order dated

21.06.2016 of Commissioner of Income Tax (Appeals)-16, Chennai, in ITA

No.97/CIT(A)-16/2013-14 for AY 2013-14 on the following grounds of

appeal:

Grounds: 1. On the facts and in the circumstances of the case and, in law, the Learned Commissioner of Income - tax (Appeals) erred in confirming the order dated 7th March, 2016 passed by the Learned Income - tax Officer International Taxation I(1) Chennai, without appreciating the law that as per provisions of section 49 read with Explanation (iii) of section 48 of the Income-tax Act the index point of 100 pertaining to 01.04.1981

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adopted by the appellant was correct as the property was acquired by the appellant's father prior to 01.04.1981 as against the index point of 519 pertaining to the year 2006-07, year of settlement by the appellant's father on the appellant adopted by the Learned Income-tax Officer thus resulting in excess capital gain of RS.10,96,970/-.

assessing officer on account of Long term capital gains(LTCG) adopting

the date of acquisition of the property as 28/06/2016 instead of adopting

the date of acquisition of the previous owner.The assessee filed return of

income declaring total income of Rs.710/-. In the return of income, the

assessee claimed deduction u/s.54 to the tune of Rs.56,16,130/-. During

the AY 2013-14, the assessee sold house property measuring 3988 sq.ft.

at Door No.9, Plot No.52, Senthil Andavar Street, Dhanalakshmi Colony,

Vadapalani, Chennai-26, along with his brother Shri B.Kandaswamy and

his sister Smt.Veena Ramakrishnan to M/s.Sri Priya Constructions,

Chennai-93, for a consideration of Rs.2,39,28,000/- on 24.10.2012. In

this transaction, the assessee received a sum of Rs.74,76,000/- towards

his share.

father Shri K.Bharathan from one Shri C.Tharansingh Gramani through a

Sale Deed executed on 20.06.1966 for an amount of Rs.4,900/- and

constructed a residential building with his own funds - Ground Floor in

1970-71, First Floor in 1982-83 and Second Floor during the FY 1996-98.

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On 28.06.2006, Shri K. Bharathan (assessee’s father) executed a

Settlement Deed in favour of the assessee/Shri Bharathan Anand

transferring the 1/3rd of the above mentioned property.

under:

Sale consideration (1/3rd share) Rs.74,76,000-00 Less: Expenses on Transfer Rs.3,00,000-00 Net Sale consideration Rs.71,76,000-00 Cost of acquisition: Rs.7,07,870-00 - Land Cost (estimated at 62.5 per sq.ft. as on 01.04.1981): 3988 x 62.5 = 2,49,250/- Indexed cost of acquisition: 2,49,250 x 852/100 = 21,23,610/3 Cost of acquisition: Rs.8,52,000-00 Rs.15,59,870-00 Building (estimated cost of building) (Rs.1,00,000/-): 1,00,000 x 852/100 LONG TERM CAPITAL GAIN A/c - Rs.56,16,130-00 Deposited in Capital Gain A/c Rs.57,00,000-00 - Investment in New Property (Advance) Rs.3,00,000-00 Rs.60,00,000-00 Balance Taxable LTCG NIL NIL

of acquisition of property as 28.06.2006 i.e. the date on which his father

executed the settlement deed and re-computed the capital gains and

worked out the cost of acquisition at Rs.1,79,110/- against claim made by

the assessee Rs.15,59,870/- towards his share and brought to tax

resultant amount of Rs.1096970/-.

before the Ld.CIT(A) and the Ld.CIT(A) confirmed the Order of the AO and

dismissed the appeal of the assessee. Aggrieved by the Order of the

Ld.CIT(A), the assessee is in appeal before this Tribunal.

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acquired the property by way of Settlement Deed on 28.06.2006 from his

father. His father, Shri Bharathan is acquired the property by purchase on

20.06.1996 and constructed residential building from 1970-71 to 1996-98.

Therefore, the assessee argued that the date of acquisition should be

reckoned from the date of acquiring the property by his father Shri

Bharathan instead of the date of Settlement Deed. He invited our

attention to Sec.2(42A) for the purpose of date of acquiring the property

and Sec.49 for the purpose of computation of capital gains and also relied

on hon’ble Bombay High Court Judgment in the case of Manula J. Shah

reported in 355 ITR 474 and the decision of this Tribunal ITAT ‘A’ Bench in

the case of Mustaf Yacob and Panaban Venkataraman. On the other

hand, the Ld.DR relied on the lower authority’s Orders.

record. The assessee has acquired the property from his father by

settlement deed and the property was acquired in 1966 and the

construction was completed in phased manner from 1970-71 to 1996-98.

This facts are not in dispute. The only dispute is to reckon the dated of

acquisition for the purpose of cost inflation index. On identical issue

Hon’ble Bombay High Court in the case of Manula J. Shah (cited supra)

held as under:

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Section 45 provides that any profits or gains arising from the transfer of a capital asset 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), 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), the said gains are taxed as long term capital gains. Section 47(iii) 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 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. [Para 10] The mode and the manner of computing the capital gains is provided under section 48. 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) 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 ), 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 would have to be determined by deducting from the total consideration received by the assessee, inter alia the deemed cost of acquisition. [Para 11] Where the gains are long term capital gains (other than long term capital gains arising to a non- resident from the transfer of shares or 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'. [Para 12] In the instant case, the capital asset in question 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. 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), 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) 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. [Para 13] 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) 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. [Para 14] It is the contention of the revenue that since the indexed cost of acquisition as per clause (iii) of the Explanation to section 48 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 financial year 2002-03 and, accordingly, the cost inflation index for 2002-03 would be applicable in determining the indexed cost of acquisition. [Para 16]

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There is no merit in the above contention. As rightly contended by 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, that expression has to be understood as defined under section 2. Explanation 1(i)(b ) to section 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 29-1-1993, as per Explanation 1(i)(b ) to section 2(42A), 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 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, 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. [Para 17] If the argument of the revenue that the deeming fiction contained in Explanation 1(i)(b ) to section 2(42A) cannot be applied in computing the capital gains under section 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 Explanation 1(i)(b ) to section 2(42A) and section 49(1)(ii) 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 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) cannot be applied in determining the indexed cost of acquisition under section 48. [Para 18] 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, 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 sections 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 section 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 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 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). [Para 19] To accept the contention of the revenue that the words used in clause (iii) of the Explanation to section 48 has to be read by ignoring the provisions contained in section 2 runs counter to the entire scheme of the Act. Section 2 expressly provides that unless the context otherwise requires, the provisions of the Act have to be construed as provided under section 2. In section 48, 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 has to be construed in consonance with the meaning given in section 2(42A). If the meaning given in section 2(42A) is not adopted in construing the words used in section 48, 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. [Para 20]

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Apart from the above, section 55(1)(b )(2)(ii) provides that where the capital asset became the property of the assessee by any of the modes specified under section 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 section 48. The question of deducting the cost of improvement incurred by the previous owner in the case of an assessee covered under section 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-section 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. [Para 21] 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 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), 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. [Para 22] 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. [Para 23] In the result, that the Tribunal 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. [Para 24]

This tribunal consistently taken view that the date of acquisition

of the previous owner to be adopted for the purpose of cost inflation index

to compute the capital gains in case of devolving the property by way of

will,gift,or inheritance placing reliance on the decision of Hon’ble Bombay

High court cited (supra). Similar views are taken by this Tribunal in the

case of Mustafa Yakub in ITA No.1872/mds/2012 and Panaban

Venkataraman in ITA No.712/mds/2016.

relied upon by the Ld.AR of the assessee. Therefore, we direct the AO to

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take the date of acquisition of his father/Shri Bharathan as the date of acquisition for the purpose of computing the capital gains and re- computing the capital gains accordingly. 11. In the result, the appeal of the assessee is allowed.

Order pronounced in the open court on 23rd December, 2016, at Chennai. Sd/- Sd/- (एन.आर.एस. गणेशन) (�ड.एस. सु�दर �संह) (N.R.S. GANESAN) (D.S.SUNDER SINGH) �या�यक सद�य/JUDICIAL MEMBER लेखा सद�य/ACCOUNTANT MEMBER

चे�नई/Chennai �दनांक/Dated: 23rd December, 2016. tln

आदेश क� ��त�ल�प अ�े�षत/Copy to: 1. अपीलाथ�/Appellant 4. आयकर आयु�त/CIT 2. ��यथ�/Respondent 5. �वभागीय ��त�न�ध/DR 6. गाड� फाईल/GF 3. आयकर आयु�त (अपील)/CIT(A)