INCOME TAX OFFICER-WARD-23(3), KOLKATA, KOLKATA vs. SUDIP ROY, KOLKATA

आदेश /O R D E R

PER Waseem Ahmed, Accountant Member:-

This appeal by the Revenue is against the order of Commissioner of Income Tax (Appeals)-XIV, Kolkata dated 10.09.2013. Assessment was framed by ITO Ward-23(3), Kolkata u/s 143(3)/263 of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) vide his order dated 14.12.2012 for assessment year 2007-08. The grounds raised by the Revenue per its appeal are as under:- “The Ld. CIT(Appeals) had erred in law as well as in facts by giving relief to the assessee on the ground of Cos Inflation Index factor, that in the event of adoption of Fair Market Value of 1981, the Cost Inflation Index factor of 1981 (i.e. 100) could only be taken, ignoring the Cost Inflation Index factor of FYr. 2002-03 (447) prevailing on the subsequent inheritance of the ownership of the property.

ITA No.2864/Kol/2013 A.Y.2007-08 ITO Ward-23(3), Kol. vs. Sudip Roy Page 2 Furthermore, the Ld. CIT(Appeals) had also erred in law as well as in facts by giving relief to the assessee on the ground that the reference to the Department Valuation Officer u/s. 55A had been contrary to law and as such the said valuation does not warrant acceptance and effect in the assessment, solely relying on the assessee’s submission without considering the facts observation in totality.”

Md. Ghayas Uddin, Ld. Senior Departmental Representative represented on behalf of Revenue and Shri I Banerjee, Ld. advocate appeared on behalf of assessee.

Appellant’s 1/8th undivided Particulars AO’ observation share (Rs) Sale price (gross consideration) 8137500.00 8137500.00 Brokerage and commission 182,671.00 182,671.00 Net sale price (net consideration) 7,954,829.00 7,954,829.00 FMV as on 01/04/1981 486,500.00 1083375.00 (vide DVO’s report) (vide valuation report) FMV as on 01/04/1981 indexed * 564,862.42 5622710.000* by the following Indexed factor: *486500 x 519 * 1083375 x 519 447 (FY 2002-03) 100 (FY 1981) Resultant LT capital gain 7146655.00 2491952/-

ITA No.2864/Kol/2013 A.Y.2007-08 ITO Ward-23(3), Kol. vs. Sudip Roy Page 3 Section 54EC deduction availed 2491952/- 2491952/- of by the appellant-investment in …. .. bond for Rs.2500000/- Taxable L.T capital gain 4,646,655.21 NIL

From the above, it is clear that AO has disregarded the valuation report of the assessee for valuing the property as stood on 01.04.1981 and also disregarded the cost inflation index factor taken by assessee for the year 1981. The AO has taken the DVO’s Valuation Report as on 1.4.1981 and cost inflation index of the year when the property was first held by the assessee i.e. 447 for the financial year 2002-03. In that view of the matter, AO worked out the LTCG taxable in the hands of assessee for ₹46,46,655/-.

With regard to action of the AO for adopting the index factor for the FY 2002-03, assessee submitted that the ownership of the property was inherited in the year 2002- 03 but as per law the value of the property will be taken as on 01.04.1981 and accordingly cost inflation index for that year i.e. 100 should be adopted. Accordingly,

ITA No.2864/Kol/2013 A.Y.2007-08 ITO Ward-23(3), Kol. vs. Sudip Roy Page 4 Ld. CIT(A) deleted the addition made by AO after having reliance in the case of Umedbhai International Ltd 330 ITR 506 and 134 TTJ 23 by observing as under:- “3.1.1 In the above judgment the Hon'ble Kolkata Tribunal, has pointed out the unintended absurdity and inconsistency in situation of adoption of some remote index factor to some distant and discrete FMV, prevailing in two different years, in the light of the clarificatory CBDT Circulars and concluded that in the event of adoption of FMV of 1981, the indexed factor of 1981 only could be taken, ignoring the indexed factor prevailing around or on the subsequent inheritance of acquisition of ownership vide section 49. This judgment from the jurisdictional Tribunal being applicable to the facts of the present appeal. I feel it incumbent to follow the above verdict and principle. This ground is allowed. The AO is directed to adopt the index factor of 519/100 in place of 519/447 and apply the former to the FMV of Rs.1083375/- (submitted by the Appellant by means of Valuation Report and recomputed the Capital Gain accordingly.”

Being aggrieved by this order of Ld. CIT(A) Revenue is in appeal before us.

ITA No.2864/Kol/2013 A.Y.2007-08 ITO Ward-23(3), Kol. vs. Sudip Roy Page 5 making reference to DVO while not accepting valuation shown by assessee on basis of registered valuer’s report was well permissible under law – Held, yes [In favour of revenue]

Finally, Ld. DR vehemently relied on the order of AO.

On the other hand, Ld. AR submitted that the provision of Sec.55A of the Act was amended with effect from 01.07.2012 and therefore, the amended provision cannot be applied. He further submitted that the case law cited by Ld.DR is different from the instant case, in that case the question before the Hon'ble jurisdictional High Court whether there was a motive to avoid tax or not but in the instant case, assessee has no such ill-motive to avoid his tax liability. He further submitted that on similar facts, the Hon'ble High Court of Calcutta has decided the issue in favour of assessee in the case of CIT Vs. Smt. Mina Deogun in 375 ITR 0586. The relevant extract of the order is reproduced below: “Mr. Agarwal, learned advocate appearing for the revenue/appellant has not disputed the fact that under Clause (a) of section 55A as it stood at the relevant point of time, the assessing officer could have made a reference provided he was of the opinion that the valuation made by the registered valuer was less than the fair market value of the property. When the valuation made by the registered valuer was on the higher side, there was no occasion for the assessing officer to refer the matter to the valuation officer under section 55A. therefore, the valuation at a sum of Rs.18,40,244/- as at 1st April, 1981 was correctly accepted by the learned Tribunal. The first question is answered in the positive and against the revenue. Mr. Agarwal, learned advocate appearing for the revenue submitted that the computation of capital gains has to be made in accordance with section 48 and in particular explanation (iii), which provides as follows:- “(iii) “indexed cost of acquisition” means an amount which bears to the cost of acquisition the same proportion as the 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” Mr. Agarwal is correct when he submitted that the benefit of cost inflation index going by clause (iii) of the Explanation quoted above should be available to the assessee from the year 1999 when she inherited the property which was in fact the first year of her inheritance. That can certainly be one way of looking at it. But if a harmonious construction is to be given then reference has to be made to the other provisions contained in the Act. Section 2(42A) defines short term capital asset. Clause (b) of Explanation (1) to Section 2(42A) provides as follows:-

ITA No.2864/Kol/2013 A.Y.2007-08 ITO Ward-23(3), Kol. vs. Sudip Roy Page 6 “(b) in the case of a capital asset which becomes the property of the assessee in the circumstances mentioned in [sub- section (1)] of section 49, there shall be included the period for which the asset was held by the previous owner referred to in the said section. ” Section 49 referred to in the aforesaid clause (b) of Explanation (1) provides for various circumstances including acquisition by succession, inheritance or devolution. Therefore, the period for which the asset was held by the previous owner, namely, the mother of the assessee can also be included to the period of holding of the property by the assessee. The mother held the property since 1968 as indicated above. Here is, as such, the reason why the assessee in the case before us can be said to have held the property since 1968. In order to ascertain the cost of acquisition to the assessee reference can also be made to Section 55(2)(b)(ii) which reads as follows:-

“(ii) where the capital asset became the property of the assessee by any of the modes specified in [sub-section(1) of section 49], and the capital asset became the property of the previous owner before the [1st day of April, [1981]], means the cost of the capital asset to the previous owner or the fair market value of the asset on the [1st day of April, [1981]], at the option of the assesse.”

Based on the aforesaid provision the cost of acquisition of capital asset at the option of the assessee is the fair market value of the asset on 1st April, 1981. When that is permissible in law, indexation on the fair market value as on 1st April, 1981 until the date of transfer has to be allowed. Any other interpretation will not only lead to absurd result but shall also cause immense prejudice to the assessee. If the previous owner that is to say the mother had not died and if she herself had sold the property in the year 2003, she would have got the benefit of indexation on the fair market value as at 1st April, 1981.

We are supported in our view by a judgment of the Gujarat High Court in the case of C.I.T- I Vs. Rajesh Vitthalbhai Patel reported in (2013) 37 Taxmann. Com 439 wherein the following views were expressed:-

“7. Under section 48 of the Act, thus capital gain is computed by deducting from the full value of the consideration received or accruing as a result of the transfer, the amounts of expenditure incurred wholly and exclusively in connection with such transfer, the cost of acquisition of the asset and the cost of any improvement thereto. Term ‘cost of acquisition of the asset’ is explained in Explanation (iii) to section 48. In terms of such explanation, indexed cost of acquisition would be an amount which bears to the cost of acquisition the same proportion as the 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. In simple words therefore for an asset acquired prior to 1.4.1981 the indexed cost of acquisition would be the cost of acquisition multiplied by the ratio of the Cost Inflation Index in the year in which assessee’s asset is transferred to the Cost of Inflation Index for the year beginning on 1.4.1981. It was therefore, that the Tribunal in our opinion correctly held that the indexed cost of acquisition shall have to be worked out with reference to 1.4.1981, since in the present case the

ITA No.2864/Kol/2013 A.Y.2007-08 ITO Ward-23(3), Kol. vs. Sudip Roy Page 7 asset was acquired by the previous owner of the property. Learned counsel for the Revenue however, submitted that such interpretation would fail to take into account the expression “Cost Inflation Index for the first year in which the asset was held by the assessee”. In his opinion the “assessee” referred to under such expression would be the present assessee and not the previous owner. In our opinion, such interpretation cannot be accepted. We say so for the following reasons. Firstly, by virtue of a deeming fiction provided in sub- section (1) of section 49, cost of acquisition in hands of the assessee would be the cost for which the previous owner of the property acquired it. It is for this purpose that we need to fall back on computation provision of section 48. When we do so, we work out the cost of acquisition of the asset in the hands of previous owner. While doing so, we cannot transpose the assessee in Explanation (iii) of section 48. Doing so, would amount to falling short of giving full effect to the deeming fiction contained in sub-section (1) of section 49. To our opinion such deeming fiction must be allowed to have its full play. As is often stated, a deeming fiction must be allowed its full application and should not be allowed to boggle. 8. Additionally we notice that in Sub-section (1) of section 49, the legislature has provided that 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 any cost of improvement of the assets incurred or borne by the previous owner or the assessee as the case may be. If the interpretation of the counsel for the Revenue was correct, this later reference to the cost of improvement borne by the assessee would not have been necessary since section 48 itself would take care of any improvement on the capital asset to be included for the cost of acquisition. It is precisely because such improvement referred to in section 48 would have reference only to that made by the previous owner that the additional provision had to be made in the deeming fiction provided in sub-section (1) of section 49. Further the interpretation sought to be given by the Revenue would be unacceptable because there is no provision under which the cost of acquisition in the hands of the assessee in cases such as gift on the date of acquisition of the property can be made and found in the Act. A Serious road-block would be created if such property is acquired through Will and would, therefore, have no reference to its actual cost on the date of operation of the Will”.

Mr. Murarka has also relied upon a judgment of C.I.T Vs. Manjula J. Shah reported in (2013) 355 ITR 474 (Bom) and referred to paragraphs 21 to 24 of the judgement which are as under:-

“21) 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

ITA No.2864/Kol/2013 A.Y.2007-08 ITO Ward-23(3), Kol. vs. Sudip Roy Page 8 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.”

The ld. AR further submitted that the case law cited by Ld DR has not been considered in the earlier decision of this jurisdictional High Court. In this regard, Ld. AR cited the case law of Hon'ble jurisdictional High Court in the case of CIT vs. Smt. Mina Deogun 375 ITR (2015)586 (Cal).

In rejoinder, Ld. DR submitted that the jurisdictional High Court has decided the issue on 09.06.2016 which is the latest decision. Therefore this case should have bearing on the issue of the instant case.

ITA No.2864/Kol/2013 A.Y.2007-08 ITO Ward-23(3), Kol. vs. Sudip Roy Page 9 asset" is considered to take place on inheritance and succession. The liability for capital gain arises only when the capital asset is actually transferred by the successor. It is only when the ultimate successor transfers the capital asset for a consideration the capital gains are assessed to tax. In assessing capital gain in the hands of successor, date of acquisition and period of holding, is determined taking into consideration the date on which and the cost of which the first owner acquires the capital asset. It is for this reason section 2(42A) uses the expression "in determining the period for which capital asset is held by the assessee". Sec. 48 of the IT Act incorporates computation mechanism for qualifying the ‘capital gain’ and therefore the expressions used in the computation formula should be given schematic interpretation. The scheme of taxation of "capital gain" can however, be understood by applying provisions of ss. 2(42A), 2(47), 47(ii), 48, 49(i)(ii) and 55(2)(b)(ii) of the Act. As per the provisions of these sections, where an assessee sells an inherited capital asset, the capital gain is computed with reference to the period of holding and cost of acquisition incurred by the previous owner. It is, so because in fact the successor assessee does not actually incur any cost. If for applying other provisions relating to computation of capital gains, period of holding and cost incurred by the previous owner is considered, then it will be improper to apply only the cost inflation index, applicable to the year of inheritance. The provisions of section 48 prescribing indexed cost of acquisition were enacted by the Finance Act, 1992. Memorandum explaining the Provisions of Finance Bill, 1992 explained that old provisions relating to taxation of capital gain were unfair because the deduction u/s 48 was being allowed in respect of cost of acquisition which did not relate to the period of time for which the asset was held. The old system of computation of capital gain did not take into account the inflation which occurred over a period of time. The new system was therefore, enacted for computing capital gain which allowed the cost of asset to be adjusted for general inflation before deducting it from the sale proceeds. The statutory objective of the new system was to favour those assessee’s where capital gains accrued over a long period. The CBDT, in Circular No. 636, dt. 31st Aug., 1992, explained provisions of Finance Act, 1992 relating to amended scheme of capital gains. In this circular the Board explained that in the scheme prior to 1992 a specified percentage was allowed as deduction under s. 48(2)

ITA No.2864/Kol/2013 A.Y.2007-08 ITO Ward-23(3), Kol. vs. Sudip Roy Page 10 which was unrelated to the length of the period of holding of the capital asset. Under the new system a fair method of allowing relief was enacted to link the cost of acquisition to the period of holding. For this purpose, the cost of acquisition and the cost of improvement of the asset were to be inflated to arrive at indexed cost of acquisition. The circular further clarified that if an asset was acquired before 1st April, 1981, the market value of the capital asset as on 1st April, 1981 would be taken for the purpose of indexation. A co-joint reading of the Memorandum explaining the Finance Bill, 1992 and CBDT Circular No. 636 shows that the indexation is to be allowed in respect of period of holding of the asset and not in relation to the individuality of the assessee. For the purpose of determining the period of holding intermediate transfers on account of succession are to be ignored. In the present case, the AO himself allowed the benefit of "FMV" of the property as on 1st April, 1981 to be cost under s. 55(2)(b)(ii) of the Act. Under s. 2(42A) the period of holding of the capital asset in the hands of the assessee was the period commencing from 1st April, 1981 till the date of transfer. It is, therefore, quite clear that as on 1st April, 1981 the asset was statutorily considered to be held, by the assessee under s. 55(2)(b)(ii) r/w s. 2(42A) of the Act. In our considered opinion therefore, the cost inflation index applicable for financial year 1981-82 and not to financial year 2002-03 should have been applied by the AO. A similar view was taken by Chandigarh Bench of the Tribunal in the case of Smt. Pushpa Sofat Vs. ITO (2004) 89 TTJ (Chd) 499. In that case house property was inherited by the assessee from her father was sold in asst. yr. 1993-94. The father of the assessee acquired the property in 1972 and therefore, the assessee opted for FMV of 1st April, 1981 to be the cost of acquisition. The assessee computed the indexed cost of acquisition with reference to the cost of inflation index of 1st April, 1981 being 100 per cent. Assessee’s father expired on 17th Feb., 1991 and the AO allowed the indexation of cost with reference to the cost inflation index of FY 1990-91 as against inflation index of 100 per cent. The Hon’ble Tribunal however held that the assessee was entitled to compute capital gain by applying cost inflation index of 1st April, 1981. Considering the totality of the facts and the scheme of the Act relating to taxation of capital gains, we are of the considered opinion that as per the schematic interpretation the cost of inflation index should be made applied with reference to the

ITA No.2864/Kol/2013 A.Y.2007-08 ITO Ward-23(3), Kol. vs. Sudip Roy Page 11 year in which the capital asset was first acquired by the previous owner. If only for the purpose of computing indexed cost of acquisition, the date of acquisition by the previous owner is excluded then it will lead to absurd result. Such interpretation of section 48 will be against the intent and object of the enactment and will be against the overall scheme of taxation of capital gains in case of inherited assets. The cardinal principles of interpretation of statutes is that if literal meaning of the statute leads to an absurdity then the statute should be interpreted in a manner which will result in harmonious interpretation which avoids absurdity and promote the objective of an enactment. We, therefore, direct the AO to re-compute the capital gains by applying cost inflation index of 100 per cent applicable for financial year 1981-82. Hence, we uphold the order of Ld. CIT(A) on this point and this ground of Revenue’s appeal is dismissed.

6.1 For the other issue of referring the matter to the DVO for the valuation of the property as on 1.4.1981, we find that the Hon’ble Jurisdictional High Court has decided the issue in favour of Revenue in the case of Nirmal Kumar Ravinder Kumar- HUF Vs. CIT in IT Appeal No. 293 of 2008 vide order dated June 9, 2016. The relevant extract of the order is reproduced below:- “Section 55A of the Income-tax Act, 1961 – capital gains – reference to Valuation Officer (General) – Assessment year 1996-97 – whether clause (b)(ii) to section 55A empowers Assessing Officer to make reference to DVO where in his opinion fair market value estimated by assessee is not proper – Held, yes – assessee had sold it property for Rs.97,50000 which was purchased by assessee on 31-7-1979 at a purchase price of Rs.2,80,882 – However, while calculating long-term capital gain, assessee adopted market value of property at Rs.34,55,000 as on 1-4-1981 – Assessing Officer considered such estimation of fair market value at a higher side and referred matter to DVO who computed fair market value of property at Rs.3,77,250 and completed assessment accordingly Whether since assessee inflated market value of property as on 1-4-1981 with motive of avoiding capital gain, action of Assessing Officer in making reference to DVO while not accepting valuation shown by assessee on basis of registered valuer’s report was well permissible under law – Held, yes [In favour of revenue]”

We find that the above said judgment has been passed by the Hon’ble Calcutta High Court very recently i.e. 9th June 2016. Therefore we are of the considered view this will prevail over the other decisions of this jurisdictional High Court. This decision is binding on the Hon’ble Tribunals. The facts of the instant case are identical to the

ITA No.2864/Kol/2013 A.Y.2007-08 ITO Ward-23(3), Kol. vs. Sudip Roy Page 12 facts of the case which was before the Hon’ble High Courts. In this view of the matter we set aside the order of the ld. CIT(A) and this point of Revenue’s ground is allowed. AO is directed accordingly.

In the result, Revenue’s appeal is allowed partly. 7. Order pronounced in open court on 19/10/2016

Sd/- Sd/- (S.S.Viswanethra Ravi) (Waseem Ahmed) Judicial Member Accountant Member *Dkp Sr.P.S �दनांकः- 19 /10/2016 कोलकाता / Kolkata आदेश क� ��त�ल�प अ�े�षत / Copy of Order Forwarded to:- 1. अपीलाथ�/Appellant-ITO Ward-23(3), 169, AJC Bose Road, Bamboo Villa 9th Floor, Kolakta-14 2. ��यथ�/Respondent-Sudip Roy, 47/1G, Badridas Temple Street, Kolkata-04 3. संबं�धत आयकर आयु�त / Concerned CIT 4. आयकर आयु�त- अपील / CIT (A) 5. �वभागीय ��त�न�ध, आयकर अपील�य अ�धकरण कोलकाता / DR, ITAT, Kolkata 6. गाड� फाइल / Guard file.

By order/आदेश से, /True Copy/ उप/सहायक पंजीकार आयकर अपील�य अ�धकरण, कोलकाता