Commissioner of Income Tax vs Kaveri Thimmaiah

N. Kumar, J.—These three appeals are preferred by the Revenue is against the common order passed by the Tribunal in respect of the three assessees setting aside the order passed by the Commissioner of Income-tax under section 263 of the Income-tax Act, 1961 (for short hereinafter referred to as "the Act") and grant relief to the assessees. The assessees in these three appeals are individuals. They are the legal heirs of one Mr. C.B. Devaiah. Mr. C.B. Devaiah owned the property which had been acquired by him prior to April 1, 1981. Mr. C.B. Devaiah died on April 23, 2000. His legal heirs sold the property owned by him during the previous year relevant to 2005-06, i.e., on October 18, 2004. The three assessees as legal heirs were entitled to one-fifth share each over the property owned by Mr. C.B. Devaiah. They declared capital gains on sale of the property in their returns of income filed for the assessment year 2005-06. In the computation of capital gains, they adopted the fair market value (FMV) of the property as on April 1, 1981, as the cost of acquisition of the property. The Revenue did not dispute this valuation. The assessees while computing their cost of acquisition also claimed indexation on fair market value as on April 1, 1981. The assessing authority while completing the assessment of the assessees, accepted the claim of the assessees in the order of assessment dated December 24, 2010, passed under section 143(3) of the Act allowing the benefit of indexation from April 1, 1981. The Commissioner of Income-tax exercising his power under section 263 of the Act was of the view that the Assessing Officer''s order in the case of the assessees allowing the benefit of indexation from April 1, 1981, was erroneous and prejudicial to the interests of the Revenue because as per the Explanation (iii) to section 48 of the Act, "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 assessees or for the year beginning on the 1st day of April, 1981, whichever is later. According to the appellate authority, the assets was held by the assessees only from April 23, 2000, when Mr. C.B. Devaiah died. Therefore, the benefit of indexation has to be allowed only from April 23, 2000, and not from April 1, 1981, as claimed by the assessees. Accordingly, the order passed by the assessing authority was revised and the assessing authority was directed to allow the indexation benefit from the financial year 2000-01 only.

Aggrieved by the said order, the assessees preferred appeals to the Tribunal. The Tribunal, after hearing both the parties and relying on a judgment of the Bombay High Court in the case of The Commissioner of Income Tax-12, Aayakar Bhavan, M.K. Road, Mumbai Vs. Manjula J. Shah 309, Marine Chambers, 11 New Marine Lines, Mumbai-400 020, , held that the Commissioner was not justified in not following the decision of the hon''ble Bombay High Court, the ratio of the decision of the Bombay High Court rendered in the context of acquisition of property by way of gift will apply with greater force when property devolves by succession. The view taken by the assessing authority was correct and, therefore, the Commissioner of Income-tax was not justified in exercising his jurisdiction under section 263 of the Act and in interfering with the order passed by the assessing authority. Therefore, the appeal was allowed. The order of the appellate authority was set aside. The order of assessment was restored.

Aggrieved by the said order, the Revenue is in appeal.

Learned counsel for the Revenue assailing the impugned order contends as is clear from Explanation (iii) to section 48, the indexed cost of acquisition is to be allowed for the first year in which the asset was held by the assessees or in the year beginning on the first day of April, 1981, whichever is later. Therefore, the Tribunal was not justified in interfering with the order passed by the Commissioner of Income-tax. In fact, the Revenue has preferred a special leave petition against the judgment of the Bombay High Court and it is pending consideration before the apex court and, therefore, he submits the order requires to be interfered with.

Per contra, learned counsel for the assessees submitted if the cost of acquisition of the property as on April 1, 1981, is taken into consideration, then the indexed cost of acquisition has to be calculated from that date, not from the day the assessees held the property by way of succession. He submits in view of section 49, 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 assets incurred or borne by the previous owner or the assessees, as the case may be, if the acquisition is by way of succession, inheritance or devolution. If, cost of acquisition is to be computed as on the day the previous owner held the property on April 1, 1981, though the assessees acquired the said property by way of succession, indexed cost of acquisition is to be allowed from the day the property was owned by the previous owner and not when the assessees held the property after his death and that is the ratio decided by the Bombay High Court in the aforesaid judgment and, therefore, he submits no case for interference is made out.

The appeals are admitted to consider the following substantial question of law:

"Whether, on the facts and in the circumstances of the case, the Tribunal is right in law in concluding that while computing the capital gains arising on transfer of a capital asset acquired by the assessee through succession, 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 actually became the owner of the asset through succession?"

Section 45 of the Act provides that any profits or gains arising from the transfer of a capital asset effected in the previous year shall be chargeable to income-tax under the head "Capital gains". Capital gains is of two types. Short-term capital gains and long-term capital gains. Depending upon the nature of capital gains the liability of the tax is determined. The mode and manner of computing the capital gains is provided under section 48 of the Act. 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 transfer of the capital asset, the expenditure incurred wholly and exclusively in connection with such transfer and the cost of acquisition of the asset and the cost of any improvement thereon. The second proviso to section 48 provides where long-term capital gains arises from the transfer of a long-term capital asset, the cost of acquisition of the asset has to be read as "indexed cost of acquisition". Indexed cost of acquisition has been defined in the Explanation to the said section, it 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 assessees or for the year beginning on the 1st day of April, 1981, whichever is later.

Section 49 deals with the cost with reference to certain modes of acquisition. One such mode is if the assessees acquires a capital asset by way of succession, inheritance or devolution, then 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 assets incurred or borne by the previous owner or the assessee, as the case may be. Therefore, when an asset is acquired by way of inheritance, the cost of acquisition of the asset should be calculated on the basis of the cost of acquisition by the previous owner and the said cost of acquisition of the previous owner has to be calculated on the basis of the indexed cost of acquisition as provided in Explanation (iii) to section 48.

Though in the definition of "indexed cost of acquisition", the words used are, "in which the asset was held by the assessee", a harmonious reading of sections 48 and 49 makes it clear for the purpose of "indexed cost of acquisition", it has to be understood as the first year in which the previous owner held the said property. Otherwise, if the date of inheritance is taken into consideration, then the cost of acquisition of the asset on that date corresponding to the market value is to be taken into consideration. Otherwise, take the cost of acquisition on the day the previous owner acquired it and apply the "indexed cost of acquisition" and then calculate the capital gains and the tax payable. That is precisely what has been held by the Bombay High Court in the aforesaid judgment which, in our view, is the correct legal decision. In that view of the matter, the Tribunal was justified in following the judgment of the Bombay High Court and in setting aside the order passed by the Commissioner of Income-tax. Therefore, the substantial question of law framed is answered in favour of the assessees and against the Revenue. The appeals are dismissed. No costs.