In case of gifted assets index to be taken of the year in which acquired by previous owner

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 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 u/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.

INCOME TAX APPELLATE TRIBUNAL
MUMBAI BENCHES ‘F’ MUMBAI

BEFORE SHRI VIJAY PAL RAO, JUDICIAL MEMBER &
SHRI RAJENDRA, ACCOUNTANT MEMBER

  ITA No. 5616/Mum/2010 – Assessment Year 1995-96

A.C.I.T.  Vs. Shri Vijay Kamlakar Wagh

ITA No. 5782/Mum/2010 – Assessment Year 1995-96

Shri Vijay Kamlakar Wagh Vs.  A.C.I.T.

Date of Hearing  : 09-05-2013

Date of Pronouncement : 17-05-2013

OR D E R

PER RAJENDRA, A.M.

Cross appeals have been filed by the assessee and the Assessing Officer (AO) against the order dt. 23-04-20 10 passed by the CIT(A)-30, Mumbai raising the following Grounds of Appeal:

Grounds of Appeal – ITA No. 5616/M/2010

(1) On the fact and in the circumstances of the case and in law, whether the Ld. CIT(A) is right in holding that non-monetary consideration in terms of two flats received from M/s. Nirmit Developers are ‘adjustment of the sale consideration towards purchase price of flats’ ignoring the fact that

(a) the flats are received free of cost by the assessee and directing that the same are eligible for deduction u/s. 54(1) of the Act.

(b) it is clearly laid out in the Act that for the purpose of the claim of deduction u/s. 54, the assessee has to either purchase or construct a new residential property within the stipulated period.

(2) Without prejudice to the above ground and on the fact and in the circumstances of the case and in law, the Ld. CIT(A) erred in ignoring the fact that the two flats received by the assessee are two distinct and separate flats therefore the same cannot be considered as a single residential house envisaged u/s. 54(1) of the Act and hence are not eligible for deduction u/s. 54(1) of the Act.

(3) On the fact and in the circumstances of the case and in law the Ld. CIT(A) failed to appreciate the fact that clause (b) of Section 2(42A) is only for determining the period held by the assessee for the purpose of treating the asset as a long term capital asset and Explanation (iii) to Section 48 clearly states that the Cost Inflation Index shall be from the first year in which the asset was held by the assessee.

(4) The decision of the Special Bench of the ITAT in the case of Manjula J. Shah, ITA No. 7315/Mum/2007 dated 16-06-2009 has not been accepted by the Department.

(5) The appellant prays that the order of the CIT(A) on the above ground be set aside and that of the AO be restored.

(6) The appellant craves leave to amend or alter any ground or add a new ground which may be necessary.

Grounds of Appeal – ITA No. 5782/M/2010

(i) On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in holding that out of the six flats offered to the appellant, his three brother being co-owners and parents and the sister having life interest in the property which is given to the Developer for Development, is entitled to claim exemption for one flat i.e., 1/4^th of the total consideration received and not 1/6^th of the consideration received.

(ii) On the facts and in the circumstances of the case and in law, the Ld. CIT(A) after holding that as the development of property could not have been possible without the consent of the parents and sister, the developer had agreed to give six flats free of cost, one flat each to four brothers owners and one flat each to the parents and sister, erred in holding that the appellant is only entitled to 1/4^th of the total consideration as against 1/6^th of the total consideration as exempt u/s. 54 of the Income Tax Act, 1961.

(iii) On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in holding that the parent’s and sister’s right in the property only extended till the date they continue to live and, thereafter two flats enjoyed by them would revert back to the appellant and his three brothers, the appellant share in the property would be 1/4^th share and, therefore, out of 6 flats he would be entitled to claim exemption for one flat only.

(iv) On the facts and in the circumstances of the case and in law, the Ld. CIT(A) ought to have held that as the flats allotted to the parents and the sister were not received as consideration by the appellant and his three brothers who are co-owners of the property, the value of the flats allotted to the parents and the sister cannot be considered as consideration received by the appellant and his three brothers and, therefore, the extent of the value of the flats allotted to the parents and sister should have been excluded from the consideration received by the appellant and his three brothers.

(v) The appellant craves leave to add, alter, amend or delete any ground(s) of appeal either before or during the course of hearing of the appeal.

2. Assessee, an individual, filed his return of income and assessment u/s. 143(3) r.w.s. 147 of the Income Tax Act, 1961 (Act) was completed on 26-02-2001 determining the total income at Rs. 33,61,280/-. The assessee had referred an appeal before the CIT(A)-XIX, Mumbai. Vide his order dt. 16-10-2002 he had allowed the appeal. The Department had filed Second Appeal before the ITAT, Mumbai on 31- 12-2002. The ‘I’ Bench of ITAT, Mumbai vide its order in ITA No. 7478/M/2002 dt. 14-08-2007 has set aside the issue to the file of the AO. Consequent upon the order of the Tribunal, a notice u/s. 142(1) dt. 13-08-2008 has been issued and served on the assessee. Initially the return filed by the assessee was processed u/s. 143(1) of the Act. Later on proceedings u/s. 147 of the Act were initiated as the AO was of the opinion that there were reason to believe that taxable income has escaped assessment. Order u/s. 143(3) r.w.s. 254 of the Act was passed by the AO on 24-12-2008 determining the total income of the assessee at Rs. 63.18 Lakhs.

3. Brief Facts and Background of the case:Appellant and three other co-owners owned a building of his uncle ‘Wagh House’. This property was sold to Nirmit Developers for a monetary consideration of Rs. One Crore plus the builder was to provide to the owners free of cost 6 flats measuring 617 sq. ft., each and two garages in the building to be constructed by him. The appellant had claimed the flats and garages as exempt from capital gains u/s. 54 of the Act. The AO took the view that on flat for each co-owner could only be deductible u/s. 54 of the Act. The value of the remaining two flats and garages was considered by the AO to be includible in the sale consideration and not exempt u/s. 54. After including the value of sale consideration, capital gain corresponding to the share of the appellant was worked out to Rs. 33,39,895/-. First the AO initiated proceedings u/s. 154 to correct this mistake, but after receipt of the appellant’s reply dropped the rectification proceedings. Instead the assessment was reopened u/s. 147 of the Act.

4. Assessee preferred an appeal before the First Appellate Authority (FAA). After considering the submissions of the assessee and the Assessment Order, he held that the deduction as claimed by the appellant u/s. 54 was allowable in respect of all the six flats and the two garages. He directed the AO to re-compute the capital gains accordingly. Against the order of the FAA, the department filed an appeal before ITAT. During the course of hearing before the ITAT, the appellant filed the copy of Family Arrangement dt. 20-03-1994, claiming that the right in the property of the appellant, which was sold giving rights to capital gain was 1/6^th and not 1/4^th as claimed earlier in the return of income. Tribunal vide its order No. 7478//Mum/2002 dt. 14-08-2007, held that since the appellant had filed additional evidence in the form of Agreement of Arrangement between the family dt. 20-03-1994 for the first time, thereby claiming that, the value of his right in the property sold is 1/6^th and not 1/4^th, that said fact would materially affect the computation of capital gain. After admitting additional evidence, ITAT restored the issue of taxation of capital gains to the file of the AO. Following are the observations of the Tribunal:

On due consideration of facts and circumstances of the case, we find that the additional evidences in the form of agreement dated 20^th March, 1994 between various family members and the Will of Shri Dinkar Vishnu Wagh dated 9^th March, 1989 are relevant for deciding the issue and, therefore, we admit the same and restore this issue to the file of the AO to examine the claim of the assessee afresh as per law, and after taking into consideration the decision of the Special Bench of the Tribunal in the case of Sushila Jhaveri (supra).

As per the direction of the ITAT, a notice was served on the assessee and an order was passed by the AO u/s. 143(3) r.w.s. 254 on 24-12-2008. In the order passed, the AO determined the income of the appellant at Rs. 63,18,613/- which included Long Term Capital Gain (LTCG) of Rs. 62,97,244/-. In the said order, no benefit of exemption for re-investment of LTCG, as per Section 54 was given to the appellant. AO allowed the benefit of indexation, as per Section 48(iii) of the Act, w.e.f. 07-08- 1986 i.e., from the date on which the appellant became the owner of the property on the date of the death of the deceased and not w.e.f. 01-04-1981. Besides the claim of the appellant that he was 1/6^th owner, and not 1/4^th owner, was rejected.

5. Assessee again preferred an appeal before the FAA. After considering the ratio decidendi of the decision of Sushila Jhaveri [292 ITR (AT)1(Mumbai)(SB)], he held that exemption u/s. 54 should be allowed to the appellant for one house only since the appellant alongwith 3 other co-owners had acquired by investing in 6 new houses and 2 garages, that the deduction had to be restricted to only 4 houses thereon and that no deduction could be allowed u/s. 54 for the remaining 2 houses and 2 garages.5.1 With respect to the claim of the assessee that the he was 1/6^th owner and not 1/4^th owner due to the Family Arrangement Deed made out between all the family members dt. 20-03-1994 he held that to Pg. 14 of the Paper Book, that the parents and the sister had a right to occupy the flat till their demise and without their permission the property could not have been put for development by entering into agreement with M/s. Nirmit Developers, that Will of Mr. Dinkar Wagh gave the right to the parents and sister of the appellant to reside in the house till their death, that the said right did not make the parents and the sister of the appellant as the owners of the property, that their rights were limited till the date they continued to live and after that the flats reverted back to the appellant and the other 3 co-owners, that earlier claim of the appellant of he being 1/4^th owner, as per the return of income filed, appeared to be legally correct, that the appellant was 1/4^th owner and not 1/6^th owner of the property­in-question.

6. Before us, Authorised Representative (AR) submitted that assessee was entitled to exemption u/s. 54 of the Act for all the six flats and 2 garages, that flats were single residential units as contemplated by the provisions of Section 54, that in the first round FAA had held that assessee was entitled to exemption for all the six flats, that section does not provide for restricting the exemption to one flat. He relied upon the case of Gita Duggal delivered by the Hon’ble High Court of Delhi [257 CTR 208]. AR supported the order of the AO and the FAA. DR supported the order of the FAA.

6.1 We have heard the rival submissions and perused the material before us. We find that issue is covered in favour of the assessee by the judgment of Gita Duggal (supra). In that case, Hon’ble Delhi HC has held as under:

“……… What in effect the assessing officer had done was to reject the assessee ’s claim for deduction U/s. 54/54F of the Act in respect of the house/units in the first and second floors holding that they were separate and independent residential units having separate entrances and cannot be considered as one unit to enable the assessee to claim the deduction. This was disapproved by the CIT(Appeals) on the basis of the judgment of the Karnataka high Court (supra) and his decision was approved by the Tribunal. The Tribunal expresses the view that the words ‘a residential house’ appearing in Section 54/54F of the Act cannot be construed to mean a single residential house since u/s. 13(2) of the General Clauses Act, a singular includes plural.

8. It is the correctness of the above view that is questioned by the revenue and it is contended that the interpretation placed by the Tribunal gives rise to a substantial question of law. The assessee strongly relies upon the judgment of the Karnataka High Court (supra) which, it is stated, has become final, the special leave petition filed by the revenue against the said decision having been dismissed by the Supreme Court as reported in the annual digest of Taxman publication. The judgment of the Karnataka High Court supports the contention of the assessee. An identical contention raised by the revenue before that Court was rejected in the following terms:

“A plain reading of the provision of Section 54(1) of the Income Tax Act discloses that when an individual- assessee or Hindu undivided fami ly-assessee sells a residential building or lands appurtenant thereto, he can invest capital gains for purchase of residential building to seek exemption of the capital gains tax. Section 13 of the General Clauses Act declares that whenever the singular is used for a word, it is permissible to include the plural.

The contention of the Revenue is that the phrase “a” residential house would mean one residential house and it does not appear to the correct understanding. The expression “a” residential house should be understood in a sense that building should be of residential in nature and “a” should not be understood to indicate a singular number. The combined reading of Section 54(1) and 54F of the Income Tax Act discloses that, a non-residential building can be sold, the capital gain of which can be invested in a residential building to seek exemption of capital gain tax. However, the proviso to section 54 of the Income Tax Act lays down that if the assessee has already one residential building, he is not entitled to exemption of capital gains tax, when he invests the capital gain in purchase of additional residential building”

This judgment was followed by the same High Court in the decision in CIT Vs. Smt. K.G. Rukminiamma in ITA No. 783/2008 dt. 27-08-2010.

8. There could also be another angle. Section 54/54F uses the expression ‘a residential house’. The expression used in not ‘a residential unit’. This is a new concept introduced by the assessing officer into the section. Section 54/54F requires the assessee to acquire a ‘residential house’ and so long as the assessee acquires a building, which may be constructed, for the sake of convenience, in such a manner as to consist of several units which can, if the need arises, be conveniently and independently used as an independent residence, the requirement of the Section should be taken to have been satisfied. There is nothing in these sections which require the residential house to be constructed in a particular manner. The only requirement is that it should be for the residential use and not for commercial use. If there is nothing in the section which requires that the residential house should be built in a particular manner, it seems to us that the income tax authorities cannot insists upon the requirement. A person may construct a house according to his plans and requirements. Most of the houses are constructed according to the needs and requirements and even compulsions. For instance, a person may construct a residential house in such a manner that he may use the ground floor for his own residentce and let out the first floor having an independent entry so that his income is augmented. It is quite common to find such arrangements, particularly post-retirement. One may build a house consisting of four bedrooms (all in the same or different floors) in such a manner that an independent residential unit consisting of two or three bedrooms may be carved out with an independent entrance so that it can be let out. He may even arrange for his children and family to stay there, so that they are nearby, an arrangement which can be mutually supportive. He may construct his residence in such a manner that in case of a future need he may be able to dispose of a part thereof as an independent house. There may be several such considerations for a person while constructing a residential house. We are therefore, unable to see how or why the physical structuring of the new residential house, whether it is lateral or vertical, should come in the way of considering the building as a residential house. We do not think that the fact that the residential house consists of several independent units can be permitted to act as an impediment to the allowance of the deduction u/s. 54/54F. It is neither expressly nor by necessary implication prohibited…… ”

Respectfully following the same, we decided the effective Ground of Appeal in favour of the assessee.

Appeal filed by the assessee stands allowed.

7. Though, there are Four Grounds of Appeal in the appeal filed by the AO, but effectively they pertain to two issues only. First is decision of the FAA wherein he was held that non-monetary consideration in terms of two flats received from developer was adjustment of the sale consideration towards purchase price of flats. Second issue is about date of Cost Inflation Index. As discussed earlier, FAA while deciding the appeal filed by the assessee had held that consideration received by the assessee in favour of two flats from the developer was to be taken as sale consideration towards purchase price of flats.

8. Before us, DR submitted that flats were received free of cost by the assessee, that assessee had not purchased/constructed a new residential property within the stipulated period, that two flats received by the assessee were two distinct and separate flats therefore, same could not be treated as single residential units. AR submitted that as per the family settlement, assessee was entitled to 1/6^th share of the property, that whole development agreement not contain conditions to be considered are for determining the issue, that matter was covered by the judgment of Gita Duggal (supra) delivered by the Hon’ble High Court of Delhi.

9. We have heard the rival submissions and perused the material put before us. We are of the opinion that in similar circumstances, Hon’ble Delhi High Court has held that non-monetary consideration have to be taken as consideration towards purchase of property. As far as question of number of units is concerned, we have already decided the issue in favor of the assessee at para No. 6.1. Following the same, we decide Ground Nos. 1 & 2 against the AO.

10. Next two Grounds of Appeal are about date of indexation cost. During the assessment proceedings, AO held that date for Cost Inflation Index had to be taken from the first year in which assets were held by the assessee not from the date form which asset was acquired by the original order.

11. Assessee preferred an appeal before the AO. He held that the case of the appellant was covered by the decision of the ITAT, Mumbai Special Bench in the case of Manjula J. Shah (ITA No. 7315/Mum/2007 date 16-10-2009), that the said issue was settled and was never a part of appeal as whatever was shown in the return of income, was duly accepted by the AO in his Order passed u/s. 143(3) r.w.s. 147 dt. 26-02-2011. He directed the AO, to adopt cost inflation index of acquisition of the capital asset with reference to the year in which the previous owner first held the asset. He directed the AO re re-compute the Capital Gain of the appellant accordingly by taking Cost Inflation Index as on 01-04-1981 and not 1989-90. As a result, appeal filed by the assessee was allowed by the FAA.

12. Before us, DR relied upon the orders of the AO. AR submitted that issue was covered in favour of the assessee by the decision of Hon’ble Jurisdictional High Court delivered in the case of Manjula J. Shah. He relied upon the case of Manjula J. Shah (249 CTR 270). After hearing the rival submission, we find that issue is squarely covered in favour of the assessee by the said decision. Hon’ble Bombay High Court has held as under:“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      

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.     

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 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 u/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.”