Year of Indexation & Cost of Acquisition in case of bequeathed Property

Rohan Developers Pvt. Ltd. Vs ITO (Bombay High Court)

According to petitioner, under Section 49(1)(ii) of the Act, cost of acquisition of the said property in the hands of seller is deemed to be the cost for which the said property was acquired by late Mrs. Dolly Jehangir Gazdar. It is also petitioner’s case that under clauses (29A) and (42A) of Section 2, the period of holding of late Mrs. Dolly Jehangir Gazdar, Mrs. Rhoda Rustom Framjee and Mr. Rustom Framjee are also to be included in the period of holding of seller for ascertaining whether the said property is held by him as a short term capital asset or as a long term capital asset. Therefore, in its application under Section 195(2) of the Act, petitioner annexed a copy of draft computation of long term capital gains of the seller in respect of the transfer of the said property. Petitioner took the benefit of the option provided in the provisions of Section 55(2)(b)(ii) of the Act, which provides that where a capital asset became the property of the assessee by any of the modes specified in Section 49(1) and the capital asset became the property of the previous owner before the 1^st day of April 1981, cost of acquisition means the cost of the capital asset to the previous owner or the fair market value of the asset on the 1^st day of April 1981 at the option of the assessee. Based on the scheme of the Act as is provided in Section 49(1)(ii), clauses (29A) and (42A) of Section 2 and Section 55(2)(b)(ii) of the Act, petitioner claimed that indexation of the cost of acquisition under the second proviso to Section 48 should be available from the financial year 1981­82. Transfer of the property to petitioner had taken place in the financial year 2010-11.

The only point of dispute between petitioner and respondent No.1 on the issue of computation of capital gains is with respect to the year from which benefit of indexation is to be granted. According to petitioner, indexation should be granted from financial year 1981-82 as a previous owner, who had acquired the property by any means other than those specified in Section 49 was late Mrs. Dolly Jehangir Gazdar, who had acquired her share in the said property in the year 1972, i.e., before 1981, while, respondent No.1 has granted such indexation from financial year 1992-93.

ITAT held that the cost of acquisition of the said property in the hands of seller is deemed to be the cost for which the said property was acquired by late Mrs. Dolly Jehangir Gazdar and the period of holding of late Mrs. Dolly Jehangir Gazdar, Mrs. Rhoda Rustom Framjee and Mr. Rustom Framjee are also to be included in the period of holding of seller for ascertaining the period for which the property was held by the seller. Based on the Scheme of the Act, as provided in Section 49(1)(ii), clauses (29A) and (42A) of Section 2 and Section 55(2)(b)(ii) of the Act, indexation of the cost of acquisition under the second proviso to Section 48 should be available from the financial year 1981-1982. Therefore, on this ground alone, we will have to grant prayer clause (a) as quoted earlier.

FULL TEXT OF THE JUDGMENT/ORDER OF BOMBAY HIGH COURT

1. Petitioner is a company engaged in the business of development and re-development of various properties in the city of Mumbai. One Mrs. Dolly Jehangir Gazdar held an undivided ¹/₂ (one half) share in a piece of land admeasuring about 8071.64 square yards situated at Dr. Ambedkar Road (Sopari Baug Road) with the buildings standing thereon in Parel Sewri Division in BMC F/South Ward, Mumbai from the year 1972. The other ¹/₂ (one half) share in the said property belonged to her brother one Mr. Meherwan Nadirshaw.

2. Mrs. Dolly Jehangir Gazdar expired on 10^th June 1982 leaving her last Will and Testament dated 20^th June 1979. The Probate of her Will was granted by the Bombay High Court on 5^th November 2004. Under the said Will, she had bequeathed her share in the said property to her aunt – Mrs. Rhoda Rustom Framjee and her brother – Mr. Meherwan Nadirshaw in equal shares. Accordingly, the undivided 1/4^th share in the said property vested in Mrs. Rhoda Rustom Framjee from the year 1982. Mrs. Rhoda Rustom Framjee expired on 12^th May 1992 leaving her last Will dated 3^rd June 1977, whereunder she bequeathed all her estate including 1/4^th share in the said property to her husband Mr. Rustom Framjee. Mr. Rustom Framjee expired on 17^th September 2006 leaving behind two sons as his legal heirs namely, Mr. Sohrab Rustom Framjee and Mr. Pesh Rustom Framjee. As per the Will of Mr. Rustom Framjee dated 19^th February 2006, he bequeathed his estate including his 1/4^th share in the said property to his two sons in equal shares. Though no probate has been granted in respect of the Wills of Mrs. Rodha Rustom Framjee and Mr. Rustom Framjee, their only sons – Mr. Sohrab Rustom Framjee and Mr. Pesh Rustom Framjee have accepted the said Wills and acted upon the same.

3. Accordingly, Mr. Pesh Rustom Framjee (hereinafter referred to as “seller”) became owner of 1/8^th share in the said property. Petitioner had decided to buy that 1/8^th share of seller and since Mr. Pesh Rustom Framjee (seller) was a non-resident in so far as the Income Tax Act, 1961 (the Act) is concerned and he had not filed his return of income for any of the earlier years as there was no taxable income in India in those years in his hands, petitioner filed an application before respondent No.1 under Section 195(2) of the Act requesting him to issue a LOW tax rate Certificate for Deduction of Tax at Source in respect of consideration for purchase of immovable property from seller.

4. By an order dated 21^st December 2010, respondent No.1 directed petitioner to deduct tax of Rs.28,74,100/-. It is this order, which is impugned in this petition. Admittedly, petitioner has deposited this amount of Rs.28,74,100/- with the Revenue even though it is petitioner’s case that the amount directed to be deducted as tax at source has been incorrectly calculated and according to petitioner, only a sum of Rs.74,523/- was the tax that had to be deducted. For ease of reference, the computation, as given in the petition, is reproduced hereunder:-