ITAT MUMBAI BENCH ‘E’
Sonia Maria Mistry
Income-tax Officer, Ward 19(3)(4), Mumbai
IT Appeal No. 8506 (Mum.) of 2011
[ASSESSMENT YEAR 2006-07]
FEBRUARY 1, 2013
Sanjay Arora, Accountant Member
This is an Appeal by the Assessee directed against the Order by the Commissioner of Income Tax (Appeals)-30, Mumbai (‘the CIT(A)’ for short) dated 30.09.2011, partly allowing the assessee’s appeal contesting its assessment for the assessment year (A.Y.) 2006-07 vide order u/s. 143(3) of the Income Tax Act, 1961 (‘the Act’ hereinafter) dated 24.12.2008.
2. The first ground of appeal is for the adoption of the fair market value (FMV) as on 01.04.1981 of a long term capital asset, being Flat No.83A in the building by the name ‘Jal Darshan’ at 51, Nepean Sea Road, Mumbai, sold during the relevant year by the Assessing Officer (A.O.) at Rs. 18,22,464/-, as against its returned value at Rs. 20,05,750/- by the assessee.
3. The difference is on account of the different valuation rates applied by the parties, as under, which both of them claim to be based on the Stamp Duty Rates:-
Area (sq. ft.)
Rate (in Rs.)
|By the assessee||
|By the Assessing Officer||
The ld. AR, the assessee’s counsel, was during hearing enquired by the Bench as to why, with both the sides basing their valuation on the same source, should there at all be any difference, which is in any case only marginal. It was explained, while conceding to the difference being nominal, that this was as while the assessee adopts the carpet area, the Assessing Officer (A.O.) has taken the built-up area. As regards the rate applied, the A.O. has discounted the base rate of Rs. 1,600/- by 20%, after adding another Rs. 80/- sq. ft. toward one lift, while there are in fact two lifts.
4. We have heard the parties, and perused the material on record. The primary facts are not in dispute. Even as conceded by the ld. AR during hearing, it is the built-up area that is to be taken into account. This is as it is this area that is to be valued. As regards the objections qua the two lifts, as against one considered by the A.O., in our view, it is not the numerical strength of the lifts that would be material, but the fact that the flat or the residential unit, being located at a higher floor, is serviced by a ‘lift’. The number of lifts is only toward adequate ‘lift capacity’, which would rather depend on the number of people residing in the building who would be ordinarily requiring that facility and, besides, the number of lifts would also stand to be determined by the carrying capacity of the lifts themselves. The same (number of lifts), thus, would not assume any significance of its own, and the increase, if any, in valuation of the house property on account of a higher number of such units would be marginal, and not in any case in linear proportion to the number of lifts. With regard to the depreciation, the A.O. applied a rate of 20%, i.e., as applicable to the buildings which fall in the age group of 19-20 years; the subject property being constructed in the year 1969-70. We are unable to see as to how the said rate is not reasonable. This is all the more so considering that the estimated life of the building (subject to regular repairs and maintenance) is 50 years (refer para 16(c) of the registered valuer’s report dated 27.9.2004/PB pgs. 15 to 17). Accordingly, we find no infirmity in the valuation adopted by the A.O., since confirmed by the ld. CIT(A). We decide accordingly. Ground ‘A’ is thus answered in favour of the Revenue.
5. We next consider the assessee’s second ground ‘B’, raising the principal issue in appeal. The same is in respect of deduction in the sum of Rs. 35 lakhs claimed from the sale consideration of Rs. 175 lakhs of the residential flat under reference in computing the capital gains arising on its transfer during the year. The basis of the assessee’s claim is that the same represents a condition precedent subject to which only the said property stands bequeathed to, among others, her. The same was not accepted by the A.O. as the same fell under neither of the clauses (i) or (ii) of section 48, which are the only sums specified for being adjusted against the consideration accruing or arising on the transfer of a capital asset in computing the capital gains arising thus, namely:
(i) expenditure incurred wholly and exclusively in connection with such transfer;
(ii) the cost of acquisition of the asset and the cost of improvement thereto.
Reliance was placed by him on the decisions in the case of Smt. Rugmani Varma v. CIT  222 ITR 357; K.V. Idiculla v. CIT  214 ITR 386; Ambat Echukutty Menon v. CIT  111 ITR 880 (Ker.); and CIT v. A. Venkataraman  137 ITR 846. In appeal, the ld. CIT(A) found that no amount was specified in the Will. He further found that neither was the impugned payment in connection with the sale of the property nor could be said to have been expended toward improvement of the asset transferred. The same was, therefore, not deductible, finding the reliance on the case law by the AO as apposite. Aggrieved, the assessee is in second appeal.
6. We have heard the parties, and perused the material on record as well as the case law cited.
6.1 Before us, the assessee’s case was principally with regard to the application of the principle of diversion of income by overriding title. Adverting to the relevant clauses in the Will dated 13.08.2003 of Ms. Dena Patil (PB pgs. 1-8), it was submitted by the ld. AR that but for the payment to the two payees concerned (as specified in clauses 3 and 4 of the Will), who happened to be close friends of the testator, the property would not have devolved on the legatees, including the assessee, upon whom it had, to the extent of 25% share therein. However, as there was uncertainty as to the amount to be paid thereto, the four co-owners (Mr. Cawas Mistry, the first legatee, pre-deceasing the testator – who expired on 16.06.2004, so that his 33.33% share came to be shared equally among the other four legatees), agreed to pay an amount of Rs. 35 lakhs vide a separate agreement dated 04.04.2005 (at PB pgs. 9-12) subsequent to the death of the testator. However, as the legatees had no money, the amount was to be paid from the sale proceeds of the house property bequeathed. It is in respect of this amount that the deduction is being claimed, toward which the ld. AR cited the decision in the case of CIT v. Smt. Shakuntala Kantilal  190 ITR 56.
The Revenue, on the other hand, has denied the assessee’s claim on the basis that the same does not fall to be covered either under clause (i) or (ii) of section 48.
6.2 We begin by reviewing the law in the matter; both the parties relying on case law before us, so that the same would also stand to be examined from the stand-point of any divergence of opinion, if any, expressed by the hon’ble courts on the subject. Section 48, i.e., the relevant provision prescribing the manner of computation of capital gains chargeable u/s.45, reads as under:-
Mode of computation
48. 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 following amounts, namely :—
(i) expenditure incurred wholly and exclusively in connection with such transfer;
(ii) the cost of acquisition of the asset and the cost of any improvement thereto:
We find that not only is the provision unambiguous, the same – as well as the related provisions, have also been interpreted uniformly by the hon’ble courts of law. Firstly, no deduction, apart from that falling within the scope of section 48, is to be allowed in the computation of capital gains. Further, with reference to the obligation cast on a legatee under the terms of the instrument on the basis of which the property, which is the subject matter of transfer, devolves on him, we find again unanimity of view point. It is the entire bundle of rights as acquired by previous owner that constitute the asset or the property under reference, and it is its cost to the previous owner, i.e., where the capital asset stands acquired by the assessee under any of the modes specified u/s.49, as in the instant case (section 49 (iii)(a)), which is deemed to be the cost of acquisition to the successor-owner, and which continues unabated as long as the property is ‘transferred’ under any of the modes specified u/s. 49. The fiction extends to the holding period of the asset as well, so that the lives of the testator and the legatee/s are combined for reckoning the holding period and, consequently, for the purpose of the benefit of cost indexation. It is only on account of this clear position of the law that the Tribunal found little difficulty in extending the indexation benefit with reference to the period of holding by the previous owner where the Revenue sought to restrict the same only to the period of holding by the successor in the case of Dy. CIT v. Manjula J. Shah  35 SOT 105 (Mum.)(SB), which stands since upheld by the hon’ble jurisdictional High Court in the case of CIT v. Manjula J. Shah  204 Taxman 691. There is, thus, no scope for further adding any ‘cost of acquisition’, if any, incurred by the assessee, to that by the previous owner. That is, the deeming as to the ‘cost of acquisition’ and ‘holding period’ is to be given full effect to, taking it to its logical conclusion. The cost incurred by the legatee/s, if any, as toward discharge of a mortgage created either by him or even by the previous owner would not qualify to be considered or included as a part of the cost of acquisition u/s. 48(ii). In the case of Smt. S. Valliammai v. CIT  127 ITR 713, the issue involved was the deductibility of estate duty, charge in respect of which is created on the immovable property passing on the death of its owner. Negating the claim for its deduction in the computation of the capital gains on its transfer by a legatee, it was held by the hon’ble court that non-payment of estate duty did not result in their (legatees) getting an imperfect or incomplete title to the property. It is only when the title is defective, incomplete or imperfect that the cost of making the title complete and perfect could be treated as the cost of acquisition. Like view stands also almost uniformly expressed by the hon’ble courts in the context of the similar obligations, including those flowing from the instrument conferring or vesting title in the successor, as (say) a partition or gift deed, so that the same were considered as not qualifying for deduction either as cost of acquisition or as cost of improvement u/s. 48(ii). The latter, i.e., the cost of improvement, has again been uniformly understood to imply a physical or tangible improvement to the asset since its acquisition by the transferor or, for that matter, even the previous owner.
Here it would be relevant to state and clarify that the obligation that devolves or is cast on the previous owner himself, i.e., in acquiring the capital asset, whether discharged subsequently by him or any of his successor/s, would stand to be considered as a part of his cost of acquisition and, thus, by definition, the cost of acquisition of the successor, deductible u/s. 48(ii). The same, even apart from being so considered in view of the clear provisions of law, would also be so construed on first principles. No one can bestow or confer a title better than what he has. As such, if the title of the previous owner was itself defective or subject to some encumbrance, the cost incurred on its removal or discharge would qualify for deduction u/s. 48(ii). The same also follows considering the principle of parity inasmuch as it is the cost of the un-encumbered asset that would stand to be adjusted or set off against its sale or transfer consideration in computing income by way of capital gain arising thus, i.e., on its transfer. In the instant case, the capital asset having become the asset of the previous owner prior to 01.04.1981, the fair market value (FMV) of the same as on 01.04.1981 has been adopted as the deemed cost of acquisition in the hands of the assessee as well, and on which aspect of the matter we observe no dispute. How could then, that being the case, the assessee claim further deduction toward the claimed cost in removing the encumbrance or satisfying the condition precedent, i.e., assuming so, subject to which the property stands bequeathed to her? This aspect stands particularly taken note of by the hon’ble High Court in the case of Smt. Rugmani Varma (supra) (refer pgs. 369-370). It is, thus, only the cost, where so, as incurred by the previous owner, or that which would stand to have been incurred by him, that would qualify for deduction u/s. 48(ii). The law in the matter is well settled, and this also perhaps explains the complete non-reference to any of the decisions relied upon by the Revenue by the ld. AR either before the first appellate authority or even before us.
6.3 At this stage it would also be relevant to discuss the decision by the hon’ble jurisdictional High Court in the case of Smt. Shakuntala Kantilal (supra). In the facts of that case, the assessee had prior to the transfer under reference entered into an agreement for sale of his piece of land to one ‘R’ in 1963. Disputes arose subsequently, and ‘R’ filed a suit for specific performance, which was settled by a compromise whereby the assessee agreed to pay Rs. 35,504/- to ‘R’. In the meant time, the assessee entered into another agreement of sale in 1967 in respect of the same property with ‘C’. ‘C’ had to give assurance to ‘R’ that on the completion of the sale, ‘C’ would deduct Rs. 35,504/- from the total consideration and pay it to ‘R’. The assessee claimed that this amount of Rs. 35,504/- should be allowed as deduction for the purpose of computing the income under the head ‘capital gains’. It was in this context that the hon’ble High Court upheld the tribunal’s order accepting the assessee’s said claim.
Though the hon’ble court has clarified that the expression ‘in connection with such transfer’, as appearing in section 48(i), is wider than the expression ‘for the transfer’, the said exposition by the hon’ble court, on which there could be no doubt, was only to meet the argument of the Revenue’s counsel that no deduction, apart from that stated in section 48, could be allowed in the computation of capital gains chargeable u/s. 45. The basis of the hon’ble court’s decision, as its reading would show, is the interpretation of the words ‘full value of the consideration received or accruing as a result of the transfer of the capital asset’ as appearing in section 48. The same stands interpreted to exclude payments that are absolutely necessary, so as to arrive at the real and effective consideration. In the facts of that case, though the payment to ‘R’, the transferee under the previous arrangement, got tagged and intertwined with the subsequent transfer of the subject property, he claimed to have interest in the said property, i.e., independent and de hors the subsequent transfer by the assessee-respondent, which he could and, rather, sought to enforce through a suit for specific performance, and the amount under reference represented the compromise amount in settlement of the said suit. As such, it could well be that the payment to him stood made, or was to be made, even if no transfer was in contemplation. In fact, that is also what the hon’ble court itself clarifies (at pg. 60 of the report), admitting to no precedents being available, so that it had decided the case on first principles.
The hon’ble jurisdictional High Court, thus, upheld the tribunal’s order by invoking and applying the principle of diversion of income by overriding title, which is an accepted principle under the Income Tax Law, having been expounded upon by the hon’ble apex court as far back as in CIT v. Sitaldas Tirathdas  41 ITR 367. As explained therein, the true test for the application of the rule of diversion of income by an overriding charge is whether the amount sought to be deducted in truth never reached the assessee as his income. Obligations, no doubt, there are in every case, but it is the nature of the obligation which is the decisive fact. There is a difference between an amount which a person is obliged to apply out of his income and an amount which by the nature of the obligation cannot be said to be a part of the income of the assessee. Where by the obligation income is diverted before it reaches the assessee, it is deductible; but where the income is required to be applied to discharge an obligation after such income reaches the assessee, the same consequence, in law, does not follow; it is the first kind of payment which can truly be excused and not the second. The second payment is merely an obligation to pay another a portion of one’s own income, which has been received and is since applied.
In our view, therefore, the exclusion of the payment made by the assessee-respondent in that case, or on his behalf, was by applying the principle of diversion of income by overriding title, which was found to obtain in the facts and circumstances of that case by the hon’ble court. The situation as obtaining in the instant case, on the other hand, stands well contemplated and provided for under the provisions of the Act, of which the assessee is not only well aware of but has also invoked, being ss. 2(29A) r.w.s 2(42A); 47, 48 & 49 (including Explanations thereto); and 55. There is no scope for the application of the principle of diversion of income by over-riding title in the facts and circumstances of the present case for the said decision (i.e., in the case of Smt. Shakuntala Kantilal (supra)) to be applicable or of any assistance to the assessee.
6.4 We may also examine the facts of the instant case, if only for the sake of completeness of this order. Proceeding in the matter, we firstly find that the membership in the Jal Darshan Co-operative Housing Society Ltd., i.e., through the transfer of the membership/shares in which only the subject property, being Flat No.83A therein, stands transferred to the co-owners prior to the sale, as signified by its certificate dated 09.03.2006 (PB pg. 39). How could it be so; the title being subject to the condition of payment, except perhaps by recording or registering a lien of the payees on the said property? In fact, the society had earlier (on 13.02.2006) issued a ‘no objection certificate’ to the co-owners in support of the proposed sale, so that all the formalities for the transfer of the membership in their joint names in its record had been completed (PB pg. 40), and which is not understandable given that no payment has admittedly been made, so that the ‘condition precedent’ had not been satisfied. Further, the same also bears no reference to any interest in the said flat in favour of any person other than the legatees. So much so, the membership (share) certificate in the housing society stands transferred in the name of the legatees as far back as on 01/2/2005, i.e., even prior to the execution of the tripartite agreement. The said transfer is on the basis of a nomination filed by the testator, and bears no reference to her subsequent Will, only through which, where so, inheritance could take place, so that the same is de hors and without reference to and/or taking cognizance of the rights bestowed by the testament. How could it be?
There is even no reference in the deed of transfer dated 24.03.2006 (PB pgs. 27 – 38), vide which the subject property stands transferred, to either the testator’s Will or to the compromise agreement dated 04.04.2005 (PB pgs. 9-12), or even of any interest of the Gadatwalas (the persons specified in clause 3 of the Will). That is, the instrument of transfer, through which the impugned sale consideration and, thus, the capital gains arises to the co-owners, including the assessee, does not recognize any interest in the property of any person other than the legatees. We wonder how could it be so; the impugned payment having admittedly not been made, and the Will dated 13.08.2003, per which alone the assessee and the co-owners derive their title to the property, was subject to the condition of payment, so that it constitutes a condition precedent to the bequeathment? In fact, even the compromise agreement does not record any interest in the subject property, but merely speaks of some discrepancies in the Will as to the amount payable.
6.5 Though we have gone through the entire sale deed, a registered document, reference to some of its clauses would be relevant in the matter, which reads as under, and explicitly brings forth the absolute title to the property of the four legatees, including the assessee:-
3. The Transfers have delivered vacant and peaceful possession of the said flat to the Transferee as the absolute owner thereof.
4. The Transferors agree, confirm and declare that :-
(a) The Transferors as members of the said Society are solely and absolutely entitled to hold the said shares and to own and posses the said flat and that no other person or party has any right, title, interest property claim or demand into/over/upon the same or any part thereof by way of sale, exchange, mortgage, gift, trust, tenancy, inheritance, possession, lien or otherwise howsoever.
(b) The Transferors have good right, full power and absolute authority to transfer the said shares and as incidental thereto to sell and transfer the right to hold, use and occupy the said flat and that neither they nor any of them nor any one on their behalf have done, committed or omitted any act, deed, matter of thing whereby the Transferors right to hold the said flat and/or the said shares are or can be forfeited, extinguished or rendered void or voidable AND the Transfers will keep indemnified the Transferee from the against all actions, suits and proceedings and all claims, demands, fines penalties, costs, charges, expenses, damages or other liabilities of whatsoever nature made or suffered or incurred by or caused to or imposed or levied on the Transferee by reason or virtue of any non-performance or non-observance by the Transferors or any of them of any of the terms, conditions, agreements, covenants and provisions stated herein AND the Transferors will at all times hereafter at the request and cost of the Transferee do and execute and caused to be done and executed all such further and other lawful and reasonable acts, deeds, matters and things for the better, further and more perfectly assuring the said shares and the said flat unto and to the use of the Transferee.
(c) The Transferors have not in any way encumbered or agreed to encumber by way of mortgage, charge, lien, trust, sale, pledge or otherwise howsoever their right, title and interest in the said shares and/or the said flat and that the same are free from all encumbrances.
(d) The Transferors have not let out the said flat to any person on lease, leave and license, tenancy or any other basis whatsoever and no lease/leave and license/tenancy agreement in respect of the said flat entered into by the Transferors prior to the execution of this Deed with any party or parties, or any third party rights howsoever created in respect of the said shares and the said flat, is subsisting or is legally valid as on the date of the execution of this Deed.
(e) There is no suit or other litigation or proceeding pending or instituted in respect of the said shares and/or the said flat and the same are not the subject matter of any claim, demand, litigation or attachment either before or after judgement or encroachment of any nature whatsoever.
(f) There is no order attachment or prohibitory order under the Income Tax Act or any other law for non-payment of taxes, dues charges, levies or other sums of the Government, Central and/or State or other local body or authority, either in respect of the said shares and/ or the said flat.
The co-owners, who have admittedly not paid the impugned amount, had, however, become the absolute co-owners of the property and, accordingly transferred the same to the transferees, i.e., the absolute right in the same. How could it be? Further, the said sale deed, which under the circumstances is a title deed, declares that no other persons had any right, title or interest, claim or demand or lien in/over or on the same (Flat No. 83 in Jal Darshan Building) or any part thereof by way of any mode, including inheritance, so that the transferees had full power and authority to transfer the said shares in the society as well as the ownership and possession of the flat under reference. We are, thus, unable to hold of the Gadatwalas as having any right or title or interest in the subject property, for the assessee to claim of their overriding title or even interest therein, or to the sale proceeds thereof, to the extent agreed to. In fact, it is this that led to an inquiry from the Bench to the ld. AR, as to why, in that case (i.e., of overriding title or of constituting a condition precedent – as claimed), the payees were not made a party to the said instrument of transfer and, rather, paid the agreed sum directly by the buyers, to no convincing reply from her, who surprisingly also did not advert to the sale deed while arguing the case. In the case of Smt. Shakuntala Kantilal (supra), on the other hand, the payee had, rather, filed a suit for specific performance against the assessee. The subsequent agreement of sale entered into by the assessee with ‘C’ in 1967 was not an independent transaction and, rather, being not satisfied by an undertaking from its solicitors to pay the agreed compromise amount thereto from the sale proceeds, ‘C’ had itself to give an assurance to ‘R’ that it would deduct the said amount from the sale consideration and pay the same to it. ‘R’ was thus recognised by both the parties as holding an interest antecedent in the property. It was under these circumstances that the said payment was considered by the hon’ble court to have become an absolute necessity to effect the transfer, so that the same ought to be considered as an expenditure covered by clause (i) of section 48, i.e., an expenditure incurred wholly and exclusively in connection with the such transfer. In the facts of the present case, on the other hand, the sale has been effected independent and de hors the amount ostensibly agreed to paid to the payees, so that we are unable to see as to how it could be regarded as an expenditure incurred in connection with the transfer, entitled to deduction u/s. 48(i). In fact, the instrument of transfer, which is under the circumstances a title deed, recognises no interest, right, title, etc. of any other person other than the transferees, either in the membership or in the flat, in favour of any person. We also cannot consider the said payment, assuming it to have been made, to be toward removing an encumbrance on the property which stands to be discharged, albeit subsequent to the sale, in view of the aforesaid absence of any reference thereto in the sale deed, which conveys clear title.
6.6 In sum, we find the assessee’s case as not maintainable both in law as well as on facts. On facts, the assessee has not been able to show of the impugned sum as representing a condition precedent, with the succession of rights being given effect to without the said payment having been made, with even the transfer deed not recognizing the interest of any party other than the legatees in the subject property. In fact, the succession being through inheritance, it could only be through Will, where so, while in the instant case there is no reference to the Will either in transfer of membership or in the conveyance deed. Even the payment has not been shown to have been made. So much so for a condition that is being claimed to be a condition precedent per its terms.
As regards the legal position, the same has again been found as well-settled by the hon’ble courts. The law does not recognize transfer by way of Will (s. 47), so that even if it were so, i.e., a condition precedent, entailing a cost to the legatee/s, it is only the cost to the previous owner, that would stand to be considered as the cost of acquisition, and there is no scope for adding thereto the cost, if any, incurred on acquisition by the successor, which would be in fact his – the latter’s – cost. The same could also not be considered as a cost of improvement, so as to qualify, either way, for deduction u/s. 48. The holding period is again to be reckoned with reference to the date of acquisition by the previous owner, so that even by implication it is only the cost of such acquisition, or the deemed cost of acquisition, i.e., the FMV as on 01/4/1981, where the said date is prior to the cut-off date (01/4/1981), that could in any case be considered. These principles have been upheld by the hon’ble jurisdictional high court in the case of Manjula J. Shah (supra). It is clearly not a case of diversion of income by over-riding title, as was in substance found to be the case in Smt. Shakuntala Kantilal (supra) relied upon by the assessee, so that the said case has no application in the instant case. As such, even if payment, which has not been, were to be shown, it would only stand to be regarded as a case of application of income. We decide accordingly, dismissing the assessee’s Ground # B.
7. Ground # C is general in nature, raising no specific issue for adjudication and, accordingly, warrants no adjudication.
8. In the result, the assessee’s appeal is dismissed.