2005 (8) TMI 576 - AT - Income Tax

Capital gains - sale of the house property - Indexation of Cost of acquisition of the property u/s 48 whether the amount of first instalment paid or the total amounts paid by the assessees for acquiring the properties. - HELD THAT - A house property has got its own intrinsic/market value. The assessee might have ultimately purchased a property worth Rs. 22 lakhs. The first instalment paid by the assessee might have been Rs. 5 lakhs. The question is what is the original cost of acquisition of the houses whether it is Rs. 22 lakhs ultimately paid by the assessees or Rs. 5 lakhs initially paid by the assessees. According to us, the cost of the property is Rs. 22 lakhs and not Rs. 5 lakhs. As already stated, every property has got its own intrinsic/market value irrespective of the mode of payment negotiated between the concerned parties. A house property worth Rs. 23 lakhs might be sold for Rs. 21 lakhs against a lump sum payment or it might be sold for Rs. 23 lakhs against instalment payments. Therefore, the maximum variation in the cost of the property depending upon the method of payment is only Rs. 2 lakhs i.e., the difference between Rs. 23 lakhs and Rs. 21 lakhs. If the first instalment paid in that case was Rs. 5 lakhs, it could never be held that the cost of the property was Rs. 5 lakhs which is far less than the real value of Rs. 22 lakhs. This illustration makes the matter very clear. The cost or the value of the property remains the same subject to minor variations of interest of discount factor, irrespective of the mode of payments. The cost or value of the property does not get diluted for the reason that the cost of acquisition was paid by instalments. The basic idea of bringing the principle of indexation is to give some sort of protection to the assessees from the on slaught of inflation. The effect of inflation could be measured only with reference to the total cost of acquisition of a property. If the effect of inflation is measured with the payment of the first instalment, the whole scheme becomes ridiculous. It is to be seen that the factor of inflation is not with reference to the payments made by the assessee but with reference to the value of the asset vis-a-vis the cost of acquisition of the sale consideration of the property. Therefore, we are of the considered view that the cost of acquisition of the houses for the purpose of long-term capital gains computation is the total cost incurred by the assessees and not the first instalment value as determined by the lower authorities. Accordingly, the contentions raised by the assessees are accepted and the appeals are allowed. The assessing authority is directed to adopt the cost of acquisition as directed by us and re-compute the long-term capital gains taxable in the hands of the assessees accordingly. In result, these two appeals are allowed.

Summary

Issues:
Cost of acquisition for computing capital gains under section 48.

Analysis:

Issue: Cost of acquisition for computing capital gains under section 48

The case involved two brothers who sold their houses in Mumbai and computed the indexed cost of the houses based on the rate of indexation from a previous year. However, the assessing authority considered the first instalment paid by the brothers as the cost of acquisition and subsequent instalments as cost of improvements, resulting in a differential loss of indexation benefit. The total cost incurred by the brothers for acquiring the houses was not considered for indexation, leading to a higher capital gain assessment by the Assessing Officer. The brothers argued that the total cost should be considered for indexation, citing relevant case laws. The Tribunal deliberated on the concept of cost of acquisition under section 48, emphasizing that the intrinsic value of the property should be the determining factor. The Tribunal highlighted that the cost or value of the property remains the same regardless of the payment mode, and inflation protection is linked to the total cost of acquisition, not just the initial instalment. Ultimately, the Tribunal ruled in favor of the brothers, stating that the total cost incurred should be considered for computing long-term capital gains, directing the assessing authority to re-compute the capital gains accordingly. The appeals were allowed, setting aside the lower authorities' decision.

This judgment clarifies the crucial aspect of determining the cost of acquisition for computing capital gains, emphasizing the intrinsic value of the property and the significance of considering the total cost incurred by the assessee. The decision provides clarity on the application of indexation benefits and ensures a fair assessment of capital gains in line with the principles of taxation law.