2002 (8) TMI 28 - HC - Income Tax

Computation Of Capital Gains - Whether, having regard to the Explanation to section 49(1) of the Income-tax Act, 1961, and the fact that the asset became the property of Shri Sourirajulu on the distribution of assets on the dissolution of the firm within the meaning of sub-section (1)(iii)(b) thereof, the Appellate Tribunal is correct in law in coming to the conclusion that the sum of Rs. 1 lakh paid by the said Sri Sourirajulu at the time of taking over the business as proprietary business would form part of the cost of acquisition for the purpose of computing the capital gains in this case? - It is evident from the Explanation that where the previous owner of an asset which was sold had himself acquired it by any of the modes set out in section 49(1) in its sub-clauses (i) to (iv) it is the cost incurred by the owner who had owned the asset prior to the previous owner that is required to be taken into account and not the cost incurred by the previous owner at the time he received the asset in any of the modes set out in sub-clauses (i) to (iv) of section 49(1). In this case, Sourirajulu paid a sum of Rs. 1 lakh to the retiring partner in 1972 at the time the firm was dissolved. The cost of the acquisition, therefore, is not to be computed by taking that one lakh rupees into account but by only looking to the cost of the acquisition to the firm which was dissolved. The Tribunal was clearly in error in holding otherwise. The question referred to us is, therefore, answered in favour of the Revenue and against the assessee.

Summary

Issues: Assessment year 1976-77 - Interpretation of section 49(1) of the Income-tax Act, 1961 - Whether the sum paid by an individual during the dissolution of a firm should be considered as part of the cost of acquisition for computing capital gains.

Analysis:
The case involved a dispute regarding the cost of acquisition for computing capital gains during the assessment year 1976-77. The main issue was the interpretation of section 49(1) of the Income-tax Act, 1961, specifically focusing on the Explanation provided under the section. The question referred to the court was whether the sum of Rs. 1 lakh paid by an individual during the dissolution of a firm should be considered as part of the cost of acquisition for computing capital gains. The asset in question was a theatre originally owned by a firm, which underwent reconstitution resulting in only two partners continuing the business. One partner retired, leaving the other partner to continue the business alone. Subsequently, the remaining partner entered into a partnership with his sons and sold the theatre, resulting in a capital gain.

The firm claimed that the sum of Rs. 1 lakh paid to the retiring partner during the dissolution should be included in the cost of acquisition for computing capital gains. However, this claim was rejected by the Assessing Officer and the Commissioner (Appeals). The Tribunal, on the other hand, allowed the claim, leading to the reference being brought before the High Court by the Revenue. The court analyzed section 49 of the Act, particularly focusing on the relevant provisions related to the cost of acquisition in cases of asset distribution during the dissolution of a firm.

The court emphasized the Explanation under section 49(1), which clarified that the cost of acquisition should be based on the cost incurred by the owner prior to the previous owner, not the cost incurred by the previous owner during asset acquisition. In this case, the individual paid Rs. 1 lakh to the retiring partner during the firm's dissolution in 1972. The court concluded that the cost of acquisition should only consider the cost incurred by the firm that was dissolved, not the additional payment made during the dissolution. Therefore, the Tribunal's decision was deemed erroneous, and the court ruled in favor of the Revenue and against the assessee, answering the question in the Revenue's favor.