1998 (1) TMI 37 - HC - Income Tax

Summary

Issues Involved:
1. Determination of capital gains for the assessment year 1972-73.
2. Interpretation of Section 49(1) of the Income-tax Act, 1961, regarding the cost of acquisition of capital assets.
3. Application of the Explanation below Section 49(1) concerning the previous owner.
4. Applicability of amendments and judicial precedents to the case.

Issue-wise Detailed Analysis:

1. Determination of capital gains for the assessment year 1972-73:
The primary issue was whether the Income-tax Appellate Tribunal erred in holding that no capital gains arose to the assessee in his individual assessment for the assessment year 1972-73. This was based on the assertion that the Hindu undivided family (HUF) of the assessee was the last previous owner of the plots in question, as per Section 49(1) of the Income-tax Act, 1961.

2. Interpretation of Section 49(1) of the Income-tax Act, 1961:
Section 49(1) provides the basis for determining the cost of acquisition of a capital asset for computing capital gains when the asset becomes the property of an individual through specific modes such as partition of a HUF. The general principle is to deduct the cost of acquisition from the sale price to compute capital gains. However, Section 49(1) introduces exceptions where the cost to the previous owner is deemed to be the cost to the assessee.

3. Application of the Explanation below Section 49(1) concerning the previous owner:
The Explanation under Section 49(1) specifies that the cost of acquisition should be the cost at which the last previous owner acquired the property, provided the acquisition was not through partition, gift, will, succession, inheritance, or devolution. In this case, the assessee purchased the plots in 1962, threw them into the HUF's common stock in 1968, and reacquired them on partition in 1970. The Tribunal initially held that the cost of acquisition in the hands of the HUF was nil, thus no capital gains arose. However, the court concluded that the cost of acquisition should be the cost incurred by the last previous owner, i.e., the assessee himself, who acquired the property by purchase.

4. Applicability of amendments and judicial precedents to the case:
The court examined various judicial precedents and amendments to the Income-tax Act. Notably, a new clause (iv) was inserted by the Taxation Laws (Amendment) Act, 1975, effective from April 1, 1976, which was not applicable to the assessment year in question. The court referred to several cases, including CIT v. Ashok Kumar Jalan, CIT v. Kanubhai R. Shah (HUF), CIT v. S. Krishnamurthy, and CIT v. Trikamlal Maneklal (HUF), to understand the treatment of property thrown into the common stock of a HUF and the subsequent computation of capital gains.

In CIT v. Ashok Kumar Jalan, the Patna High Court held that the cost of acquisition should be nil if the HUF did not incur any cost. In CIT v. Kanubhai R. Shah (HUF), the Bombay High Court held that the cost of acquisition should be the market value on the date of acquisition by the HUF. However, the court in the present case disagreed with the Bombay High Court's view, emphasizing the importance of the Explanation below Section 49(1).

Conclusion:
The court concluded that the cost of acquisition of the property should be deemed to be the cost at which the property was acquired by purchase by the last previous owner, i.e., the assessee. The question was answered in the affirmative, in favor of the Department and against the assessee.