1996 (2) TMI 57 - HC - Income Tax

Capital Asset, Capital Gains, Cost Of Acquisition, Diversion Of Income, Income By Overriding Title

Issues Involved:
1. Determination of consideration received for capital gains calculation under Section 48 of the Income-tax Act, 1961.
2. Treatment of the amount paid to the Income-tax Department as the cost of acquisition of capital assets.
3. Eligibility for exemption under Section 54E of the Income-tax Act, 1961.
4. Admissibility of an additional ground regarding the property being agricultural land and thus exempt from capital gains tax.

Issue-wise Detailed Analysis:

1. Determination of Consideration Received for Capital Gains Calculation:
The primary issue was whether the consideration received by the assessee and other co-owners from the sale of the property should be taken as Rs. 6,20,000 or if there was a diversion by overriding title in respect of Rs. 4,44,374 paid by the purchaser to the Income-tax Department. The court held that the attachment of the property during the lifetime of the assessee's father created an overriding title. Therefore, when part of the sale consideration was paid directly to the Income-tax Department, it was considered a diversion of the amount by overriding title. Consequently, only the balance amount received by the assessee could be brought to tax. The court relied on the principles laid down in CIT v. Sitaldas Tirathdas [1961] 41 ITR 367 (SC) and Raja Bejoy Singh Dudhuria v. CIT [1933] 1 ITR 135 (PC), concluding that the payment made to the Income-tax Department out of the sale consideration was a diversion by overriding title.

2. Treatment of Amount Paid to Income-tax Department as Cost of Acquisition:
The second issue was whether the amount paid to the Income-tax Department could be treated as the cost of acquisition of the capital assets. The court referred to the principles established in Ambat Echukutty Menon v. CIT [1978] 111 ITR 880 and K. V. Idiculla v. CIT [1995] 214 ITR 386, determining that the cost of acquisition for inherited property is deemed to be the cost for which the previous owner acquired it, plus any improvements. Since the amount paid towards tax liability did not constitute an improvement or alteration to the capital asset, it could not be considered the cost of acquisition.

3. Eligibility for Exemption under Section 54E:
The third issue was whether the assessee was entitled to exemption under Section 54E of the Income-tax Act, 1961, for deposits made in May 1978 and February 1979. The court found that the deposits were not made within six months of the transfer of the capital asset, which occurred on March 17, 1977. Therefore, the assessee was not entitled to claim the exemption under Section 54E.

4. Admissibility of Additional Ground Regarding Agricultural Land:
The fourth issue concerned whether the Commissioner of Income-tax (Appeals) was justified in not entertaining an additional ground that the property sold was agricultural land and thus exempt from capital gains tax. The court noted that arguments were addressed, and decisions were cited, but both sides agreed that if the first question was answered in favor of the assessee, the fourth issue need not be decided. Consequently, the court declined to answer this question.

Conclusion:
The court answered question No. 1 in favor of the assessee, recognizing the diversion by overriding title. Questions Nos. 2 and 3 were answered against the assessee, affirming that the amount paid to the Income-tax Department could not be treated as the cost of acquisition and that the exemption under Section 54E was not applicable. The court declined to answer question No. 4. There was no order as to costs, and a copy of the judgment was to be communicated to the Income-tax Appellate Tribunal, Cochin Bench, for information.

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