1994 (4) TMI 49 - HC - Income Tax

Capital Gains, Computation Of Capital, Cost Of Acquisition, Fair Market Value, Taxing Statutes, The High Court

Summary

Issues Involved:
1. Option to substitute fair market value as the cost of acquisition for computing capital gains.
2. Validity of Section 50(2) of the Income-tax Act, 1961 under Article 14 of the Constitution.

Issue-wise Detailed Analysis:

1. Option to Substitute Fair Market Value as the Cost of Acquisition for Computing Capital Gains:
The primary issue is whether an assessee who has purchased a depreciable asset before January 1, 1954, can opt to substitute the fair market value on that date as the cost of acquisition for computing capital gains under the Income-tax Act, 1961. The court examined relevant sections including Sections 45, 48, 49, 50, and 55 of the Act. Section 45 creates a charge on any profits or gains arising from the transfer of a capital asset. Section 48 deals with the mode of computation and deductions, while Section 49 deals with the cost of acquisition with reference to certain specified modes of acquisition like gift or succession. Section 50 contains special provisions for computing the cost of acquisition in the case of depreciable assets, stipulating modifications to Sections 48 and 49.

The court noted that Section 50(2) allows the fair market value on January 1, 1964, to be taken into account at the option of the assessee, but this option is not the source of the option itself. The source of the option is Section 55(2), which grants the option to the assessee to either use the actual cost of acquisition or the fair market value on the specified date. The court concluded that Section 50, though a special provision, does not affect the option given under Section 55(2). Therefore, the assessee has the option to substitute the fair market value as the cost of acquisition.

2. Validity of Section 50(2) of the Income-tax Act, 1961 under Article 14 of the Constitution:
The second issue is whether Section 50(2) is arbitrary and thus ultra vires Article 14 of the Constitution. The court observed that the object of the option given in Section 55(2) is to protect the assessee against the assessment of illusory capital gains resulting from inflation and the decline in the value of money. The court found no justifiable reason for denying this option to an assessee who has purchased a depreciable asset and sold it after using it. The court highlighted that Section 50(2) deals with assets acquired otherwise than by purchase and does not take away the option conferred by Section 55(2)(i).

The court further noted that the distinction between an assessee who acquires an asset by purchase and one who acquires it by gift or succession has no nexus to the object of the enactment, which is to prevent the assessment of illusory capital gains. The classification between depreciable and non-depreciable assets and between different classes of assessees lacks a rational basis and could make Section 50 irrational and violative of Article 14. The court emphasized the need to interpret legislation in a manner that makes it constitutional, suggesting that Section 50 should be read down to ensure it does not infringe upon the assessee's rights under Section 55(2).

Conclusion:
The court quashed the assessment order and notice of demand issued by the Income-tax Officer and upheld by the Commissioner of Income-tax, restraining the respondents from proceeding with the recovery of the demanded tax. The court allowed the petition and made the rule absolute, rendering the appeal before the Tribunal infructuous. No costs were awarded.