2011 (8) TMI 453 - AT - Income Tax

Determination of capital gain - Section 51 of the Act is applicable to an aborted transaction only - Whereas in the instant case there was neither cancellation nor forfeiture of any deposit and hence section 51 has no application - As per the decision of the Apex Court in the case of Travancore Rubber & Tea Co. Ltd. v. CIT 2000 -TMI - 5789 - SUPREME Court wherein the Supreme Court has very clearly held that under section 51 retention of any money by the assessee is not taxable at all and it is a capital receipt - However, it has to be reduced from the cost of asset so that at the time of subsequent sale of the said asset net cost would be considered and not the original cost - thus the capital gains as worked out by the assessee under section 48 of the Act, after considering the cost inflation index applicable to the assessment year 2004-2005 is in accordance with law and therefore, deserves to be accepted - Held that assessee is entitled to work-out the capital gains under section 48 of the Act after considering the cost inflation index applicable to assessment year 2004-2005.

Summary

Issues:
1. Proper opportunity provided to the appellant by CIT (A).
2. Applicability of section 51 to the appellant's case.
3. Allowance of indexation of cost as claimed by the appellant.
4. Disallowance of genuine expenditure claimed against income from capital gains.

Analysis:

Issue 1:
The appellant contended that the CIT (A) erred in assuming proper opportunity was provided. The CIT (A) observed that sufficient opportunity was given before applying section 51 of the Act, dismissing the appellant's preliminary objection. The appellant's argument on this count was deemed not maintainable.

Issue 2:
Regarding the applicability of section 51, the Assessing Officer reduced advance money from the cost of acquisition, computing capital gains accordingly. The CIT (A) upheld this decision, stating that advances received had to be deducted from the value as on 1-4-1981 for computing the cost of acquisition. The appellant argued that section 51 applied only to failed transactions, citing legal commentary. The Tribunal held that section 51 applied to aborted transactions only, allowing the appellant to compute capital gains as per index cost applicable to the assessment year 2004-2005.

Issue 3:
The appellant claimed indexation of cost for capital gains computation. The Tribunal considered the legal provisions and the specific circumstances of the case, ultimately allowing the appellant to work out capital gains under section 48 after considering the cost inflation index for the relevant assessment year.

Issue 4:
The disallowance of genuine expenditure against capital gains was raised. The Tribunal directed the Assessing Officer to accept the appellant's plea, as a similar computation had been accepted for another co-owner without reopening the case. Consequently, the cost inflation index calculated by the appellant was to be used as the basis for determining capital gains.

In conclusion, the Tribunal partly allowed the appeal, ruling in favor of the appellant on the issues related to the applicability of section 51 and the computation of capital gains based on the cost inflation index.