1986 (1) TMI 37 - HC - Income Tax

Summary

Issues Involved:
1. Whether the sale proceeds of the lands in question attract the provisions of section 45 of the Income-tax Act, 1961.
2. Whether the Tribunal was correct in holding that no capital gains accrued to the assessee.

Summary:

Issue 1: Applicability of Section 45 of the Income-tax Act, 1961
The main controversy was whether the sale proceeds of the lands situated within the compounds of Shri Ranjit Vilas Palace and Shri Lokendra Bhavan attracted the provisions of section 45 of the Income-tax Act, 1961. The learned counsel for the Revenue argued that the sale proceeds should be considered capital receipts and thus taxable under section 45. The relevant provisions of the Income-tax Act, including sections 2(14), 2(47), 45, 49, and 55, were discussed to determine the applicability. The Revenue relied on Circular No. 31 dated September 21, 1962, which stated that the cost of acquisition could be substituted with the fair market value as on January 1, 1954, for assets acquired by inheritance before that date.

Issue 2: Tribunal's Decision on Capital Gains
The Tribunal permitted the assessee to argue that there was no cost of acquisition for the asset in question, thus no capital gain could arise from its transfer. The Tribunal concluded that no capital gain arose from the sale of the land and building, considering the historical context that the property was inherited without any cost of acquisition in terms of money. The learned counsel for the assessee supported this view, citing several judicial precedents, including CIT v. Home Industries and Co., CIT v. Jaswantlal Dayabhai, CIT v. B. C. Srinivasa Setty, and others, which established that if there is no cost of acquisition, the sale price would not attract capital gains tax.

The court agreed with the Tribunal's decision, emphasizing that the provisions of section 45 require a cost of acquisition in terms of money for capital gains to be applicable. Since the forefathers of the assessee did not incur any cost for acquiring the property, the sale did not result in any "profits or gains" as defined by the Act.

Conclusion:
The reference was answered in favor of the assessee, holding that no capital gains accrued to the assessee under the provisions of section 55(2) of the Income-tax Act, 1961. The Tribunal's decision was upheld, and no costs were awarded.