2016 (3) TMI 178 - AT - Income Tax

Capital gain computation - whether Property held by the assessee is relevant in computing capital gain and not owned - indexation - computation of Cost of acquisition - market value - antecedent interest over the property - revision u/s 263 - Held that - The expression where the capital asset became the property of the Assessee before 1st April, 1981 in the context of Sec.55(2)(b)(i) of the Act, is rather ambiguous, in the sense that it does not speak of the date of vesting of legal title to the property. Even the provisions of sec.2(47)(v) & (vi) of the Act which defines what is transfer for the purpose of the Act, considers possessory rights as akin to legal title. It is therefore necessary to look into the policy and object of the provisions giving exemption from levy of tax on capital gain. In the present case the Assessee had paid the entire consideration for the property prior to 1.4.1981. Therefore the claim of the Assessee that the property became property of the Assessee before 1st April, 1981 as it held the property from the year 1970 has to be accepted, keeping in mind the policy and object of the provisions giving the benefit of inflation by adopting fair market value as on 1.4.1981 in respect of properties acquired prior to that date. In our view that the legislature would not have intended to give a meaning to the expression where the capital asset became the property of the Assessee before 1st April, 1981 used in Sec.55(2)(b)(i) of the Act, as referring to only vesting of legal title. It is unlikely that the legislature would wish to deny benefit of adopting Fair Market value as on 1.4.1981 while computing cost of acquisition for the purpose of Sec.48 of the Act, in a case where, otherwise the Assessee satisfies all parameters for grant of fair market value as on 1.4.1981. The expression where the capital asset became the property of the Assessee before 1st April, 1981 as used in Sec.55(2)(b)(i) of the Act should not be therefore be equated to legal ownership. In the present case the Assessee had an antecedent interest over the property as early as 3.3.1970 and a vested right over the property by paying the entire sale consideration and complying with the other terms of the deed of assignment much prior to 1.4.1981. We are therefore of the view that the CIT was not justified in directing the AO to adopt the date of acquisition of the property by the Assessee for the purpose of computing capital gain u/s.48 as 19.4.1994. The claim of the Assessee that it was entitled to adopt fair market value of the property as on 1.4.1981 as cost of acquisition and consequent indexation benefit is correct. We reverse and modify the order of the CIT to this extent. As far as what is the cost of acquisition and as to whether the expenditure incurred by the Assessee in connection with the transfer were allowable deduction or not, has not been examined by the AO while completing the assessment u/s.143(3) of the Act. To this extent we uphold the order of the CIT directing the AO to examine these two aspects and compute capital gain accordingly

Issues Involved:
1. Validity of the CIT's initiation of proceedings under Section 263 of the Income Tax Act, 1961.
2. Determination of the date of acquisition of the property for computing long-term capital gain.
3. Validity of the Assessee's claim for adopting the fair market value of the property as on 1.4.1981.
4. Examination of the cost of acquisition and expenditure incurred in connection with the transfer.

Issue-wise Detailed Analysis:

1. Validity of the CIT's Initiation of Proceedings under Section 263:
The Assessee argued that under Section 263 of the Income Tax Act, 1961, only the CIT could initiate proceedings suo motu and that the AO's proposal for revision invalidated the CIT's order. The Tribunal rejected this argument, stating that there is no prohibition under Section 263 for the CIT to act based on the AO's proposal. As long as the CIT applies his mind to the errors and the conditions under Section 263 are satisfied, the initiation of proceedings is valid.

2. Determination of the Date of Acquisition of the Property:
The CIT contended that the Assessee became the owner of the property only on 19.4.1994 when a registered conveyance was executed. The Assessee argued that it became the owner by virtue of the assignment deed dated 3.3.1971 and had complied with all conditions, thus becoming the de facto owner before 1.4.1981. The Tribunal held that the Assessee's title to the property could be traced to the original assignment deed dated 3.3.1970, and the property became the Assessee's before 1.4.1981 due to the payment of the entire consideration and compliance with conditions. Therefore, the Assessee was entitled to adopt the fair market value as on 1.4.1981.

3. Validity of the Assessee's Claim for Adopting the Fair Market Value as on 1.4.1981:
The CIT argued that the Assessee could not adopt the fair market value as on 1.4.1981 because it did not have absolute ownership before that date. The Assessee relied on various legal precedents, arguing that the term "held" in Sections 2(14), 2(42A), and 48 of the Act refers to possession and not legal ownership. The Tribunal agreed with the Assessee, stating that the expression "where the capital asset became the property of the Assessee before 1st April, 1981" in Section 55(2)(b)(i) does not necessarily refer to legal ownership. The Assessee had a vested right over the property before 1.4.1981, and thus, it was entitled to adopt the fair market value as on 1.4.1981.

4. Examination of the Cost of Acquisition and Expenditure Incurred:
The CIT directed the AO to examine the actual cost of acquisition and the expenditure incurred in connection with the transfer, as these aspects were not verified during the initial assessment. The Tribunal upheld this direction, stating that the AO should examine these aspects and compute the capital gain accordingly.

Conclusion:
The appeal by the Assessee was partly allowed. The Tribunal reversed the CIT's order to the extent that it directed the AO to adopt 19.4.1994 as the date of acquisition. The Tribunal upheld the Assessee's claim to adopt the fair market value as on 1.4.1981. However, the Tribunal upheld the CIT's direction for the AO to examine the cost of acquisition and the expenditure incurred in connection with the transfer.

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