1979 (6) TMI 19 - HC - Income Tax

Capital Gains, Carrying On Business, Cost Of Acquisition, Immovable Property, In Part, Movable Property, One Partner, Set Off

Issues Involved:
1. Determination of the cost of acquisition for computing capital gains.
2. Applicability of sections 49 and 55 of the I.T. Act, 1961.
3. Validity of the valuation method used by the firm and the partners.
4. Relevance of the Supreme Court decision in Kalooram Govindram v. CIT.
5. Finality of the AAC's order on the valuation date and its implications.

Detailed Analysis:

1. Determination of the Cost of Acquisition for Computing Capital Gains:
The primary issue was whether the cost of acquisition of the property for the assessee should be taken as its market value as on April 1, 1964, or another value. The Tribunal held that the cost of acquisition should be the market value as on April 1, 1964, but this was contested by the revenue.

2. Applicability of Sections 49 and 55 of the I.T. Act, 1961:
The ITO argued that the property never became the firm's property but remained that of the original HUF, and thus, the cost of acquisition should be the cost to the HUF under sections 49(1)(i) and 55(2) of the Act. The Tribunal, however, found that the property was indeed transferred to the firm and later taken out and divided among the partners. Consequently, sections 49 and 55 were deemed not applicable by the Tribunal.

3. Validity of the Valuation Method Used by the Firm and the Partners:
The Tribunal determined that the Rs. 9,400 value recorded in the firm's books was not the true market value but a notional value. The Tribunal directed the ITO to compute the capital gains based on the market value as on April 1, 1964. However, the court found that the valuation method used by the firm and the partners, where the property was taken over at Rs. 9,400, was legitimate and not notional, as it involved real adjustments in the accounts.

4. Relevance of the Supreme Court Decision in Kalooram Govindram v. CIT:
The court referred to the Supreme Court decision in Kalooram Govindram v. CIT, which held that the value given to a property for partition purposes should be considered its cost, provided it was real. The court applied this principle, stating that the valuation of Rs. 94,000 for the entire property, and consequently Rs. 9,400 for the assessee's share, was real and not notional.

5. Finality of the AAC's Order on the Valuation Date and Its Implications:
The AAC had allowed the assessee to opt for the value as on January 1, 1954, fixing it at Rs. 800 per ground. This order was not challenged by the department, making it final. The court clarified that nothing in its judgment should disturb the computation from the AAC's order.

Conclusion:
The court concluded that the Tribunal was incorrect in describing the valuation as notional. The valuation of Rs. 9,400 was real and should be taken as the cost of acquisition. The question referred was answered in the negative and in favor of the revenue. The revenue was entitled to its costs, with counsel's fee set at Rs. 500.

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