1985 (7) TMI 123 - AT - Income Tax

Summary

Issues Involved:
1. Whether the remainderman's interest is a capital asset.
2. Whether the cost of acquisition of the remainderman's interest can be identified or conceived.
3. Whether the provisions of Section 45 of the Income Tax Act are applicable to the transaction.

Issue-wise Detailed Analysis:

1. Whether the remainderman's interest is a capital asset:

The Tribunal examined if the remainderman's interest qualifies as a capital asset under the Income Tax Act. It was noted that the assessee had shown the value of their remainderman's interest in their Wealth Tax returns and had sold such interest for a significant consideration. The Tribunal concluded that the remainderman's interest is indeed a capital asset. The Judicial Member noted, "It is no doubt true that the remainderman's interest is an asset." However, the Accountant Member emphasized that "the asset sold by the assessee cannot be said to be self-generated" and "the asset sold by the assessee does constitute a capital asset under s. 2(14)."

2. Whether the cost of acquisition of the remainderman's interest can be identified or conceived:

The Tribunal explored whether the cost of acquisition for the remainderman's interest could be determined. The Judicial Member argued that the remainderman's interest was created by the trust deed and did not involve any cost, thus falling within the ratio laid down in the case of Srinivasa Shetty. He stated, "The cost of acquisition of such an interest cannot be identified or conceived which is required for computing the chargeable capital gains under s. 45 of the Act." Conversely, the Accountant Member contended that the asset was not self-generated and its moment of birth was known. He argued that the asset's cost could be traced back to the settlor, stating, "The word 'the capital asset' has to be taken as referring to the asset even if it existed in a conglomeration in inchoate or nebulous form."

3. Whether the provisions of Section 45 of the Income Tax Act are applicable to the transaction:

The Tribunal debated the applicability of Section 45, which deals with capital gains tax. The Judicial Member opined that since the cost of acquisition could not be conceived, the provisions of Section 45 could not be applied. He cited the Supreme Court's decision in Srinivasa Shetty, emphasizing, "In our opinion, the cost of acquisition of the remainderman's interest cannot be conceived or identified. Therefore, the assessee's case squarely falls within the ratio laid down in the case of Srinivasa Shetty." On the other hand, the Accountant Member believed that the asset was indeed a capital asset and that the cost could be traced back, thus making the provisions of Section 45 applicable. He stated, "I, therefore, hold that there was an asset and that the asset did exist in the hands of the previous owner. The ratio of Srinivasa Shetty's case therefore does not apply to this case."

Separate Judgments Delivered:

The Judicial Member concluded that the assessee was not liable for capital gains tax as the cost of acquisition could not be determined, thus allowing the appeals. "The ITO is, therefore, directed to modify the assessment accordingly. In the result, both the appeals are allowed."

The Accountant Member disagreed, holding that the remainderman's interest was a capital asset with a determinable cost, thus subject to capital gains tax. "I, therefore, hold that in this case capital gain is correctly assessed to tax and that the appeals should be dismissed."

Reference to Third Member:

Due to the difference in opinions, the matter was referred to a Third Member. The Third Member agreed with the Accountant Member, stating, "I hold that the remainderman's interest is a capital asset and that the said capital asset was owned by the previous owner in terms of Explain. 1 to s. 49 (1) of the Act. Accordingly, I further hold that the assessee are liable to tax under the head 'capital gains' on the surplus arising from the sale transactions of their remainderman's interest."

Final Decision:

The majority view, including the Third Member's opinion, concluded that the assessee was liable to be taxed on the capital gains arising from the sale of their remainderman's interest in the trust.