1996 (2) TMI 173 - AT - Income Tax

Summary

Issues Involved:
1. Whether the release of life interest by the assessee amounts to a transfer or gift.
2. Determination of the cost of acquisition of the life interest for the purpose of capital gains tax.
3. Correct computation of capital gains in relation to bonus and right shares.

Issue-wise Detailed Analysis:

1. Whether the release of life interest by the assessee amounts to a transfer or gift:

The primary issue was whether the release of life interest by the assessee constituted a transfer or gift. The assessee argued that the release of life interest was a unilateral act and did not amount to a transfer, as per the precedent set by the Bombay High Court in the case of CIT v. Neville N. Wadia [1973] 90 ITR 155. The court had held that the execution of a release deed did not amount to a transfer of assets by the assessee in favor of his minor children. The Departmental Representative (DR) contended that the release of life interest was a gift and should be taxed accordingly. The tribunal noted that under the Gift-tax Act, the definition of 'gift' includes any transfer of existing property made voluntarily and without consideration. The tribunal concluded that the act of releasing life interest fell within the scope of a gift, as it involved the transfer of property without consideration. Therefore, the release of life interest was deemed to be a gift and subject to taxation under the Income-tax Act.

2. Determination of the cost of acquisition of the life interest for the purpose of capital gains tax:

The assessee contended that since the life interest was acquired without any cost, the capital gains tax should not be levied, relying on the decision of the Supreme Court in CIT v. B.C. Srinivasa Setty [1981] 128 ITR 294 (SC). The CIT(A) held that the settlement deed by Neville Wadia in favor of Nusli Wadia amounted to a gift, and therefore, the cost of acquisition should be determined in terms of section 49(1)(ii) of the Income-tax Act. The tribunal agreed with the CIT(A) that the capital asset became the property of the assessee under a gift, and thus, the cost of acquisition should be deemed to be the cost for which the previous owner acquired it, as per section 49 of the Income-tax Act. The tribunal emphasized that the cost to the settlor, as per the index, shall be the cost of acquisition.

3. Correct computation of capital gains in relation to bonus and right shares:

The assessee argued that the value of the asset was not correctly taken into account, considering the right issues and bonus shares received after 1-1-1964. The tribunal acknowledged that the cost of acquisition should be determined correctly, taking into account the subsequent acquisition of bonus and right shares. The tribunal allowed the alternative argument advanced by the assessee and directed the Assessing Officer (A.O.) to compute the capital gains correctly in accordance with the law, after providing adequate opportunity to the assessee to be heard.

Conclusion:

The tribunal concluded that the release of life interest by the assessee constituted a gift and was subject to taxation under the Income-tax Act. The cost of acquisition should be determined based on the cost to the settlor, as per the index. The tribunal set aside the impugned order and restored the matter to the file of the A.O. with directions to compute the capital gains correctly, considering the subsequent acquisition of bonus and right shares. The appeal of the assessee was partly allowed.