1987 (6) TMI 88 - AT - Income Tax

Summary

Issues Involved:
1. Determination of the cost of acquisition for the purpose of computing capital gains on the sale of jewellery.
2. Applicability of the Supreme Court decision in CIT v. Bai Shirinbai K. Kooka.
3. Consideration of market value as on a specific date when the asset became a capital asset.

Issue-wise Detailed Analysis:

1. Determination of the cost of acquisition for the purpose of computing capital gains on the sale of jewellery:
The primary issue in this case revolves around the appropriate cost of acquisition to be used for calculating capital gains on the sale of jewellery. The assessee argued that jewellery was not considered a capital asset until the amendment of section 2(14) of the Income-tax Act by the Finance Act, 1972, effective from 1-4-1973. Therefore, the assessee contended that the market value of the jewellery as of 31-3-1972 should be adopted as the cost of acquisition. The Income Tax Officer (ITO), however, determined the capital gains based on the original cost of acquisition in 1966, which was Rs. 28,000, resulting in a capital gain of Rs. 75,500.

2. Applicability of the Supreme Court decision in CIT v. Bai Shirinbai K. Kooka:
The assessee relied on the Supreme Court decision in CIT v. Bai Shirinbai K. Kooka, arguing that the cost of jewellery on the date it became a capital asset under law should be taken at the market value as on that date. The Tribunal, however, clarified that the decision in Bai Shirinbai K. Kooka was not applicable to the present case. In Bai Shirinbai K. Kooka, the issue was related to the conversion of shares held as an investment into business stock, and the computation of business profit based on the market value of the stock on the date of conversion. In contrast, the present case involved the computation of capital gains on the sale of jewellery, not business income.

3. Consideration of market value as on a specific date when the asset became a capital asset:
The Tribunal examined whether the market value of the jewellery as of 31-3-1972 should be considered for the purpose of computing capital gains. The Tribunal referred to the Gujarat High Court decision in Ranchhodbhai Bhaijibhai Patel v. CIT, which held that the cost of acquisition of a capital asset should be based on the actual cost incurred by the assessee at the time of acquisition, regardless of whether the asset was considered a capital asset at that time. The Tribunal emphasized that the cost of acquisition is a factual determination and should not be altered based on subsequent changes in the asset's classification under tax law.

The Tribunal also noted that the decisions of the Allahabad Bench and Chandigarh Bench, which the assessee relied upon, did not consider the Gujarat High Court's ruling. The Tribunal concluded that the cost of acquisition should be based on the original cost incurred in 1966, and the market value as of 31-3-1972 should not be substituted. The Tribunal set aside the order of the Appellate Assistant Commissioner (AAC) and upheld the ITO's determination of capital gains at Rs. 75,500.

Conclusion:
The Tribunal's judgment clarified that for the purpose of computing capital gains, the cost of acquisition should be based on the actual cost incurred by the assessee at the time of acquisition, and not on the market value as of a later date when the asset became a capital asset under law. The appeal was allowed, and the ITO's determination of capital gains at Rs. 75,500 was upheld.