2004 (12) TMI 29 - HC - Income Tax

Capital gains - admittedly, the assets have been acquired by a mode of acquisition specified in section 49(1)(iii)(a) of the Act and thus the asset in question is a long-term capital asset but neither the cost nor the date of acquisition are ascertainable - it cannot be held that the order of the Tribunal suffers from any legal error or infirmity so as to call for any interference. The Tribunal was justified in law in holding that the income-tax authorities were not right in working out the capital gains at Rs. 41,11,414 so as to bring the same to tax under the head Capital gains

Summary

Issues Involved:
1. Validity of the inclusion of capital gains of Rs. 41,11,414 in the total income of the assessee.
2. Applicability of the Supreme Court decision in CIT v. B.C. Srinivasa Setty [1981] 128 ITR 294 to the case.
3. Interpretation of sections 48, 49, and 55 of the Income-tax Act, 1961.

Detailed Analysis:

1. Validity of the inclusion of capital gains of Rs. 41,11,414 in the total income of the assessee:
The core issue is whether the Income-tax authorities were justified in including capital gains of Rs. 41,11,414 in the total income of the assessee. The assessee inherited the property known as "Ranjit Vilas Palace" along with adjacent lands. The Income-tax Department attached and auctioned part of this land to recover outstanding tax dues. The gross realization from the auction was Rs. 65,50,870. The assessee declared long-term capital gains as "nil," arguing that the land was inherited and had no ascertainable cost of acquisition. The Assessing Officer estimated the cost price of the land at Rs. 3,000 and computed long-term capital gains at Rs. 41,11,414. The Tribunal, however, concluded that the cost of acquisition was nil, making the computation of capital gains infeasible, thus deleting the addition of Rs. 41,11,414 from the assessee's total income.

2. Applicability of the Supreme Court decision in CIT v. B.C. Srinivasa Setty [1981] 128 ITR 294 to the case:
The Tribunal accepted the assessee's reliance on the Supreme Court decision in CIT v. B.C. Srinivasa Setty, which held that if the cost of acquisition of an asset is not ascertainable, the computation provisions fail, and no capital gains can be taxed. The Tribunal found that the property was acquired by conquest by the assessee's forefathers, implying no ascertainable cost of acquisition. The Revenue argued that the decision in B.C. Srinivasa Setty pertained to self-generating business assets like goodwill and was not applicable to tangible assets like land. However, the Tribunal upheld that the principles from B.C. Srinivasa Setty applied to this case as well, as the cost of acquisition was unascertainable.

3. Interpretation of sections 48, 49, and 55 of the Income-tax Act, 1961:
The Revenue contended that under sections 48 and 49, even if the cost of acquisition is nil, the full value of the consideration received should be taxed as capital gains. They argued that section 55(2) allowed the assessee to adopt the fair market value as of January 1, 1964, but the assessee chose not to. The Tribunal noted that the asset was acquired by inheritance, falling under section 49(1)(iii)(a), and the cost of acquisition in the hands of the previous owner (who acquired it by conquest) was nil. The Tribunal held that without an ascertainable cost of acquisition, the computation provisions under section 48 could not be applied, thus no capital gains could be charged. The Tribunal's interpretation was that the legislative intent, as reflected in sections 45, 48, 49, and 55, did not support taxing capital gains where the cost of acquisition was unascertainable.

Conclusion:
The High Court upheld the Tribunal's decision, affirming that the income-tax authorities were not justified in including the capital gains of Rs. 41,11,414 in the total income of the assessee. The Court concluded that the Tribunal correctly applied the Supreme Court's decision in B.C. Srinivasa Setty and interpreted the relevant sections of the Income-tax Act. The judgment was delivered in favor of the assessee, confirming that without an ascertainable cost of acquisition, the computation of capital gains fails, and thus, no capital gains tax could be levied.