“The cost of acquisition” is a definite sum incurred to acquire capital asset- the judgment of Punjab and Hariyana High Court (FB)** appears to be contrary to law ans settled legal position - deserve to be reviewed.

[DEV KUMAR KOTHARI]

**{ The Commissioner of Income Tax, Patiala Versus Raja Malwinder Singh, Patiala 2011 (1) TMI 775 - PUNAJB AND HARYANA HIGH COURT  

This has also been followed in subsequent judgment namely

2014 (6) TMI 14 - PUNJAB & HARYANA HIGH COURT

Thakur Dwara Shri Krishanji Maharaj Handiyaya, Barnala through Mahant Om Parkash Chela Mahant Madan Dass Versus Commissioner of Income Tax And Another}

Before starting discussion on the above judgments general aspects need consideration:

Judgments accepted by revenue- settled legal position not followed:

It is surprising that no mention was made by counsels appearing as to whether the revenue has challenged some judgments on the same and similar issues including the judgment of the same High Court. From reading of the judgment, it appears that no attempt was made to ascertain latest position in this regard. The court also did not enquiry about the appeal, if any filed by revenue before the Supreme Court even against judgment of the same High Court and also other High Courts. Without ascertaining about settled legal position, author with due respect express that it was not proper for  the High Court  to differ from earlier judgments.

On web-search the author could not find any reference of revenue having challenged the following judgments before the Supreme Court (author hopes that the result of web-search are up to date) :

1. CIT Versus AMRIK SINGH - 2008 (2) TMI 28 - PUNJAB AND HARYANA HIGH COURT
2.  Commissioner Of Income-Tax Versus HH. Maharaja Sahib Shri Lokendra Singhji - 1986 (1) TMI 37 - MADHYA PRADESH High Court
3. Commissioner of Income-Tax Versus Manoharsinhji P. Jadeja. - 2004 (12) TMI 29 - GUJARAT High Court
4. CIT v. Octavious Steel and Co. Ltd. 1995 -TMI - 18414 – (CALCUTTA High Court),
5. Sri Krishna Dairy and Agricultural Farm v. CIT 1987 -TMI - 25399 – (ANDHRA PRADESH High Court)

             CIT v. E. C. Jacob 1972 -TMI - 8672 – (KERALA High Court), the Full Bench of the Kerala High Court held that what is charged under section 45 of the Income-tax Act, 1961, is the profits or gains arising from the transfer of a capital asset and in computing the profit or gain in accordance with the provisions of section 48 of the Act, the cost of acquisition of the capital asset and the cost of any improvement thereto have to be deducted from the full value of the consideration for the transfer of the capital asset and that in the context of the Income-tax Act the expression " cost of acquisition " signifies some expenditure or outlay in terms of money by the assessee in the creation or acquisition of the concerned capital asset. This view of the Full Bench of the Kerala High Court was approved by the Supreme Court in B. C. Srinivasa Setty 1981 -TMI - 5845 – (SUPREME Court).

In the following case SLP of revenue was dismissed for  lack of merit as well as delay:

CIT Vs. Suman Tea & Plywood Ind. 1997 -TMI - 17682 – (CALCUTTA High Court). 

Some basic aspects:

Deemed profit:

As per general rule, on sale of a capital asset one realise capital and there is no profit or gain. This is because, one capital asset is transferred and cash is realised. If one want to acquire another asset of same nature or similar type, he will have to incur capital cost, which may be more than the sale price realised on sale of original asset. However, gains on transfer of capital asset is deemed to be income which is chargeable under the head “capital gains”.

The cost of acquisition:

In context of provisions relating to capital gains the expressions used are ‘the cost of acquisition’ of the ‘capital asset’. This means that it must be sum incurred to acquire the capital asset (which is transferred) by the owner or the previous owner, as the case may be.

The article ‘the’ has been used with both expressions. This means that the ‘cost of acquisition’ must of the capital asset which has been transferred.

Circumstances in which market value as on date of acquisition can be considered are also specified in law. Therefore, in other situations, fair market value cannot be considered as the cost of acquisition.

Market value as on cut-off date – option is only for assessee:

In case of old capital assets acquired prior to applicable  cut-of date (01.04.1954, 01.04.1961, 01.04.1981 and now 01.04.2001), the assesse is given an option to substitute fair market value as on applicable cut-off date. The option available is only to the assesse and not to the Assessing Officer.

Such market value, if opted by the assesse and is treated as  ‘the cost of acquisition’, then only such market value will be deemed as cost of acquisition. Naturally the assesse will opt for fair market value as on cut-off date only if it is beneficial to the assesse. In case the market value is lower than the cost of acquisition, the assesse will not opt to substitute FMV. Even in case where cost of acquisition is nil the assesse may choose to take nil as cost of acquisition instead of market value as on cut-off date, if it is beneficial to assessee. The AO cannot force to opt market value instead of actual cost of acquisition or  nil if there was no cost of acquisition.

An option given to assessee is a privilege, which  cannot be made burden on assesse by tax authorities and courts. This is as per settled legal position by way of judgment of the Supreme Court, in the case of Mahendra Mills in context of S.32.   2000 (3) TMI 3 - SUPREME Court / 2000 - 243 ITR 56 (SC)

Relevant portion of provisions are reproduced below:

From the judgment of the Full Bench of Punjab and Hariyana High Court , provisions as considered by the Court, relevant portion for this study are reproduced with highlights added:

“Mode of computation and deductions:

48. The income chargeable under the head “Capital gains” shall be computed by deducting from the full value of the consideration received or accruing as a result of the transfer of the capital asset the following amounts, namely:-

i) xx

ii) the cost of acquisition of the capital asset and the cost of any improvement thereto.

Cost with reference to certain modes of acquisition:  

49. 1) Where the capital asset became the property of the assesse

(i) on any distribution of assets on the total or partial partition of a Hindu undivided family;  

ii) under a gift or will;

iii) a) by succession, inheritance or devolution, or

b) on any distribution of assets on the dissolution of a firm, body of individuals or other association of persons, or  

c) on any distribution of assets on the liquidation of a company, or  

d) under a transfer to a revocable or an irrevocable trust, or

e) under any such transfer as is referred to in clause (iv) or clause (v) or clause (vi) of section 47;  

iv) such assessee being a Hindu undivided family, by the mode referred to in sub section (2) of section 64 at any time after the 31st day of December, 1969 

the cost of acquisition of the assets shall be deemed to be the cost for which the previous owner of the property acquired it, as increased by the cost of any improvement of the assets incurred or borne by the previous owner or the assessee, as the case may be.

Explanation: In this sub section the expression “previous owner of the property” in relation to any capital asset owned by an assessee means the last previous owner of the capital asset who acquired it by a mode of acquisition other than that referred to in clause (i) or clause (ii) or clause (iii) or clause (iv) of this sub section.

 (2)

xx xx xxx xxx

55(1) For the purposes of sections 48, 49 and 50 –  

a) xx

b) ‘cost of any improvement’, in relation to a capital asset –  

i) where the capital asset became the property of the previous owner or the assessee before the Ist day of January 1954 and the fair market value of the asset on that day is taken as the cost of acquisition at the option of the assessee, means all expenditure of a capital nature incurred in making any additions or alterations to the capital asset on or after the said date by the previous owner or the assessee, and  

ii) in any other case, means all expenditure of a capital nature incurred in making any additions or alterations to the capital asset by the assessee after it became his property, and, where the capital asset became the property of the assessee by any of the modes specified in sub section (1) of section 49, by the previous owner, but does not include any expenditure which is deductible in computing the income chargeable under the head ‘interest on securities’, ‘income from house property’, Profits and gains of business or profession’, or ‘income from other sources’, and the expression ‘improvement’ shall be construed accordingly.  

(2) For the purposes of sections 48 and 49, ‘cost of acquisition’, in relation to a capital asset

(i) where the capital asset became the property of the assessee before the Ist day of January 1954 means the cost of acquisition of the asset to the assessee or the fair market value of the asset on the Ist day of January 1954, at the option of the assessee;

ii) where the capital asset became the property of the assessee by any of the modes specified in sub section (1) of section 49, and the capital asset became the property of the previous owner before the Ist day of January 1954, means the cost of the capital asset to the previous owner or the fair market value of the asset on the Ist day of January 1954, at the option of the assessee;

iii) where the capital asset became the property of the assessee on the distribution of the capital assets of a company on its liquidation and the assessee has been assessed to income tax under the head ‘capital gains’ in respect of that asset under section 46, means the fair market value of the asset on the date of distribution;

iv) (omitted by Finance Act, 1966, w.e.f 1.4.1966);

v)

(3) Where the cost for which the previous owner acquired the property cannot be ascertained, the cost of acquisition to the previous owner means the fair market value on the date on which the capital asset became the property of the previous owner.”

The full bench observed and held as follows:

Paragraph 2. The assessee sold certain plots for consideration and the income derived therefrom was sought to be taxed as ‘capital gains’. The CIT(A) reversed the view taken by the Assessing Officer, holding that cost of acquisition of property in question was nil and thus, no capital gain was attracted. The Tribunal upheld the said view, inter-alia, relying upon judgment of the Hon’ble Supreme Court in CIT v. B.C.Srinivasa Setty, (1981) 128 ITR 294.  

Paragraph 6. In the present case, the assessee acquired the property by succession from previous owner. According to the stand of the assessee, cost of acquisition by the previous owner could not be ascertained.  However, he failed to exercise the option of going either by the date of market value on the date of acquisition or by the cost of the previous owner in which case only option available to the Assessing Officer was to proceed to compute capital gain by taking the cost of the asset to be fair market value on the specified date i.e. 1.1.1954 as per applicable provision for assessment year 1977-78 and as on 1.1.1964 for assessment year 1978-79. Even in a case where cost of acquisition cannot be ascertained, section 55(3) statutorily prescribes the cost to be equal to the market value on the date of acquisition. This being the position, capital gain is not excluded even on the plea that value of the asset in respect of which capital gain is to be charged was incapable of being ascertained. The view taken in Amrik Singh’s case (supra) based on the assumption that where market value cannot be ascertained, capital gain cannot be applied, is not correct being against the statutory scheme. Similarly, the view taken by the Madhya Pradesh High Court in CIT v. H.H.Maharaja Sahib Shri Lokendra Singhji’s case (supra) cannot be accepted. The said judgment also does not give effect to the mandate of section 55(3) which provides for a situation where value of the asset acquired could not be ascertained. If market value can be ascertained, it has to be taken to be equal thereto and if the value cannot be ascertained, it has to be equal to market value on a specified date at the option of the assessee. It is not the case of the assessee that land had no market value at all on the date of its acquisition. Contention that value was incapable of being ascertained, as already observed, the value in such case has to be taken as being equal to market value on a specified date.  

7. We, thus, hold that even where cost of acquisition of capital asset cannot be ascertained but the asset has market value, capital gain will be attracted by taking the cost of acquisition to be fair market value as on 1.1.1954 or on date statutorily specified or at the option by assesse, market value on the date of acquisition.  

8. The question will stand answered accordingly in favour of the revenue and against the

Observation of author:

There was no cost of acquisition as found by the CIT(A) and the ITAT. Therefore, the observations of the High Court that

 “According to the stand of the assessee, cost of acquisition by the previous owner could not be ascertained”.

Unquote: the above  appears to be contrary to the fact that there was no cost of acquisition, as finally found as fact by the Tribunal while affirming decision of CIT(A).

Option:

The Court also considered that assesse failed to opt for FMV as on cut- off date. This is also not correct because it is at option of the assessee,  whether to adopt actual cost which was nil or FMV? As in the case of assessee it was beneficial to take cost of acquisition he did not opt for the option..

The court also held that  ‘ only option available to the Assessing Officer was to proceed to compute capital gain by taking the cost of the asset to be fair market value on the specified date i.e. 1.1.1954’

With respect author feels that honourable High Court did not apply provision as they stand. As discussed earlier, option to adopt FMV, in this case was only with the assessee and not the AO. Because the cost of acquisition was ascertained and it was nil. This is not a case where the cost of acquisition in hands of previous owner could not be ascertained.

FMV can be taken as cost of acquisition only in specified circumstances namely ( a) where assessee  opts FMV as on cut-off date, S.55.2.b I  (b) in case where cost of acquisition in hands of previous owners cannot be ascertained  S.55.3 and (c) In case capital asset received on distribution by a company on liquidation  of company  wherein distributed assets has already been assessed as  capital gains – S.55.2.b.iii.

In case before the Full Bench these circumstances were not prevalent. The fact was that there was no cost of acquisition.

The honourable High Court had, in fact forcibly  imposed option to  take  FMV which was option with the assessee alone and the AO had no such option. Such imposition of option or privilege upon assessee has thus been made a burden upon assessee. This is again contrary to law settled in Mahendra Mills, as referred earlier.

Therefore, with due respect author feels that the judgment in case of Raja Malvinder Singh is not as per law and not even as per settled legal position. The judgment in case of  CIT Versus AMRIK SINGH supra was  correct and it was not necessary to reconsider the same when the judgment was accepted by the revenue.

Courts are to resolve disputes and not to create disputes:

Courts are to resolve disputes. However, it appears that sometimes Courts also become a cause of dispute.

When the judgment of P & H High Court and other Courts were not challenged, the position was settled, by making a review by full / large bench of P & H High Court, the settled legal position has been unsettled.