2011 (1) TMI 775 - HC - Income Tax

Capital gain - principle applied to asset like goodwill for excluding taxability of capital gain cannot be applied to assets like land which are clearly capable of being valued - in case of acquisition of land, the same is either acquired at some cost or without cost and under the scheme of the Act, there can be no situation when the cost is incapable of ascertainment - 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 - Held 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 - Decided against the assessee

Issues Involved:
1. Taxability of capital gains on assets acquired without a determinable cost of acquisition.
2. Applicability of the Supreme Court's judgment in CIT v. B.C. Srinivasa Setty to assets other than goodwill.
3. Interpretation of Sections 48, 49, and 55 of the Income Tax Act concerning the computation of capital gains.

Detailed Analysis:

Issue 1: Taxability of capital gains on assets acquired without a determinable cost of acquisition
The primary issue was whether the assets sold by the assessee, which were acquired without a determinable cost, could be subjected to capital gains tax. The assessee argued that the cost of acquisition by the previous owner, an ex-ruler of Pepsu State, was incapable of being ascertained, and hence, no capital gains tax was applicable. The Assessing Officer, however, assessed the capital gains by taking the cost of acquisition equal to the market value as on 1.1.1954/1.1.1964, as per Section 55(2) of the Income Tax Act. The Tribunal upheld the assessee's plea, citing the Supreme Court's judgment in B.C. Srinivasa Setty, which excluded capital gains tax on assets with an unascertainable cost of acquisition.

Issue 2: Applicability of the Supreme Court's judgment in CIT v. B.C. Srinivasa Setty to assets other than goodwill
The revenue contended that the principle from B.C. Srinivasa Setty, which excluded taxability of capital gains for assets like goodwill that cannot be valued, should not extend to other capital assets like land, which are capable of being valued. The revenue relied on the Supreme Court's judgment in CIT v. D.P. Sandu Bros. Chembur P. Limited, which distinguished B.C. Srinivasa Setty's applicability to assets that can be acquired at a cost. The court agreed with the revenue, stating that the principle applied to goodwill cannot be applied to land, which can be valued.

Issue 3: Interpretation of Sections 48, 49, and 55 of the Income Tax Act concerning the computation of capital gains
The court examined the relevant provisions of the Income Tax Act. Section 48 outlines the mode of computation and deductions for capital gains, while Section 49 specifies the cost of acquisition in certain modes of acquisition, including inheritance. Section 55(2) and (3) provide methods for determining the cost of acquisition when it cannot be ascertained. The court noted that Section 55(3) statutorily prescribes that if the cost of acquisition cannot be ascertained, it should be taken as the fair market value on the date the asset was acquired by the previous owner. The court concluded that even if the cost of acquisition is unascertainable, capital gains tax is not excluded, as the statute provides a method to determine the cost.

Conclusion:
The court held that even where the cost of acquisition of a capital asset cannot be ascertained, but the asset has a market value, capital gains will be attracted by taking the cost of acquisition to be the fair market value as on 1.1.1954 or on a date statutorily specified, or at the option of the assessee, the market value on the date of acquisition. The view taken in Amrik Singh's case and by the Madhya Pradesh High Court in H.H. Maharaja Sahib Shri Lokendra Singhji's case was not accepted. The question was answered in favor of the revenue and against the assessee.

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