2012 (12) TMI 421 - HC - Income Tax

Application of income versus diversion of income at Source - Capital gain from sale of inherited property - settlement between two brothers - the sale consideration of Rs.14 crores was distributed between the respondent and his brother at Rs.6 crores and Rs.8 crores respectively. - AO observed that the sale consideration of the inherited property has to be distributed between the two brothers at Rs.7.00 crores each. - This was on the basis that Rs.1 crore received by respondent s brother was in excess of that received by the respondent and is, in fact, an application of income received by the respondent and not diversion of income at source. - AO brought to tax the capital gain taxable in the hands of the respondent on the basis of the net consideration of Rs.7 crores as against Rs.6 crores declared by the respondent for sale of New Delhi property. - CIT(A) and ITAT deleted the addition Held that - the appellant had received only Rs.6 crores for the sale of his rights in the New Delhi property and the same had been offered to tax. There is no provision to tax a person on the basis of the deemed income for the purpose of capital gain tax. - Decided in favor of assessee. Determination of cost of acquisition of inherited property - Fair Market value (FMV as on 1/4/1981) - held that - the valuation done by an empaneled registered valuer of the Income Tax Department would certainly take precedence over Nabhi s Guide to House Tax. The valuation done by the registered valuer is with regard to the specific property and takes into account its various advantages and disadvantages all of which influence the valuation of the property. As against the above, the Nabhi s Guide to House Tax is generalized guide and does not take into account the peculiar features of the property being valued. Moreover, the determination of the fair market value as on 1/4/1991 is a question of fact which has been examined by both the Commissioner of Income Tax (Appeals) as well as the Tribunal and both have concluded that the fair market value as estimated by the registered valuer at Rs.47.74 lacs as on 1/4/1981 is acceptable. - Decided in favor of assessee. Exemption u/s 54 - purchase of two flats - inter connected by internal stair case. - held that - two flats were joined together before the respondent assessee became the owner of the two flats. The Certificate from the society also established the fact that two flat Nos. 416A and 516A were joined together and were considered as one residential house. - Exemption allowed - Decided in favor of assessee.

Summary

Issues Involved:
1. Deletion of addition of capital gain assessed.
2. Consideration of Fair Market Value (FMV) as on 1/4/1981.
3. Determination of cost inflation index of the property.
4. Exemption under Section 54 for investment in two new flats.

Detailed Analysis:

1) Regarding Deletion of Addition of Capital Gain Assessed:
The primary issue was whether the Tribunal was justified in approving the decision of the Commissioner of Income Tax (Appeals) in deleting the addition of capital gain assessed in the hands of the assessee. The assessee and his brother inherited property and sold it for Rs.14 crores, with the assessee receiving Rs.6 crores and his brother Rs.8 crores, based on a Memorandum of Understanding (MoU) reflecting their late father's wishes. The Assessing Officer deemed that the sale consideration should be Rs.7 crores each, treating the additional Rs.1 crore received by the brother as an application of income by the assessee. However, the Commissioner of Income Tax (Appeals) and the Tribunal held that the MoU was legally binding, and the additional Rs.1 crore was diverted before reaching the assessee, thus not includable in his income. The court upheld this view, stating that the assessment must be based on the actual amount received, not on perceived income.

2) Regarding Consideration of Fair Market Value (FMV) as on 1/4/1981:
The issue was whether the Tribunal was justified in upholding the FMV estimated by a registered valuer over the rates adopted by the Assessing Officer from Nabhi's Guide to House Tax. The registered valuer's report valued the property at Rs.47.74 lacs as of 1/4/1981, whereas the Assessing Officer valued it at Rs.17.33 lacs using Nabhi's Guide. The Commissioner of Income Tax (Appeals) and the Tribunal accepted the valuer's report, noting that it considered the specific property's advantages and disadvantages, unlike the generalized guide. The court found no fault with this conclusion, emphasizing that the valuation by an empaneled registered valuer takes precedence over a generalized guide.

3) Regarding Determination of Cost Inflation Index of the Property:
This issue concerned whether the Tribunal was justified in determining the cost inflation index from 1/4/1981 instead of the year 1999 when the assessee inherited the property. The court noted that this question was covered in favor of the assessee by a previous decision, Commissioner of Income Tax -12 Vs Manjula J. Shah, and thus did not raise any substantial question of law.

4) Regarding Exemption under Section 54 for Investment in Two New Flats:
The question was whether the Tribunal was justified in treating two flats as a single unit for the purpose of deduction under Section 54. The assessee claimed a deduction for investment in two flats (416A and 516A) that were interconnected and treated as one duplex flat. The Assessing Officer restricted the exemption, arguing that the exemption applies to one residential house only. However, the Commissioner of Income Tax (Appeals) and the Tribunal found that the flats were interconnected and functioned as a single residential unit before the assessee's purchase. The court upheld this view, stating that the two flats constituted one residential house, thus qualifying for the full exemption under Section 54.

Conclusion:
The appeal was dismissed on all counts, with the court finding no substantial question of law in the issues raised by the revenue. The decisions of the Commissioner of Income Tax (Appeals) and the Tribunal were upheld, confirming the deletion of the addition of capital gain, the acceptance of the registered valuer's FMV, the determination of the cost inflation index from 1/4/1981, and the exemption under Section 54 for the interconnected flats.