Naraindas L.Sakraney, Mumbai vs Department Of Income Tax

ACIT, Shri Naraindas L. Sakraney, Circle-12(3), बनाम/ 1A, Court Chambers, Room No.137, 1st Floor, 35, New Marine Lines, Aayakar Bhavan Vs. Mumbai-400020 Mumbai-400020 (राज व /Revenue) ( नधा%&रती /Assessee) P.A. No.AADPS3266M

राज व क ओर से / Revenue by Shri Pawan Kumar Beerla-DR नधा%&रती क ओर से / Assessee by Shri None

ु वाई क* तार+ख / सन 01/04/2015 Date of Hearing :

आदे श क* तार+ख / 08/04/2015 Date of Order:

आदे श / O R D E R

Per Joginder Singh (Judicial Member)

The Revenue is aggrieved by the impugned order dated 06/08/2013, of the ld. First Appellate Authority, Mumbai, on 2 Shri Naraindas L. Sakraney

the ground that the ld. Commissioner of Income Tax (Appeals) erred in deleting the addition made as computation of the indexed cost of acquisition by holding that such indexed cost of acquisition has to be taken from the date on which it was held by the previous owner and not from the date from which the asset was first held by the assessee.

2. During hearing of this appeal, Shri Pawan Kumar Beerla, ld. DR, defended the conclusion arrived at in the assessment order and advanced his arguments which are identical to the ground raised. However, none was present on behalf of the assessee in spite of issuance of registered AD notice, consequently, we have no option but to proceed ex-party, qua the assessee, and tend to dispose of this appeal on the basis of material available on record.

2.1. Before coming to any conclusion, we are reproducing hereunder the relevant uncontroverted finding recorded in the order of the ld. Commissioner of Income Tax (Appeals) for ready reference and perusal/analysis:-

"3.3 I have considered the facts of the case and the submissions made by the assessee. In the case of the Commissioner of Income-tax, Mumbai vs. Manjula J Shah in Income-tax Appeal No.3378 of 2010 dated 11th October, 2011, the Hon'ble Bombay High Court has held that while computing the capital gains arising on transfer of a capital asset acquired by the assessee under a gift, the indexed cost of acquisition had to be computed with reference to the year in which the previous owner first 3 Shri Naraindas L. Sakraney

held the asset and not the year in which the assessee became the owner of the asset. In that case, the assessee's daughter purchased a flat on 29/01/1993 at a cost of Rs.50.48 lakhs. She gifted the flat to the assessee on 01/02/2003. The assessee sold the flat on 30/06/2003 for Rs.1.10 crores. In computing the LTCG, the assessee took the indexed cost of acquisition under Explanation

(iii) to See. 48 on the basis that she "held" the flat since 29/01/1993. The A.O. held that as the assesses had held the flat from 61/02/2003, the cost inflation index for 2002- 03 would be applicable. The Ld. CIT(A) and, thereafter, the Hon'ble Special Bench of the Hon'ble Mumbai Tribunal upheld the claim of the assessee. On appeal by the Department, the Hon'ble Bombay High Court took up the following substantial question of law for hearing:-

"While computing the capital gains arising on transfer of a capital asset acquired by the assessee under a gift, whether the indexed cost of acquisition has to be computed with reference to the year in which the previous owner first held the asset or the year in which the assessee became the owner of the asset ?"

3.3.1 The Hon'ble High Court examined the various provisions relating to the taxability of the capital gains and held that where the assessee acquired any capital asset under a gift or will without incurring any cost of acquisition, there would be no capital gains liability. However, sec. 49(1 )(ii) of the Act provided that in the case of an assessee acquiring an asset under. a "gift" or "will", the cost of acquisition of the asset would be deemed to be the cost for which the previous owner of the property acquired it, as increased by the cost of improvement of the asset incurred or borne by the 4 Shri Naraindas L. Sakraney

previous owner or the assessee as the case may be. Thus, on account of the deeming fiction contained in see. 49(1)(ii) of the Act, gains arising on transfer of a capital asset acquired by the assessee under a gift or will would arise. In such a case, the capital gains u/s 48 of the Act would have to be determined by deducting from the total consideration received by the assessee, inter-alia, the deemed cost of acquisition. In Para 17 of their judgment, the Hon'ble High Court held as follows :-

"We see no merit in the above contention. As rightly contended by Mr. Rai, learned counsel for the assessee, the indexed cost of acquisition has to be determined with reference to the cost inflation index for the first year in which the capital asset was 'held by the assessee'. Since the expression 'held by the assessee' is not defined under Section 48 of the Act, that expression has to be understood as defined under Section 2 of the Act. Explanation 1 (i)(b) to Section 2( 42A) of the Act provides. that in determining the period for which an asset is held by an assessee under a gift, the period for which the said asset was held by the previous owner shall be included. As the previous owner held the capital asset from 29/1/1993, as per Explanation 1(i)(b) to Section 2(42A) of the Act, the assessee is deemed to have held the capital asset from 29/1/1993. By reason of the deemed holding of the asset from 29/1/1993, the assessee is deemed to have held the asset as a long term capital asset. If the long term capital gains liability has to be computed under Section 48 of the Act by treating that the assessee held the capital asset from 29/1/1993, then, naturally in determining the indexed cost of acquisition under Section 48 of the Act, the assessee

5 Shri Naraindas L. Sakraney

must be treated to have held the asset from 29/1/1993 and accordingly the cost inflation index for 1992-93 would be applicable in determining the indexed cost of acquisition.

18) If the argument of the revenue that the deeming fiction contained in Explanation 1 (i)(b) to Section 2( 42A) of the Act cannot be applied in computing the capital gains under Section 48 of the Act is accepted, then, the assessee would not be liable for long term capital gains tax, because, it is only by applying the deemed fiction contained in Explanation 1 (i)(b) to Section 2(42A) and Section 49(1)(ii) of the Act, the assessee is deemed to have held the asset from 291111993 and deemed to have incurred the cost of acquisition and accordingly made liable for the long term capital gains tax. Therefore, when the legislature by introducing the deeming fiction seeks to tax the gains arising on transfer of a capital asset acquired under a gift or will and the deemed fiction, it is not possible to accept the contention of revenue that the fiction contained in Explanation 1 (i)(b) to Section 2(42A) of the Act cannot be applied in determining the indexed cost of acquisition under Section 48 of the Act." "

3.3.2 In Para 21 of their judgment, the Hon'ble High Court held as follows :-

"Therefore, it is reasonable to hold that in the case of an assesses covered under Section 49(1) of the Act, the capital gains liability has to be computed by considering that the assessee held the said asset from the date it was held by the previous owner and the same analogy has also to be applied in determining the indexed cost of acquisition. "

3.3.3 In Para 22 of their judgment, the' Hon'ble High 6 Shri Naraindas L. Sakraney

Court held as follows :-

"If indexation is linked to the period of holding the asset and in the case of an assessee covered under Section 49(1) of the Act, the period of holding the asset has to be determined by including the period for which the said asset was held by the previous owner, then obviously in arriving at the indexation, the first year in which the said asset was held by the previous owner would be the first year for which the said asset was held by the assessee."

3.3.4 The Hon'ble High Court finally held that the Hon'ble ITAT was justified in holding that while computing the capital gains arising on transfer of a' capital asset acquired by the assessee under a gift, the indexed cost of acquisition had to be computed with reference to the year in which the previous owner first held the asset and not the year in which the assessee became the owner of the asset.

3.3.5 In the present case also the case of the assessee is covered u/s 49(1) of the I.T. Act, 1961. Hence, applying the judgement of the Hon'ble Bombay High Court in the case of Manjula J. Shah (supra), the capital gain liability has to be computed by considering that the assessee held the said asset from the date it was held by the previous owner and the same analogy has also to be applied in determining the indexed cost of acquisition. In arriving at the indexation, the first year in which the asset were held by the previous owner would be the first year for which the said asset was held by the assessee. Hence, the action of the Assessing Officer of computing the indexed cost of acquisition with reference to the year in which the assessee became the owner of the assets in question cannot be upheld: Since, the 7 Shri Naraindas L. Sakraney

properties in question were acquired. by the assessee by way of gift and will, while computing the capital gains arising on the transfer of the capital assets in question, the indexed cost of acquisition has to be computed with reference to the year in ;which the previous owner first held the assets. The assessee has claimed that the previous owner of the assets in question first held the assets prior to 1981 -82. However, the assessee has submitted in the course of the appellate proceedings that Nisha Sakraney have gifted her 50% share in the properties in question to Subhash Sakraney on 30/05/1995 which was subsequently gifted by Subhash Sakraney to the assessee on 30/08/2004. Hence, for this part of the property which was first gifted to Subhash Sakraney on 30/05/1995, the year in which the previous owner first held the assets would be the year 1995-96. The Assessing Officer will, therefore, examine the above contention of the assessee. If the same is found to be correct, the indexed cost of acquisition will be computed with reference to the year 1995-96 and not with reference to the year 1981-82 as done by the assessee. As regards the part of the assets which are claimed to have been gifted to the assessee by Subhash Sakraney on 30/08/2004 as claimed by the assessee (and which was held by the donor from 02/09/1968, the indexed cost of acquisition will be computed with reference to the year 1981-82 as done by the assessee. Subject to the above, this ground of appeal filed by the assessee is partly allowed.

4. In the result, the appeal filed by the assessee is partly allowed."

8 Shri Naraindas L. Sakraney

2.1. We have considered the submissions put-forth by the ld. DR and considered the material available on record. The facts, in brief, are that the assessee declared long term capital gains of Rs.1,51,58,752/- on the sale of Arun Chamber (Unit no.707, 708 and 709) owned by the assessee. As per the Assessing Officer, the assessee became the owner of these units on 30/08/2004 as the property was gifted to the assessee by Subhash Sakraney. It was noted by the Assessing Officer that long term capital gains was calculated by the assessee on the basis of indexed valued having the base year 1981-82. As per the ld. DR/AO, indexation has to be taken from the date when the assessee became the owner of the properties and not as on the date of valuation taken as 01/04/1981. The stand of the assessee is that for computing capital gains, the fair market value was adopted as on 01/04/1981 as the asset was purchased by the earlier owner prior to 01/04/1981, therefore, indexation has to be on the index base 100 by placing reliance upon the decision in Mrs. Pushpa Sofar vs ITO and DCIT vs Manjula J. Shah (SB). The ld. Assessing Officer did not find favour with the contention of the assessee on the plea that the assessee acquired the asset vide gift on 03/08/2004, consequently, the indexed cost was to be calculated as per section 48, Explanation III of the Act. The ld. Assessing Officer further held that the base year should have been taken as 2004-05, when the assessee became the owner. The ld. Assessing Officer, therefore, worked out the long term capital gains by taking the indexed cost for the financial year 2004-05 as against the indexation 9 Shri Naraindas L. Sakraney

for financial year 1981-82 resulting into capital gains at Rs.2,34,92,236/- against the long term capital gains of Rs.1,51,58,752/-, declared by the assessee. We find that identically the Tribunal in the case of Mrs. Pushpa Sofar vs ITO and DCIT vs Manjula J. Shah (Special Bench) deliberated upon the issue and decided in favour of the assessee. The decision of the Special Bench in the case of Manjula Shah was affirmed by Hon'ble Jurisdictional High Court in 16 taxman. com 42. Identically, vide order dated 24/04/2011 in Jayesh Sheth vs ITO, ITA No.3584/Mum/2010, it was held that for acquisition of property by inheritance, the decision of the Special Bench in Manjula Shah shall apply. In another decision, the Hon'ble High Court of Bombay in CIT vs Smt. Nita Kamlesh Tanna (2014) 220 TAXMAN 165 (Bom.) while interpreting section 48 of the Act and computation of capital gains (cost inflation index), wherein the assessee inherited property from his mother in AY 2007-08, which was originally acquired by his father in 1979, held that the cost of acquisition, as on 01/04/1981 has to be taken into consideration. We are of the view, the benefit of indexed cost of inflation is given to ensure the taxpayer pays capital gains tax on 'real or actual gain' and not on increase in capital value of property due to inflation. While computing capital gains arising on transfer of capital assets, acquired by the assessee under a gift, indexed cost of acquisition has to be computed with reference to the year in which previous owner, first held the asset and not the year in which assessee became the owner of the asset. Explanation (iii) provides index cost of 10 Shri Naraindas L. Sakraney

acquisition means an amount which bears to the cost of acquisition the same proportion as cost inflation index for the year, in which the asset is transferred bears to the cost inflation index for the first year in which the asset was held by the assessee or for the year beginning on the first day of April, 1981. The property in question was gifted on 01/02/2003 and the assessee sold the flat on 30/06/2003 for Rs.1.10 crores. Applying the decision of the Hon'ble jurisdictional High Court pronounced in the case of Manjula J. Shah (supra), the capital gains liability has to be computed by considering that the assessee held the asset from the date it was held by the previous owner and the same analogue has to be applied in determining the indexed cost of acquisition. Since the property in question was acquired by way of gift/will by the assessee, the index cost of acquisition has to be computed with reference to the year in which the previous owner first held the asset, consequently, we find no infirmity in the conclusion drawn by the ld. Commissioner of Income Tax (Appeals). It is affirmed.

Finally, the appeal of the Revenue is dismissed. This Order was pronounced in the open court in the presence of ld. DR at the conclusion of hearing on 01/04/2015.

Sd/- Sd/- (N.K. Billaiya) (Joginder Singh) लेखा सद#य / ACCOUNTANT MEMBER या$यक सद#य / JUDICIAL MEMBER मब ुं ई Mumbai; ,दनांक Dated : 08/04/2015 f{x~{tÜ? P.S/. न.स. 11 Shri Naraindas L. Sakraney

आदे श क %$त'ल(प अ)े(षत/Copy of the Order forwarded to :

1. अपीलाथ0 / The Appellant

2. 12यथ0 / The Respondent.

3. आयकर आय4 ु त(अपील) / The CIT, Mumbai.

p4. आयकर आय4 ु त / CIT(A)- , Mumbai

5. 6वभागीय 1 त न ध, आयकर अपील+य अ धकरण, मब ुं ई / DR, ITAT, Mumbai

6. गाड% फाईल / Guard file.

आदे शानस ु ार/ BY ORDER, स2या6पत 1 त //True Copy// उप/सहायक पंजीकार (Dy./Asstt. Registrar) आयकर अपील य अ धकरण, मब ुं ई / ITAT, Mumbai