Shri A. Asraf Ali, Chennai vs Assessee

This appeal of the assessee is directed against the order of

the Commissioner of Income Tax (Appeals), Tiruchirappalli, dated

05.09.2013 and pertains to assessment year 2008-09. 2 I.T.A. No.169/Mds/14

2. The first issue arises for consideration is regarding

indexation of the cost of land for the purpose of computing capital

gain.

3. Shri Philip George, the Ld.counsel for the assessee,

submitted that the land and building at T.S.R. Big Street,

Kumbakonam, belonged to the assessee's wife. His wife purchased

the property in the year 1978. After the death of his wife on

30.06.2003, the assessee was in possession of the property. This

property inherited by the assessee on the death of his wife on

30.06.2003 was sold on 13.09.2007. For the purpose of

computation of capital gain, according to the Ld.counsel, the

assessee took the cost of indexation as on 01.04.1981. However,

the Assessing Officer found that the property was inherited by the

assessee only on 30.06.2003 on the death of his wife. Therefore,

he computed the cost of indexation from 30.06.2003. Placing

reliance on the judgment of Bombay High Court in CIT v. Manjula J.

Shah (2013) (355 ITR 474), the Ld.counsel submitted that on an

identical set of facts, the Bombay High Court found that the cost of

indexation has to be computed from 01.04.1981. 3 I.T.A. No.169/Mds/14

4. On the contrary, Shri A.V. Sreekanth, the Ld. Departmental

Representative, submitted that the assessee inherited the property

on the death of his wife on 30.06.2003. Therefore, in view of

Explanation to Section 48 of the Income-tax Act, 1961 (in short 'the

Act'), the cost of indexation has to be computed only from

30.06.2003 and not from 01.04.1981.

5. We have considered the rival submissions on either side and

perused the relevant material on record. Admittedly, the property

was purchased by the assessee's wife in the year 1978. The

assessee's wife died on 30.06.2003 and the assessee inherited the

property. The question arises for consideration is when the

assessee inherited the property from his wife on her death, whether

the cost of indexation has to be computed from 30.06.2003 or from

01.04.1981? The Bombay High Court in the case of Manjula J.

Shah (supra) had an occasion to consider an identical issue. The

Bombay High Court observed in paragraphs 19, 20, 21 & 22 as

follows:-

"19. It is true that the words of a statute are to be understood in their natural and ordinary sense unless the object of the statute suggests to the contrary. Thus, in construing the words 'asset was held by the assessee' in cl.

(iii) of Expln. to s. 48 of the Act, one has to see the object with which the said words are used in the statute. If one reads Expln. 1(i)(b) to s. 2(42A) together with ss. 48 and 49 4 I.T.A. No.169/Mds/14

of the Act, it becomes absolutely clear that the object of the statute is not merely to tax the capital gains arising on transfer of a capital asset acquired by an assessee by incurring the cost of acquisition, but also to tax the gains arising on transfer of a capital asset inter alia acquired by an assessee under a gift or will as provided under s. 49 of the Act where the assessee is deemed to have incurred the cost of acquisition. Therefore, if the object of the legislature is to tax the gains arising on transfer of a capital asset acquired under a gift or will by including the period for which the said asset was held by the previous owner in determining the period for which the said asset was held by the assessee, then that object cannot be defeated by excluding the period for which the said asset was held by the previous owner while determining the indexed cost of acquisition of that asset to the assessee. In other words, in the absence of any indication in cl. (iii) of the Explanation to s. 48 of the Act that the words 'asset was held by the assessee' has to be construed differently, the said words should be construed in accordance with the object of the statute, that is, in the manner set out in Expln. 1(i)(b) to s.

2(42A) of the Act.

20. To accept the contention of the Revenue that the words used in cl. (iii) of the Expln. to s. 48 of the Act has to be read by ignoring the provisions contained in s. 2 of the Act runs counter to the entire scheme of the Act. Sec. 2 of the Act expressly provides that unless the context otherwise requires, the provisions of the Act have to be construed as provided under s. 2 of the Act. In s. 48 of the Act, the expression 'asset held by the assessee' is not defined and, therefore, in the absence of any intention to the contrary the expression 'asset held by the assessee' in cl. (iii) of the Explanation to s. 48 of the Act has to be construed in consonance with the meaning given in s. 2(42A) of the Act. If the meaning given in s. 2(42A) is not adopted in construing the words used in s. 48 of the Act, then the gains arising on transfer of a capital asset acquired under a gift or will will be outside the purview of the capital gains tax which is not intended by the legislature. Therefore, the argument of the Revenue which runs counter to the legislative intent cannot be accepted.

5 I.T.A. No.169/Mds/14

21. Apart from the above, s. 55(1)(b)(2)(ii) of the Act provides that where the capital asset became the property of the assessee by any of the modes specified under s. 49(1) of the Act, not only the cost of improvement incurred by the assessee but also the cost of improvement incurred by the previous owner shall be deducted from the total consideration received by the assessee while computing the capital gains under s. 48 of the Act. The question of deducting the cost of improvement incurred by the previous owner in the case of an assessee covered under s. 49(1) of the Act would arise only if the period for which the asset was held by the previous owner is included in determining the period for which the asset was held by the assessee. Therefore, it is reasonable to hold that in the case of an assessee covered under s. 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.

22. The object of giving relief to an assessee by allowing indexation is with a view to offset the effect of inflation. As per the CBDT Circular No. 636 dt. 31st Aug., 1992 [(1992) 107 CTR (St) 1 : (1992) 198 ITR (St) 1] a fair method of allowing relief by way of indexation is to link it to the period of holding the asset. The said circular further provides that the cost of acquisition and the cost of improvement have to be inflated to arrive at the indexed cost of acquisition and the indexed cost of improvement and then deduct the same from the sale consideration to arrive at the long-term capital gains. If indexation is linked to the period of holding the asset and in the case of an assessee covered under s. 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."

6 I.T.A. No.169/Mds/14

6. In view of the above judgment of the Bombay High Court,

this Tribunal is of the considered opinion that the cost of indexation

has to be computed only from 01.04.1981. Therefore, we set aside

the orders of the lower authorities. The Assessing Officer is

directed to compute the cost of indexation from 01.04.1981.

7. The next ground of appeal is with regard to cost of

construction.

8. Shri Philip George, the Ld.counsel for the assessee,

submitted that the assessee has incurred cost of construction for

`14,65,500/- in the assessment year 2003-04. This cost of

construction was claimed as improvements for computation of

capital gain. However, the Assessing Officer allowed the cost of

construction to the extent of `6,00,000/-. The balance amount was

disallowed. According to the Ld.counsel, the assessee had

borrowed `6,00,000/- from Indian Bank and the assessee had to

spend more money for improvement of the house. Therefore,

restricting the claim to the extent of `6,00,000/- to be borrowed

funds is not justified.

9. On the contrary, Shri A.V. Sreekanth, the Ld. Departmental

Representative, submitted that the agreement for construction was 7 I.T.A. No.169/Mds/14

signed only by a civil engineer and not by the assessee. The

assessee has not filed any evidence for the construction.

Therefore, the Assessing Officer has taken the cost of construction

of the first floor in the absence of any material available on record.

The assessee himself admitted that the improvement was to the

extent of `6,00,000/- with the bank liability of `6,01,172/- in the

return of income filed by him for assessment year 2006-07.

Therefore, the Assessing Officer has rightly restricted the

improvement cost to `6,00,000/-.

10. We have considered the rival submissions on either side and

perused the relevant material on record. The assessee himself filed

a return of income for assessment year 2006-07 on 14.11.2007

admitting the cost of improvements to the tune of `6,00,000/- and

the bank liability of `6,01,172/-. When the assessee himself admits

the cost of improvements to the extent of ` 6,00,000/- only, he is not

justified to claim the improvements to the tune of `14,65,500/-.

Therefore, this Tribunal do not find any reason to interfere with the

order of the CIT(Appeals) and the same is confirmed.

11. The next ground of appeal is with regard to application of

Section 50C of the Act.

8 I.T.A. No.169/Mds/14

12. During the course of hearing, the Ld.counsel for the

assessee submitted that this ground is not pressed. Accordingly,

the ground relating to application of Section 50C of the Act is

dismissed as not pressed.

13. The next ground of appeal is with regard to grant of

exemption under Section 54F of the Act.

14. Shri Philip George, the Ld.counsel for the assessee,

submitted that for the purpose of exemption under Section 54F of

the Act, the value shown as sale consideration has to be taken.

However, the Assessing Officer has taken the value determined

under Section 50C of the Act. The Ld.counsel placed reliance on

the decision of Jaipur Bench of this Tribunal in Gyan Chand Batra v.

ITO (2010) 6 ITR 147.

15. We have heard Ld. Departmental Representative also. The

value adopted under Section 50C of the Act is only for the purpose

of computing capital gain because of the statutory provisions.

However, for the purpose of exemption under Section 54F of the

Act, the actual sale consideration received by the assessee has to

be taken. Therefore, this Tribunal is of the considered opinion that

as rightly contended by the Ld.counsel, the value shown in the sale 9 I.T.A. No.169/Mds/14

deed as sale consideration has to be taken for the purpose of

computing exemption under Section 54F of the Act.

16. The next ground of appeal is regarding claim of the assessee

for exemption under Section 54F of the Act.

17. Shri Philip George, the Ld.counsel for the assessee,

submitted that the assessee purchased a house property and filed a

revised working of the capital gain. After purchase of the property,

the existing house was demolished and the assessee constructed a

commercial building and the building with land appurtenant thereto

rented out to Indian Bank. According to the Ld.counsel, the

residential house purchased by the assessee is eligible for

exemption under Section 54 of the Act. However, the Assessing

Officer disallowed on the ground that what was purchased by the

assessee was commercial building. According to the Ld.counsel,

the assessee purchased only a residential house.

18. On the contrary, Shri A.V. Sreekanth, the Ld. Departmental

Representative, submitted that the assessee has not purchased the

house in his name. In fact, the building was purchased by his wife.

The assessee had gifted `44,00,000/- to her wife for the purchase

of the property. Therefore, the assessee is not eligible for 10 I.T.A. No.169/Mds/14

exemption under Section 54 of the Act. Referring to the

assessment order, the Ld. D.R. submitted that the assessee had not

made any claim of deduction under Section 54 of the Act. A fresh

claim was made under Section 54 of the Act could not be

entertained. What was purchased by the assessee is commercial

building and land appurtenant thereto and that was let out to Indian

Bank. Therefore, no asset was purchased by the assessee. In fact,

it was purchased by his wife and apparently it is a commercial

building. Therefore, the assessee is not eligible for deduction either

under Section 54C or under Section 54F of the Act.

19. In his rejoinder, the Ld.counsel for the assessee submitted

that husband and wife are one and the same in the eyes of Income-

tax Act. Whether the assessee purchased a house in the name of

his wife or the wife has purchased a property by investing the

money gifted by his husband, the property has to be treated as his

property for all practical purpose. Therefore, according to the

Ld.counsel, the assessee is entitled for exemption under Section

54F of the Act. Merely because the assessee claims deduction

under Section 54 before the Assessing Officer, it is the duty of the

Assessing Officer to allow exemption under Section 54F of the Act.

Even though the assessee claims exemption under Section 54 11 I.T.A. No.169/Mds/14

wrongly, that cannot be a reason to disallow the claim of the

assessee.

20. We have considered the rival submissions on either side and

perused the relevant material on record. The assessee claims that

he purchased a residential house in the name of his wife and the

existing house was demolished and commercial building was

constructed. After construction of the building, the assessee claims

that the same was let out to Indian Bank. However, the material

available on record does not say whether the building purchased by

the assessee is a residential building or a commercial building. The

assessee has filed a copy of the sale deed. However, it does not

throw any light with regard to nature of the building. However, it

appears that there was electricity connection in the building as

referred in the Schedule to the sale deed. It is not known whether

the electricity connection available at the time of purchase of

property was for commercial purpose or for residential house. If it is

for commercial purpose, then we can safely conclude that the

building is a commercial building. It is also not known how the

building was assessed by the local authority. If the building was

assessed by the local authority as commercial building, then also it

can be said that what was purchased by the assessee is a 12 I.T.A. No.169/Mds/14

commercial building. In the absence of any material, this Tribunal is

of the considered opinion that the Assessing Officer has to

reconsider the matter afresh. Accordingly, we set aside the orders

of the lower authorities and the issue is remitted back to the file of

the Assessing Officer. The Assessing Officer shall reconsider the

matter and find out whether the building purchased by the assessee

is a commercial building or residential building and thereafter, the

Assessing Officer shall independently decide the issue afresh in

accordance with law after giving reasonable opportunity to the

assessee. It is made clear that we are not expressing any opinion

on the issue.

21. In the result, the appeal of the assessee is partly allowed for

statistical purposes.

Order pronounced on 29th May, 2015 at Chennai.

Sd/- sd/- (A.Mohan Alankamony) (N.R.S. Ganesan) (ए. मोहन अलंकामणी) (एन.आर.एस. गणेशन) लेखा सद य/Accountant Member या यक सद य/Judicial Member

चे नई/Chennai, th 4दनांक/Dated, the 29 May, 2015.

Kri. 13 I.T.A. No.169/Mds/14

आदे श क. , त5ल6प अ7े6षत/Copy to: 1. अपीलाथ+/Appellant 2. ,-यथ+/Respondent

3. आयकर आयु8त (अपील)/CIT(A), Tiruchirappalli

4. आयकर आयु8त/CIT-II, Trichy

5. 6वभागीय , त न ध/DR

6. गाड' फाईल/GF.