Neither cost nor the date of acquisition is ascertainable: Computation of Capital Gain.

In the case of Commissioner Of Income Tax vs Manoharsinhji P. Jadeja the appurtenant and adjacent lands to the inherited property have been acquired by a mode of acquisition specified in section 49(1)(iii)(a) of the Act. The asset was long-term capital asset. Neither the Cost nor the Date of Acquisition were ascertainable in the case. The appurtenant land was auctioned by the authorities for recovery of taxes, duties etc.

The court held that capital gain will not be levied in the case as the cost of acquisition is not ascertainable. Amendment in Section 55 of the Income Tax Act, 1961 has no effect in this case.

 

Commissioner Of Income Tax vs Manoharsinhji P. Jadeja

1. The Income Tax Appellate Tribunal Ahmedabad Bench ‘C’ has referred the following question for the opinion of this Court under Section 256(2) of the Income Tax Act, 1961 (the Act) at the instance of the Commissioner of Income Tax, Rajkot.

“Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is right in law in holding that the Income-tax authorities were not justified in working out capital gains of Rs. 41,11,414/- and including the same in the total income of the assessee ?”

2. The respondent – assessee is an individual. The Assessment Year is 1983-84 and the relevant previous year is the Financial Year ended on 31-03-1983. The assessee inherited property known as ‘Ranjit Vilas Palace’ along with appurtenant and adjacent lands situated at Rajkot on the death of his father, Shri Pradumansinhji, on 09-11-1973. It appears that for Assessment Years 1974-75 to 1977-78 certain tax demands along with estate duty payable on death of his father were outstanding against the assessee. To effect recovery of these outstanding dues the Income Tax Department attached 22059 sq. yds. of vacant land on 01-02-1983. The department divided 5727 sq. mtrs. of land out of the aforesaid acquired parcel of land and sold 33 plots by way of public auction held on 21-03-1983 and 22-03-1983. A sum of Rs. 65,50,870/- was the gross realization from the auction sale. The return of income filed by the assessee was accompanied by a letter dated 06-06-1983 wherein the assessee advanced reasons for showing long term capital gains at “Nil” in the return of income. The case of the assessee was that he was not liable to the charge of capital gains tax as the land in question was received by him from his forefathers by way of inheritance and no cost had been incurred by his forefathers for acquiring the land in question. The assessee in support of his stand placed reliance on the decision of the Apex Court in the case of Commissioner of Income Tax, Bangalore v. B.C. Srinivasa Setty, (1981) 128 ITR 294 and stated that the assessee was not liable to capital gains tax on correct reading of Sections 48(ii), 49 and 55(2) of the Act. The Assessing Officer distinguished the decision in the case of Srinivasa Setty (supra) on the ground that the same pertains to a self generating business asset and was not applicable to land which was a capital asset. That even otherwise the land was bound to have cost something even to the ancestors of the assessee. The assessee was also called upon to exercise option under Section 55(2) of the Act and state the fair market value as on 01-01-1964 which could be adopted as “cost of acquisition”. The Assessing Officer further took note of the fact that the assessee had specifically vide letter dated 06-06-1983 stated that he does not want to exercise option under Section 55(2) of the Act to adopt the fair market value of the plots as on 01-01-1964 as cost of acquisition, but opted for the cost of acquisition of his ancestors. The Assessing Officer rejected the contention of the assessee by stating that provisions of Sections 48 and 49 of the Act do not provide that there has to be atleast some cost while determining long term capital gains. That the term ‘cost’ was not defined. The Assessing Officer, therefore, held that though the assessee was given opportunity to produce evidence in support of the price at which the assessee’s forefathers must have purchased the land, the assessee having not furnished the same, the cost price was determined on an estimated basis. Accordingly, he estimated the cost price of 5727 sq.mtr. of land at Rs. 3,000/-.

2.1 The Assessing Officer stated that the aforesaid determination on the basis of estimated price was without prejudice to the stand of the Department that even if the price of the land was adopted as Nil, provisions of Section 45 read with Section 48 of the Act would be applicable and the assessee was liable to be charged to capital gains tax. After permitting statutory deductions long term capital gains was worked out at a figure of Rs. 41,11,414/-.

3. The assessee carried the matter in appeal before the Commissioner of Income Tax (Appeals), Rajkot who, for the reasons stated in his order dated 21-03-1986, confirmed the order made by the Assessing Officer.

4. The assessee went in Second Appeal before the Tribunal and the said appeal came to be registered as I.T.A. No. 1311/Ahd/1986. The Tribunal accepted the submission of the assessee that the ratio of the Supreme Court decision in the case of Srinivasa Setty (supra) was squarely applicable to the facts of the case. The Tribunal further found that from the history of Jadeja Rulers of the Rajkot State, which was placed before the Tribunal, it was quite clear that the property in question was never purchased by the forefathers of the assessee but was acquired by conquest. Accordingly, the Tribunal came to the conclusion that the cost of acquisition of the asset was Nil i.e. not ascertainable. According to the Tribunal, even after invoking provisions of Section 49(1)(iii)(a) read with Explanation thereto the cost of acquisition of the asset in hands of the ‘previous owner’ was not ascertainable i.e. it had cost nothing to the last previous owner for acquiring the property in question. The Tribunal, therefore, applying the ratio of the Supreme Court decision in the case of Srinivasa Setty (supra) held that there being no cost of acquisition, the computation section of income chargeable under the head “Capital Gains” fails and, therefore, no capital gains could be brought to tax. Accordingly, the addition of Rs. 41,11,414/- was deleted from the total income of the assessee.

DATE 10-12-2004

5. Mr.D.D.Vyas, learned Standing Counsel for the Revenue, read provisions of Sections 2(14), 2(22A), 45, 48, 49(1)(iii)(a), 55(2) and 55(3) of the Act to urge that the scheme of the Act relating to charging of capital gains tax was that the charge under Section 45 of the Act would arise on transfer of a capital asset in relation to profits arising on such transfer in the first place. That from the full value of consideration received by an assessee for working out the profits or gains liable to capital gains tax cost of the asset was required to be deducted, but if the case of the assessee was that it had incurred no cost the whole consideration was to be treated as income liable to be taxed under the head ‘Capital gains’.

5.1 That Section 48(i) of the Act requires that expenditure incurred wholly and exclusively in connection with the transfer had to be deducted, but if no expenditure was actually incurred nothing was deductible. Similarly, under Section 48(ii) of the Act the cost of the acquisition of the capital asset and the cost of any improvement to such asset were to be deducted from the full value of consideration but if there was no cost of acquisition or there was no improvement carried out nothing was deductible. According to Mr.Vyas this interpretation flows from the use of the term ‘incurred’ in Clause (i) of Section 48 of the Act. The other indication, according to Mr.Vyas, was available by the use of the word ‘any’ in Clause (ii) of Section 48 of the Act, meaning thereby, only if there was any cost of improvement was it deductible. If there was no cost of improvement to the capital asset nothing was to be deducted.

5.2 Referring to provisions of Section 49(1)(iii)(a) and the Explanation under the said Section it was submitted that in the case where the capital asset became the property of the assessee by the mode specified in sub-clause (iii)(a) of sub-section (1) of Section 49 the cost of acquisition was to be deemed the cost for which the previous owner of the property acquired it, and as per Explanation the expression “previous owner” meant the last previous owner of the capital asset who acquired the property by a mode of acquisition other than that referred to in any of the clauses mentioned in sub-section (1) of Section 49 of the Act. That under Section 55(2)(ii) of the Act an assessee was required to exercise option by adopting the cost of acquisition as specified in any one of the modes under Section 49(i) of the Act or adopt fair market value of the asset on 1st day of January 1964. That when sub-section (3) of Section 55 of the Act was read together with these provisions, it would point out to the scheme as operating so as to arrive at the chargeable capital gains by adopting either the fair market value of the capital asset on the specified date or fair market value to be adopted under Section 55(3) of the Act. Thus, according to Mr.Vyas, the assessee having failed to exercise option the cost had to be adopted under Section 55(3) of the Act as the fair market value which term was defined in Section 2(22A) of the Act. That accordingly the Assessing Officer had estimated the fair market value at Rs. 3,000/- and worked out the chargeable capital gains.

5.3 Mr.Vyas further submitted that the onus to establish the cost of acquisition was on the assessee and on failure to do so, or by showing the same at Nil the Revenue was entitled to assess the capital gains at full value of consideration.

5.4 Mr.Vyas further contended that reading of the decision of the Apex Court in the case of Srinivasa Setty (supra) by the Tribunal was not correct; the decision deals with a case of goodwill and the said aspect was taken care of by subsequent amendment. That the correct ratio of the said decision was that the scheme of the Act contemplated an asset with cost and the observations in relation to computation provisions were made in the context of nature and character of an asset and the date of acquisition had also to be taken into consideration only in light of the kind of asset. In other words, it was submitted that an asset like goodwill which would have no fixed date of acquisition was not contemplated to be an asset which would have cost of acquisition as the same would be acquired over a period of time. He, therefore, urged that the said decision does not assist the case of the assessee but in fact supported the stand of the Revenue. In support of the submission made by him he relied upon decision in case of S. Vaidyanathaswami v. Commissioner of Income Tax, Madras, (1979) 119 ITR 369 to point out that only an asset which by its very character could not be stated to have any cost was visualized by the Apex Court while laying down the ratio in the case of Srinivasa Setty (supra).

6. As against that Mr.K.B.Trivedi, learned Senior Advocate appearing on behalf of the respondent-assessee, submitted that though there was no dispute qua the charge to capital gains tax under Section 45 of the Act the assessee’s case primarily was on the basis of reading of Sections 48, 49 and 55 together. In other words, it was submitted that the said sections formed a compendium and it was not possible to charge an assessee under the head ‘Capital gains’, if requirements of any one of the sections were not fulfilled. Inviting attention to provisions of Section 49(1) it was submitted that the said Section dealt with certain modes of acquisition and the cost of acquisition to be taken in the event acquisition was by any one of the specified modes; but the said provision did not permit adopting Nil cost of acquisition where the cost was unascertainable.

6.1 Section 55(2)(a)(i) of the Act after amendment specified that where the price was known for acquisition of the specified asset that was the price which was to be taken as cost of acquisition and it had to be taken as Nil in any other case; that these provisions went to show that on a plain reading of Section 55(2)(a)(ii) the Legislature has referred to an asset acquired by a mode not being any of the modes specified under Section 49(1)(i) to (iv) of the Act. That even otherwise as could be seen from the said amended provision it pertains only to the specified asset and, therefore, there was no implied inclusion of any other asset where the cost was not known.

6.2 That in a case where the cost of acquisition by the previous owner as well as the date of acquisition by the previous owner were not ascertainable, the computation provision could not come into play and in light of the ratio of the Apex Court decision in the case of Srinivasa Setty (supra), no capital gains was chargeable to tax.

6.3 Mr.Trivedi further submitted that reliance on provision of Section 55(3) of the Act was unwarranted on the facts of the case. That the said section specifically requires that in a case where the date of acquisition by the previous owner is known but the cost is not known the fair market value on the date of acquisition would be deemed to be the cost of acquisition. In other words, the provision presupposes that the previous owner acquired the asset by paying a price on a particular date but the price is not known.

6.4 That the assessee not having exercised the option under Section 55 of the Act, it was not open to the Revenue authorities to impose adoption of fair market value especially when neither the date nor the cost of acquisition in hands of the previous owner are known. Inviting attention to the correspondence entered into by the assessee with the Assessing Officer it was submitted that though the assessee had referred to the cost as being Nil at different places, what the assessee in fact meant was that the cost in hands of the previous owner was unascertainable. That there was no purchase by the previous owner and as the history, which is available on record, went to show the asset in question was acquired by conquest.

6.5 In support of various submissions made Mr.Trivedi placed reliance on the following decisions :-

(i) Commissioner of Income Tax, Bangalore v. B.C. Srinivasa Setty, (1981) 128 ITR 294 (S.C.);

(ii) Sunil Siddharthbhai v. Commissioner of Income Tax, Ahmedabad – Kartikeya V. Sarabhai v. Commissioner of Income Tax, (1985) 156 ITR 509 (S.C.);

(iii) Commissioner of Income Tax v. H.H. Maharaja Sahib Shri Lokendra Singhji, (1986) 162 ITR 93 (M.P.);

(iv) Commissioner of Income Tax v. H.H. Lokendra Singh, (1997) 227 ITR 638 (M.P.);

(v) Addl. Commissioner of Income Tax, A.P. v. Ganapathi Raju Jegi, Sanyasi Raju, (1979) 119 ITR 715 (A.P.);

(vi) Commissioner of Income Tax (Addl.) v. Ganapathi Raju Jogi, (1993) 200 ITR 612 (S.C.);

(vii) Chintan N. Parikh v. Commissioner of Income Tax, (2002) 253 ITR 564 (Guj.);

(viii) Baroda Cement and Chemicals Ltd. v. Commissioner of Income Tax, (1986) 158 ITR 636 (Guj.);

(ix) Commissioner of Income Tax, West Bengal-IX v. Dhanraj Dugar, (1982) 137 ITR 350 (Cal.);

(x) Commissioner of Income Tax v. Pushpraj Singh, (1998) 232 ITR 754 (M.P.);

(xi) Sri Krishna Dairy and Agricultural Farm v. Commissioner of Income Tax, (1988) 169 ITR 291 (A.P.); AND

(iii) Commissioner of Income Tax v. Markapakula Agamma, (1987) 165 ITR 386 (A.P.);

7. Mr. D.D. Vyas in rejoinder submitted that the property which was sold was a tangible property i.e. land. That the cost was conceivable taking into consideration nature and character of the asset. In other words, it was not as if the land had no value. Alternatively, it was submitted that even if it was accepted that no payment was made for acquisition of the asset, in light of Section 55(3) read with Section 2(22A) of the Act it was open to the Revenue authorities to work out the cost on the basis of the fair market value and in the circumstances the reference made by the Revenue was required to be allowed in favour of the Revenue.

8. The scheme for charging capital gains to tax can be culled out from a conjoint reading of the provisions of Sections 45, 48, 49 and 55 of the Act. Section 45 prescribes that on transfer of a capital asset effected in a previous year the difference arising by way of any profits or gains shall be charged to income-tax under the head “Capital gains” and shall be deemed to be the income of the previous year in which the transfer took place. The terms “capital asset” and “transfer” are defined respectively in sections 2(14) and 2(47) of the Act. For the purpose of computing the income chargeable as specified under section 45 the mode of computation has been prescribed in section 48 of the Act. It is laid down that for the purpose of ascertaining the income which is chargeable to capital gains tax, the expenditure which is incurred wholly and exclusively in connection with the transfer and the cost of acquisition of the asset along with the cost of improvement, if any, have to be deducted from the full value of consideration received or accruing on such transfer taking place. Section 55 specifies the meaning of the terms “cost of improvement” and “cost of acquisition” : sub-section (2) of section 55 of the Act states that cost of acquisition for the purposes of sections 48 and 49 shall be as defined. In a case where the capital asset becomes the property of the assessee before January 1, 1964, the assessee gets an option to either adopt the actual cost of acquisition of the asset to the assessee or the fair market value of the asset on January 1, 1964. Section 49 lays down the modality of ascertaining the cost of acquisition with reference to certain modes of acquisition specified under sub-section (1) of the said section. In the present case, the admitted position between the parties is that the capital asset was transferred during the previous year and hence the provisions of section 45 stood attracted. The only dispute between the parties is as to the ascertainment of the cost of acquisition under sections 48, 49 and 55 of the Act read together. The Assessing Officer had called upon the assessee to exercise option under section 55(2) of the Act, however, the assessee did not opt to adopt the fair market value as on January 1, 1964, as his case was that there is no actual cost of acquisition.

9. It is also an admitted position between the parties that the asset in question has been acquired by inheritance i.e. by a mode of acquisition specified in Section 49(1)(iii) of the Act. The case of the assessee is that even after applying the Explanation to the said section viz. Section 49 of the Act the cost of acquisition in hands of the last previous owner who acquired it by a mode of acquisition other than that referred to in Clauses (i) to (iv) of sub-section (1) of Section 49 of the Act, it is not possible to ascertain the cost of acquisition. The simple reason according to the assessee is that the last previous owner of the capital asset acquired it by conquest i.e. without paying any price for the acquisition. As noted hereinbefore the Tribunal has categorically found, after referring to the history of Jadeja Rulers of the Rajkot State, that the property in question was never purchased by the assessee’s forefathers but was acquired by conquest and that it had cost nothing to the last previous owner for acquiring the property in question. It is in the context of the aforesaid findings of the Tribunal that the contentions raised on behalf of the Revenue have to be examined.

10. Section 48 of the Act specifies the mode of computation and deduction. Income chargeable under the head ‘Capital gains’ has to be computed by deducting from the full value of the consideration received or accruing as a result of the transfer of the capital assets – (i) expenditure incurred wholly and exclusively in connection with such transfer; (ii) cost of acquisition of the capital asset and the cost of any improvement thereto. According to the Revenue if no expenditure has been incurred in connection with the transfer of an asset nothing is deductible. Therefore, Clause (ii) of Section 48 which permits deduction of cost of acquisition has to be read by inference as meaning that in a case where there is no cost of acquisition nothing is deductible. The Revenue seeks to derive support from the latter portion of Clause (ii) which talks of cost of any improvement to the capital asset. In other words, submission is that if there is no cost of improvement no such cost is deductible. However, even if the aforesaid reading in relation to incurring of expenditure under Clause (i) as well as incurring of cost of improvement under Clause (ii) is taken to be the correct interpretation, the necessary concomitant that the Revenue wants to draw in relation to cost of acquisition does not flow from the language employed by the Legislature. In so far as expenditure is concerned, the provision talks of incurring of an expenditure wholly and exclusively in connection with such transfer, meaning thereby, there has to be some positive act on the part of a person, only then there could be incurring of an expenditure. Similarly, the phrase ‘cost of any improvement to the capital asset’ requires an overt act on part of the assessee; i.e. as far as the assessee is concerned, there should be some improvement to the capital asset. However, when it comes to cost of acquisition no action as such is required on the part of the assessee, because cost of acquisition by its very nature is incurring of or paying of a price in the past and that is why the reference to certain modes of acquisition under Section 49 of the Act taking within its sweep the cost of acquisition in hands of the previous owner of the asset.

11. There is one more reason why it is not possible to accept the contention raised on behalf of the Revenue that in case where the cost is not ascertainable it has to be adopted as Nil. The opening portion of Section 48 states that while computing income chargeable under the head ‘Capital gains’ the income shall be computed by deducting from the full value of the consideration the specified items and one of them is cost of acquisition. Therefore, in absence of ascertained cost of acquisition the charge under the head ‘Capital gains’ cannot be fastened to the full value of consideration. In other words, income which is chargeable under the head ‘Capital gains’ cannot be equated with full value of consideration when the Legislature mandates that the specified items under Section 48 of the Act have to be deducted, when the language used is : “The income chargeable under the head ‘Capital gains’ shall be computed by deducting from the full value of the consideration.” It is in this context that the ratio laid down by the Apex Court in the case of Srinivasa Setty (supra) is required to be applied to the facts found on record.

12. It is necessary to briefly recapitulate the facts in the backdrop of which the controversy arose before the Apex Court. The assessee therein, a registered firm, came to be dissolved and at the time of dissolution the goodwill of the firm was valued. Originally when the partnership was constituted the instrument showed that the goodwill of the firm had not been valued. Upon dissolution of the assessee a new partnership came to be constituted by the same name and the new partnership took over all the assets, including the goodwill, and liabilities of the dissolved firm. According to the Revenue as the goodwill was transferred by the assessee to the newly constituted firm it was liable to be charged under the head ‘Capital gains’. The assessee succeeded before the Tribunal and the High Court and the Revenue carried the matter in appeal before the Apex Court. After referring to provisions of Section 2(14) of the Act and Section 45 of the Act the Apex Court enunciated the law in the following terms :-

“Section 45 charges the profits or gains arising from the transfer of a capital asset to income-tax. The asset must be one which falls within the contemplation of the section. It must bear that quality which brings Section 45 into play. To determine whether the goodwill of a new business is such an asset, it is permissible, as we shall presently show, to refer to certain other sections of the head “Capital gains”. Section 45 is a charging section. For the purpose of imposing the charge, Parliament has enacted detailed provisions in order to compute the profits or gains under that head. No existing principle or provision at variance with them can be applied for determining the chargeable profits and gains. All transactions encompassed by Section 45 must fall under the governance of its computation provisions. A transaction to which those provisions cannot be applied must be regarded as never intended by Section 45 to be the subject of the charge. This inference flows from the general arrangement of the provisions in the I.T. Act, where under each head of income the charging provision is accompanied by a set of provisions for computing the income subject to that charge. The character of the computation provisions in each case bears a relationship to the nature of the charge. Thus, the charging section and the computation provisions together constitute an integrated code. When there is a case to which the computation provisions cannot apply at all, it is evident that such a case was not intended to fall within the charging section. Otherwise, one would be driven to conclude that while a certain income seems to fall within the charging section there is no scheme of computation for quantifying it. The legislative pattern discernible in the Act is against such a conclusion. It must be borne in mind that the legislative intent is presumed to run uniformly through the entire conspectus of provisions pertaining to each head of income. No doubt there is a qualitative difference between the charging provision and a computation provision. And ordinarily the operation of the charging provision cannot be affected by the construction of a particular computation provision. But the question here is whether it is possible to apply the computation provision at all if a certain interpretation is pressed on the charging provision. That pertains to the fundamental integrality of the statutory scheme provided for each head.

The point to consider then is whether if the expression “asset” in Section 45 is construed as including the goodwill of a new business, it is possible to apply the computation sections for quantifying the profits and gains on its transfer.

The mode of computation and deductions set forth in Section 48 provide the principal basis for quantifying the income chargeable under the head “Capital gains”. The section provides that the income chargeable under that head 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:

“(ii) the cost of acquisition of the capital asset…”

What is contemplated is an asset in the acquisition of which it is possible to envisage a cost. The intent goes to the nature and character of the asset, that it is an asset which possesses the inherent quality of being available on the expenditure of money to a person seeking to acquire it. It is immaterial that although the asset belongs to such a class, it may, on the facts of a certain case, be acquired without the payment of money. That kind of case is covered by Section 49 and its cost, for the purpose of Section 48, is determined in accordance with those provisions. There are other provisions which indicate that Section 48 is concerned with an asset capable of acquisition at a cost. Section 50 is one such provision. So also is Sub-section (2) of Section 55. None of the provisions pertaining to the head “Capital gains” suggests that they include an asset in the acquisition of which no cost at all can be conceived. Yet there are assets which are acquired by way of production in which no cost element can be identified or envisaged. From what has gone before, it is apparent that the goodwill generated in a new business has been so regarded. The elements which create it have already been detailed. In such a case, when the asset is sold and the consideration is brought to tax, what is charged is the capital value of the asset and not any profit or gain.

In the case of goodwill generated in a new business there is the further circumstance that it is not possible to determine the date when it comes into existence. The date of acquisition of the asset is a material factor in applying the computation provisions pertaining to capital gains. It is possible to say that the “cost of acquisition” mentioned is Section 48 implies a date of acquisition, and that inference is strengthened by the provisions of ss. 49 and 50 as well as Sub-section (2) of 55.

It may also be noted that if the goodwill generated in a new business is regarded as acquired at a cost and subsequently passes to an assessee in any of the modes specified in Sub-section (1) of Section 49, it will become necessary to determine the cost of acquisition to the previous owner. Having regard to the nature of the asset, it will be impossible to determine such cost of acquisition. Nor can Sub-section (3) of Section 55 be invoked, because the date of acquisition by the previous owner will remain unknown.”

13. According to Mr.Vyas for the Revenue, the correct ratio of the decision commences from the Paragraph beginning with the “The point to consider then is whether if the expression “asset” in Section 45 ….. “. Thus, it was submitted that only in case of an asset where it was not possible to envisage a cost then the ratio of the decision would be applicable and not in case of assets where it was possible to conceive a cost. Mr.Vyas, in support of the said submission, placed reliance on the observations made to the effect that “Yet there are assets which are acquired by way of production in which no cost element can be identified or envisaged.”. Therefore, according to him, it was only in case where having regard to the nature of the assets it would be impossible to determine the cost of acquisition that the ratio can be invoked. That in the present case the asset in question was land and hence, it was not possible to state that it was an asset which had no cost element or for acquisition of which no cost could be envisaged.

14. As laid down by the Apex Court though Section 45 is a charging section for the purpose of imposing the charge Legislature has enacted detailed provisions in order to compute the profits or gains under that head and no provision at variance with such computation provisions can be applied for determining the chargeable profits and gains. That all transactions covered by Section 45 have to fall under the governance of the computation provision and thus, the said provisions have to be read and applied as an integrated code. The case of Srinivasa Setty (supra) came to be applied by the Apex Court itself in a subsequent decision in the case of Sunil Siddharthbhai v. Commissioner of Income Tax, Ahmedabad – Kartikeya V. Sarabhai v. Commissioner of Income Tax, (1985) 156 ITR 509. The question before the Apex Court was : where a partner of a firm transfers personal assets held by him to a firm as his contribution towards the capital whether such contribution would amount to a transfer and, if yes, whether there was any consideration within the meaning of Section 48 of the Act so as to charge income under the head “Capital gains”. The Apex Court answered the first part of the question in favour of the Revenue holding that admittedly when a partner transfers his personal assets to a partnership firm there would be extinguishment of his exclusive rights which would amount to transfer within the meaning of Section 45 of the Act. However, in relation to the second issue relying on case of Srinivasa Setty (supra) it was held that :

“….. It is impossible to conceive of evaluating the consideration acquired by the partner when he brings his personal asset into the partnership firm when neither the date of dissolution or retirement can be envisaged nor can there be any ascertainment of liabilities and prior charges which may not have even arisen yet. In the circumstances, we are unable to hold that the consideration which a partner acquires on making over his personal asset to the partnership firm as his contribution to its capital can fall within the terms of section 48. And as that provision is fundamental to the computation machinery incorporated in the scheme relating to the determination of the charge provided in section 45, such a case must be regarded as falling outside the scope of capital gains taxation altogether.”

15. The case of Srinivasa Setty (supra) came to be applied by the Madhya Pradesh High Court in fact situation which is almost similar to the present one. The assessee therein was Maharaja of Ratlam who sold some lands which were part of the property inherited by the said assessee from his forefather to whom the property had been gifted by a Moghul Emperor. Madhya Pradesh High Court after taking into consideration various decisions repelled the two fold contentions raised by the Revenue viz. that the case of Srinivasa Setty (supra) and other decisions which followed the said decision related to intangible assets and secondly where cost of acquisition could not be ascertained fair market value had to be adopted in the following words :

“It is no doubt true that none of these cases relate to the sale of immovable property as in the present case. But the gist of all these decisions has been the same that if there is no cost of acquisition, then the sale price would not attract the provisions of capital gains. Thus, it would be clear that the liability for capital gains tax would arise in respect of only those capital assets in the acquisition of which the element of cost is either actually present or is capable of being reckoned and not in respect of those assets in the acquisition of which the element of cost is altogether inconceivable, as in the present case. The circular of the Board referred to above on which learned counsel for the Revenue placed reliance–though not binding on this court–only indicates that the section does not relate to only the immediate past owner but to past owners in succession.

Thus, we are not persuaded to agree with the submission made by the learned counsel for the Revenue that in such a case as the present one, according to the provisions of section 55 of the Income-tax Act, 1961, where cost cannot be ascertained, the fair market price has to be taken into consideration because the very basis of capital gains to us appears to be that at some point of time, the person who initially acquires acquires the property at some cost in terms of money.” [Commissioner of Commissioner of Income Tax v. H.H. Maharaja Sahib Shri Lokendra Singhji, (1986) 162 ITR 93].

16. The Andhra Pradesh High Court in the case of Commissioner of Income Tax v. Markapakula Agamma, (1987) 165 ITR 386 was once again called to resolve almost a similar controversy between the assessee and the Revenue. There the assessee was a protected tenant and acquired rights in the land itself by virtue of Section 40(4) of the Andhra Pradesh (Telangana Area) Tenancy and Agricultural Lands Act. The said rights in the land came to be compulsorily acquired by the State Government pursuant to acquisition proceedings for the purpose of the Housing Board and the lands vested in the State Government. Out of the total compensation paid by the State Government the protected tenant was entitled to 60% on the basis of provision of the aforesaid Tenancy and Agricultural Act. In relation to the said compensation question arose as to whether the assessee was liable to be charged under the head ‘Capital gains’. Applying the ratio in the case of Srinivasa Setty (supra) the Court held that the rights in the land though in the nature of protected tenancy rights do not have any cost of acquisition and the compensation cannot be brought within the net of capital gains. The contention on behalf of the Revenue that fair market value on the date of conferring of protected tenancy may be adopted as the cost of acquisition was also rejected. The necessity of providing an optional date for adopting cost of acquisition under Section 55 of the Act has been explained in the following words while repelling the contention of the Revenue that in absence of cost of acquisition fair market value has to be adopted as provided under Section 55 of the Act.

“Learned standing counsel for the Revenue contended that in any event, the fair market value on the date of conferring protected tenancy can be considered as provided under Section 55 of the Act. Learned counsel says that by this process the element of cost of acquisition can be taken as present. Considered from a proper perspective, section 55 does not yield to this line of approach. The relevant sub-section of section 55 is an elucidation and extension of sections 48 and 49 providing for the valuation being pegged down to the date specified therein, namely January 1, 1964, at the option of the assessee. Having in view the galloping increase in prices and abnormal low costs in the earlier years, the assessee is facilitated to opt for the date, i.e., January 1, 1964, for ascertaining the cost of acquisition. This provision presupposes the cost of acquisition but this mode of ascertaining the cost of acquisition is prescribed by shifting the date of ascertainment to January 1, 1964, from the actual date of acquisition. The effect of this section is that whatever be the cost during the period preceding January 1, 1964, the assessee may exercise the option of having the value ascertained as on January 1, 1964. This provision cannot be pressed into service where there is no cost of acquisition at all.”

17. This Court in the case of Baroda Cement and Chemicals Ltd. v. Commissioner of Income Tax, (1986) 158 ITR 636 was called upon to decide as to whether amount received by the assessee by way of damages for breach of contract of sale was chargeable to tax under the head ‘Capital gains’. The Court after referring to the case of Srinivasa Setty (supra) and extracting the relevant portion from Page 299 of the reported decision of 128 ITR held that :

“….. The ratio of this decision is that the asset referred to in section 45 must be one in the acquisition whereof the assessee had incurred a cost. If the Revenue fails to show that the assessee had incurred a cost as in the present case, it would be impossible to compute the income chargeable to tax under the head “Capital gains” and what the Revenue would be charging would be the capital value of the asset and not any profit or gain.”

Thus, it is apparent that the asset referred to in Section 45 of the act has to be – (i) in the acquisition of which it is possible to envisage a cost; (ii) in the acquisition whereof the assessee had incurred a cost, and the onus of showing that the assessee had incurred cost is on the Revenue. If the Revenue fails to show that the assessee had incurred a cost, as in the present case, it would be impossible to compute the income chargeable to tax under the head ‘Capital gains’. The Revenue cannot be permitted to charge capital value of the asset because what is chargeable is profits and gains on transfer of a capital asset. Therefore, stand of the Revenue that in absence of any cost being actually incurred the value thereof has to be taken as Nil and the entire sale consideration is taxable cannot be accepted in light of the settled legal position.

18. The contention that when the cost of asset is Nil the entire sale consideration is required to be taxed as profits and gains under the head ‘Capital gains’ is also sought to be supported by the amendment in Section 55 of the Act. According to the learned counsel for the Revenue the principle — that a capital asset which does not have cost of acquisition does not fall within the charging Section -is now superseded by amended provision of Section 55 of the Act. However, it requires to be noted that by the Finance Act, 1987 w.e.f. 01-04-1988 the amendment to Section 55 of the Act only ropes in taxability of goodwill on transfer of the same even if there is no cost of acquisition. Similarly, Section 55 has been amended from time to time to enable the taxation of other assets wherein no cost of acquisition is envisaged : tenancy rights, state carriage permits and, looms hours by the Finance Act, 1994 with effect from 1st April 1995; right to manufacture, produce or process any article or thing by the Finance Act 1997 with effect from 1st April 1998; trademark or brand name associated with business by the Finance Act 2001 with effect from 1st April 2002; and right to carry on any business by the Finance Act 2002 with effect from 1st April 2003.

19. Therefore, even if the amendment is taken into consideration Section 55 can be invoked in cases of Nil cost of acquisition for the purpose of bringing to tax entire sale consideration only in relation to the specified assets. The Legislature having amended the said section from time to time has roped in only specified assets as noted hereinbefore. In the circumstances, the amendment instead of working to the advantage of the Revenue goes to indicate that the Legislature does not want to bring within the purview of tax net all the assets (except the specified assets) which do not have cost of acquisition and the entire sale consideration cannot be treated as profits and gains chargeable under the head ‘Capital gains’ by adopting the cost of acquisition as Nil.

20. The contention of the Revenue that fair market value of the asset is required to be adopted by invoking provision of Section 55(3) of the Act has already been rejected by the Apex Court in the case of Srinivasa Setty (supra) in the following words ” Nor can sub-section (3) of Section 55 be invoked, because the date of acquisition by the previous owner will remain unknown.”

21. The importance of date of acquisition cannot be lost sight of taking into consideration the scheme of the Act. Under the Act both short term gains and long term capital gains are chargeable to tax but the treatment thereof is different. Section 2(42A) defines “short term capital asset” and lays down the period beyond which if an asset is held it would become a long term capital asset, transfer whereof is liable to be taxed as long term capital gains. Therefore, for working out the specified period i.e. 36 months immediately preceding the date of transfer the date of acquisition becomes relevant. In the present case, admittedly, the assets have been acquired by a mode of acquisition specified in Section 49(1)(iii)(a) of the Act and thus the asset in question is a long term capital asset but neither the cost nor the date of acquisition are ascertainable.

22. In light of what is stated hereinbefore, it cannot be held that the order of the Tribunal suffers from any legal error or infirmity so as to call for any interference. The Tribunal was justified in law in holding that the Income-tax authorities were not right in working out capital gains at Rs. 41,11,414/= so as to bring the same to tax under the head ‘Capital gains’.

23. In the result, the question referred to the Court is answered in the affirmative i.e. in favour of the assessee and against the Revenue. There shall be no order as to costs.

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