INCOME TAX OFFICER v. DEEPAK RAJ NARANG
[Citation -1987-LL-0618-3]

Citation 1987-LL-0618-3
Appellant Name INCOME TAX OFFICER
Respondent Name DEEPAK RAJ NARANG
Court ITAT
Relevant Act Income-tax
Date of Order 18/06/1987
Assessment Year 1980-81
Judgment View Judgment
Keyword Tags acquisition of an asset • appreciation in value • revenue authorities • cost of acquisition • date of acquisition • fair market value • business profit • capital asset • original cost • crucial date • capital gain • actual cost
Bot Summary: The assessee had contended that agricultural land became capital asset only from a later date and according to the assessee's submission at the time of acquisition also the asset should be a capital asset. Where the property transferred is capital asset at the date of transfer but was not capital asset at the date of acquisition as in the present case, profits or gains arising from transfer of such property would be left out from the ambit and coverage of the charging provision and would escape tax. 55(2), clause, says that where the capital asset became the property of the assessee before the 1st day of January, 1954, the cost of acquisition in relation to the capital asset means the cost of acquisition of the asset to the assessee or the fair market value of the asset on the 1st day of January, 1954, at the option of the assessee. If the property was not capital asset at the date of acquisition but subsequently acquired the character of capital asset, it must be with reference to the date of the property becoming capital asset, that 'the cost of acquisition of the capital asset' must be determined. What is required to be deducted, said the assessee, is not the cost of acquisition of the non-capital asset but the cost of acquisition of the capital asset and the crucial date must be the date on which the property became 'capital asset'. Where the property transferred was not capital asset at the date of acquisition but subsequently became capital asset as in the present case, it is difficult to see how it can be said that the property as a capital asset was acquired by the assessee when it was converted into a capital asset and how it would be possible in such a case to determine the cost of acquisition. We would have to introduce an unwarranted fiction, namely, that when the property, which at the date of acquisition was non-capital asset, becomes capital asset, it is deemed to be acquired by the assessee as a capital asset on that date and though there can be no cost of such acquisition, the market value of the property on that date should be deemed to be the cost of such acquisition.


This is departmental appeal directed against order of AAC for assessment year 1980-81. assessee is assessed in status of HUF. During year under consideration, assessee sold jewellery for Rs. 1,03,500. ITO found that cost of acquisition of this jewellery in 1966 was Rs. 28,000. assessee contended before ITO that for purposes of capital gain, jewellery was not capital asset till amendment of section 2(14) of Income-tax Act by Finance Act, 1972 w.e.f. 1-4-1973. assessee, therefore, contended that cost of acquisition of jewellery should be taken as on 31-3-1972 and market value as on that day should be adopted. According to assessee, such value was Rs. 53,000 and he worked out capital gains at Rs. 50,000. ITO, however, determined capital gains at Rs. 75,500. 2. When matter came before AAC, it was contended that following decision of Supreme Court in case of CIT v. Bai Shirinbai K. Kooka [1962] 46 ITR 86, cost of jewellery on date when it became capital asset under law should be taken at market value as on that date. Reliance was further placed on two orders of Benches of Tribunal, one in case of Shri Vishwanath, 37 ITR 32 by Allahabad Bench of Tribunal and other in case of Gurjit Singh Mansahia v. ITO [1983] 5 ITD 125 by Chandigarh Bench. AAC accepted plea of assessee after referring to above order and determined capital gains at Rs. 50,500. 3. Before Tribunal, assessee had also made similar submissions and had relied on orders of Tribunal referred to in order of AAC. However, when case was fixed for hearing on 21-4-1987, no body appeared before Tribunal though notice had been duly served. We have heard Departmental Representative and proceed to decide case on merit. We are of view that decision of Supreme Court in case of Bai Shirinbai K. Kooka has no application to facts of this case. That was case where assessee was earlier holding certain shares as his investment, commenced business in those shares and claimed that for purpose of working out business profit, value of stock should be market value as on date of such conversion. In present case, there is no question of any business income being computed and what was to be computed was capital gains on sale of jewellery. only fact which has to be determined is cost of acquisition of that jewellery in hands of assessee. fact that jewellery was acquired in 1966 and its cost at that time was Rs. 53,000, is not in dispute. only plea is that market value as in 1972 should be determined as it was from that date that jewellery became capital asset for purpose of computation of capital gains. This issue as such has not been considered by Chandigarh Bench in case of Gurjit Singh Mansahia. They were referred to this contention but have not given any decision on this issue as it had been held by them that no capital gains as such was chargeable on sale of land. There is no doubt, some observations may support claim of assessee. AAC has reproduced observations of Chandigarh Bench in his order. In other case of Shri Vishwanath decided by Allahabad Bench of Tribunal, question was regarding computation of capital gains on sale of agricultural land. HUF had acquired agricultural land on 14-9-1969 but agricultural land was included in definition of capital assets only from later date. While revenue authorities had not accepted this plea, Tribunal was of view that decision in case of Bai Shirinbai K. Kooka applies to this case as agricultural land became capital assets only from 1-4-1970 by virtue of amendment of section 2(14)(iii) of Income-tax Act. 4. Having considered submissions which had been considered by AAC and observations of Allahabad Bench, we are of view that contention of assessee could not be accepted. cost of acquisition of asset is question of fact and will depend on actual cost which particular assessee has to take in respect of particular asset. only other provision which has to be considered is option which is given to assessee to substitute cost of acquisition with market value as on 1-1-1954. In this case, question of exercising that option does not arise as asset was acquired in 1966. Such question was considered by Gujarat High Court in case of Ranchhodbhai Bhaijibhai Patel v. CIT [1971] 81 ITR 446. In that case, capital asset which had been transferred was agricultural land. assessee had contended that agricultural land became capital asset only from later date and according to assessee's submission at time of acquisition also asset should be capital asset. While holding that land in question was not agricultural land, High Court proceeded to consider question of computation of capital gains and for that purpose also considered, question of cost of acquisition of capital asset. Their Lordships observed as under: "Now question which arises for consideration is as to what is true meaning and import of words 'the cost of acquisition of capital asset' in section 48, clause (ii). One construction suggested on behalf of assessee was that these words, on plain grammatical construction, require that property which is sold must be 'capital asset' at date of acquisition by assessee, for, otherwise, these words would be rendered inappropriate and meaningless. But, this construction cannot be accepted and for two very good reasons. One is that it would introduce additional condition of attracting charge to tax which is not to be found in section 45 which is charging section. only condition for attracting charge to tax which is laid down in section 45 is that property transferred must be capital asset at date of transfer. How profits or gains arising for transfer of such property are to be computed is laid down in section 48. Section 48 is not intended to lay down any further condition for attracting charge to tax. It would not, therefore, be right to construe section 48, clause (ii), as providing that property, besides being capital asset at date of transfer as required by section 45, must also satisfy definition of 'capital asset' at date of acquisition by assessee. Moreover, such construction would stultify charging provision by unduly restricting ambit and scope of charge to those cases where property transferred is 'capital asset' at both terminals, namely, date of acquisition and date of transfer. Where property transferred is capital asset at date of transfer but was not capital asset at date of acquisition as in present case, profits or gains arising from transfer of such property would be left out from ambit and coverage of charging provision and would escape tax. Of course, if such result is inevitable, court would not strain language of statutory provision in order to bring such cases within net of taxation but if, on plain natural construction of language used by Legislature, it appears that such cases were also intended to be covered by statutory provision and there is moreover no rational justification for leaving out such cases from scope and ambit of charging provision, we should not be reluctant to adopt construction which would bring such cases within charging provision. It is, therefore, apparent that only condition which must be satisfied in order to attract charge to tax u/s 45 is that property transferred must be capital asset at date of transfer and it is not necessary that it should have been capital asset also at date of acquisition by assessee. But then what meaning is to be given to words 'the cost of acquisition of capital asset'? How is full effect to be given to these words if property transferred need not be capital asset at date of acquisition? answer to this question is simple if only we read these words in light of sec. 45. Section 45 says that profits or gains arising from transfer of capital asset shall be chargeable to tax and sec. 48, clause (ii), then proceeds to add that such profits or gains shall be computed by deducting from fall value of consideration for transfer 'the cost of acquisition of capital asset'. words 'the capital asset' in section 48, clause (ii), are clearly intended to refer to capital asset which is transferred as mentioned in sec. 45. They are identificatory words to denote property transferred and they do not introduce any requirement that property transferred shall be capital asset at date of acquisition. law says that when property which is capital asset is transferred, profits or gains arising from transfer shall be liable to tax and you shall compute such profits or gains by deducting from consideration for transfer, what cost you to acquire 'capital asset', that is, property transferred. difference between consideration for transfer of property and cost of acquisition of property would represent profits or gains arising from transfer of property and they would be taxable as capital gain u/s 45. This appears to be plain natural construction of words used in sec. 48, clause (ii), read with sec. 45. There are also certain inherent indications in Act which go to show that this is correct construction. Sec. 55(2), clause (i), says that where capital asset became property of assessee before 1st day of January, 1954, cost of acquisition in relation to capital asset means cost of acquisition of asset to assessee or fair market value of asset on 1st day of January, 1954, at option of assessee. words 'where capital asset became property of assessee' clearly show that expression 'capital asset' is used as demonstrative noun to refer to property transferred. question which has to be asked for purpose of sec. 55(2), clause (i), is when did property designated as capital asset in sec. 45 become property of assessee. If it became property of assessee before 1st January, 1954, assessee would have option either to take cost of acquisition of asset to him or fair market value of property on 1st January, 1954, as cost of acquisition for purpose of sec. 48, clause (ii). argument of assessee was that words 'capital asset' in sec. 48, clause (ii), must have meaning given in definition of 'capital asset' in sec. 2(14) and, therefore, sec. 48, clause (ii), must be construed as referring to cost of acquisition of property as capital asset. If property was not capital asset at date of acquisition but subsequently acquired character of capital asset, it must be with reference to date of property becoming capital asset, that 'the cost of acquisition of capital asset' must be determined. What is required to be deducted, said assessee, is not cost of acquisition of non-capital asset but cost of acquisition of capital asset and, therefore, crucial date must be date on which property became 'capital asset'. It was on basis of this contention that assessee urged that 'the cost of acquisition of capital asset', in present case must be taken to be market value of land on 23rd January, 1963, and not original cost of acquisition of land. But this contention is plainly contrary to language of sec. 48, clause (ii). It is difficult to see how this construction accords with words 'the cost of acquisition of capital asset'. These words emphasise two aspects: one is 'acquisition' and other is 'cost'. reference clearly is to point of time when capital asset is acquired and cost of such acquisition is required to be deducted from full value of consideration. Where property transferred was not capital asset at date of acquisition but subsequently became capital asset as in present case, it is difficult to see how it can be said that property as capital asset was acquired by assessee when it was converted into capital asset and how it would be possible in such case to determine cost of acquisition. There are no two different acquisitions of property, one as non-capital asset and other as capital asset. property is acquired by assessee only once and merely its character changes in sense that, whereas, originally it was non- capital asset, it now becomes capital asset. It would indeed be doing violence to language of sec. 48, clause (ii), to read words 'the cost of acquisition of capital asset' in manner suggested on behalf of assessee. We would have to introduce unwarranted fiction, namely, that when property, which at date of acquisition was non-capital asset, becomes capital asset, it is deemed to be acquired by assessee as capital asset on that date and, furthermore, though there can be no cost of such acquisition, market value of property on that date should be deemed to be cost of such acquisition. There is no warrant for imposing such legal fiction on plain language of sec. 48, clause (ii). only justification which could be put forward on behalf of assessee for reading section in this manner was that Legislature could not have intended that appreciation in value which took place whilst property was non-capital asset should be subjected to tax which would be inevitable result if we read section as referring to cost to which assessee was put in acquiring property. But this is wholly erroneous approach in construing statutory provision. intention of Legislature must be gathered from words used; it is well settled that what is unexpressed by Legislature must be taken as unintended. We cannot presume certain intention on part of Legislature and then bend language of section with view to making it accord with such presumed intention. contention of assessee also stands refuted by language of sec. 55(2), clause (i). property which is transferred could become property of assessee--only at one point of time. It could not become property of assessee as non- capital asset at one point of time and as capital asset at another point of time. argument of assessee would require us to introduce legal fiction also in section 55(2), clause (i). We would have to assume that when property which was non-capital asset becomes capital asset, it is deemed to become property of assessee for purpose of sec. 55(2), clause (i). Such construction would do violence to language of sec. 55(2), clause (i) and would be clearly impermissible on any recognised canon of construction. Then again, it is apparent from sections 49, 51 and 55(3), that words 'the cost of acquisition of capital asset', 'the cost for which asset was acquired' and 'the cost for which previous owner of property acquired it' are variously used by Legislature to denote same idea and reference is intended to be made only to cost of acquisition of property regardless of question whether it was capital asset or non-capital asset at date of acquisition." 5. above decision of Gujarat High Court was not considered by Allahabad Bench of Tribunal and it was not taken into consideration by Chandigarh Bench as well. In view of this, we hold that view taken by two Benches do not represent correct position in law. This decision of Gujarat High Court was followed by that very High Court in case of B.N. Vyas v. CIT [1986] 25 TAXMAN 133. Their Lordships have clearly held that cost of acquisition can have only one meaning with respect to particular asset and it was not necessary to consider value when it became capital asset under law. As already stated by us, decision in case of Bai Shirinbai K. Kooka was on different issue and it cannot be applied for purpose of determining capital gains. If plea of assessee was to be accepted, it would mean that when provisions regarding capital gains were introduced for first time on statute book, cost of acquisition of all capital assets would have to be taken as on first date of that assessment year. This will have effect of defeating whole purpose of that provision and such interpretation is not permissible. As there is no dispute about cost of acquisition in 1966, we would set aside order of AAC and hold that ITO had rightly determined capital gains at Rs. 75,500. appeal is allowed. *** INCOME TAX OFFICER v. DEEPAK RAJ NARANG
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